Hyped up by Winston Churchill as “The Pearl of Africa” in 1907, the kingdom of Uganda appears to finally be living up to its name. In keeping with other emerging economies in Africa and South/East Asia, the country undertook radical economic reforms via liberalisation of its exchange rate, central bank independence and loosening of capital controls; these changes, made in 1990, saw Uganda’s economy grow at an impressive compounded annual rate of 8% for the subsequent two decades.
Endowed with plentiful existing natural resources, the discovery of large oil reserves in 2006 added to the exuberance expressed by several analysts regarding the country’s future prospects and gave further credence to President Yoweri Museveni’s National Development Plan for economic transformation, with the aim of achieving “middle-income country” status by 2020.
This development plan highlights the primary sectoral drivers of growth, namely oil & gas, agriculture, tourism and manufacturing, and the challenging road faced by policymakers and local businesses to meet these objectives.
The Land of Black Gold
The oil & gas sphere is universally expected to be the most crucial contributor to Uganda’s economic ‘masterplan’. An estimated 1.7 billion barrels of oil equivalent (BOE) lies across 3 major fields in the country as Proved & Recoverable Reserves, a sizeable amount, though still lagging behind larger regional rivals such as Nigeria and Angola.
According to data from Deloitte surveys, there is increased optimism surrounding the recovery in commodity prices, up from the lows of $40/barrel of oil; more than 60% of oil professional and experts in the sector now believe that there will be an upturn in the upstream and midstream business cycles over the next few years, and that Uganda is currently timing its push towards first oil to perfection.
In August 2016, the government granted 8 operating licences to Total E&P Uganda and Tullow Oil Uganda plc (though Tullow has now sold its working interest to China’s CNOOC) and production is expected to begin in 2020, costing around $25/barrel and peaking at close to 230,000 barrels per day.
With this in mind, it is important for all relevant parties to ensure that there is sufficient capital expenditure on supporting infrastructure to help realise significant future cash flows from the oil fields. The energy minister has allocated a budget of $10 billion for the construction of the Uganda-Tanzania pipeline and other upstream facilities (local pipelines, rigs, drilling blocks, etc.), and an additional $4 billion for a new oil refinery to boost the productive capacity of Uganda’s midstream and logistics operations.
Strategies for Sustainability
The refinery is part of a wider strategic consideration that aims to guarantee security of oil supply and effective processing methods for raw crude, and is forecast to be completed in two phases and produce up to 30,000 barrels per day. The biggest gain for Ugandans and foreign expats alike should manifest themselves through the creation of more than 15,000 direct jobs in the oil industry; the caveat here is that the government is starting to pursue more inward looking strategies to benefit local workers and businesses with specialist assistance from abroad.
Around 70% of these jobs are reserved for Ugandans, mostly in catering, transport and pipeline construction as they may not possess the specific, technical supply & trading skill sets to take on the remaining roles in the sector. China has been providing regular injections of FDI worth up to $10 billion at relatively cheap capital rates since 2014, and has fortunately recognised the need to develop basic structural systems such as hydro power plants, electricity, road and rail networks.
Another setup the country can use to its advantage is the founding of the Petroleum Fund, which aims to collect all expected excess profits from the next 2 decades of oil production and reinvest the proceeds into other development projects. This is a dynamic and exciting mechanism that has captured the attention of the Norwegian government, who assisted with the establishment of the fund and modelled it on their own Oil for Development Programme.
Other Natural Resources & Attractions
Around 80% of Uganda’s population currently resides in rural areas and the nation currently holds 50% of the available arable land in East/Sub-Saharan Africa, so it is imperative that this land is put to productive use. Agriculture still accounts for roughly 35-40% of GDP, with the main exports crops being maize, beans, groundnuts, sesame and sweet potatoes, and with moves being made to simplify credit access to subsistence farmers, there are several opportunities to form local partnerships and circumvent issues normally associated with large commercial ventures, thereby boosting real returns to production. A boost to the manufacturing sector would also go hand-in-hand with agricultural produce, helping to mechanise farming methods whilst effectively capitalising on the array of Uganda’s natural resources.
Another point of focus is tourism in Uganda; the tourism sector is currently the fastest-growing and accounts for 9.9% of GDP. In 2014, however, the country suffered a setback in the wake of the Ebola virus outbreak, which scared off potential visitors from all over the world; tourism officers bemoaned the lack of understanding of the African continent, stating that the epicentre of the outbreak was in Guinea, almost 5,000km away from Uganda itself.
Nevertheless, local operators have taken it upon themselves to hire high-profile industry professionals from the UK, USA and Australia to assist with marketing strategies and promote their most impressive attractions and features, including the Lake Victoria, the source of the River Nile, safaris and unique forestry.
Challenges and Investment Opportunities
Propped up by the boom in Uganda’s natural resources industry and with a variety of policy options at its disposal, it would appear that the country is exceedingly well-placed to fashion a new growth model based on rapid expansion; yet as with many of its main rivals, it is faced with some serious threats. Endemic corruption is rife, particularly when it comes to oil money.
Ugandan critics cite the infamous “handshake scandal” as a major impediment to meaningful progress; the Kampala Independent unearthed the uncomfortable story in which 42 government officials pocketed the equivalent of $1.7 million for the parts they played in the government securing $700 million in tax disputes with Heritage Oil and Tullow Oil around the licensing negotiations. These officials have often thwarted some of the President’s own economic revitalisation plans, and as argued by the FT, “officers are loath to take decisions, so many issues end up on the President’s desk. And then ministers get undermined.”
Furthermore, the recent baby boom and open and progressive refugee policies have contributed to overcrowding and overpopulation in all major Ugandan cities and settlements. This has led to a surge in the national dependency ratio and mass structural unemployment, exerting more and more pressure on already fragile educational and infrastructure systems.
Although Uganda has policies that allow refugees to obtain land, set up their own enterprises and obtain access to healthcare, current crises in South Sudan and Somalia have made the situation much less manageable; the daily total of new arrivals averaged almost 3,000 in March 2017. Although social tensions are less obvious, this represents a setback in the drive to ensure that usable facilities keep pace with the development of oil fields.
As things stand, it is not healthy for an economy to have an over-dependence on volatile commodities such as oil, and non-oil FDI has actually been decreasing year-on-year since 2013 so there is a fear that the situation might eventually become unsustainable.
To craft a recipe for success in Uganda, it is important for investors to remain vigilant and take the opportunities that present themselves. In agricultural terms, it is likely to be more beneficial to invest in smallholder farmers’ production and work side-by-side with them to achieve a mutually beneficial outcome.
The capital city of Kampala recently hosted the 3rd Annual Oil & Gas Convention and 2017 Regional Logistics Expo; events that provide such platforms to exchange ideas with industry leaders aim to enhance the profile of Uganda as a major player, opening up discussions on joint venture partnerships between local upstream companies and international organisations to benefit the Ugandan people.
Major operators such as Total SA and CNOOC are likely to receive consensus “Buy” ratings on the strength of the recovery in base Brent Crude prices and on the aforementioned expansion opportunities in these fast-growing regions. Uganda must look to acquire more and more commercial and political muscle, actively engage in agreements on trade and labour movements, but continue with its ambitious mindset if it wants to carve out a truly memorable legacy.