The Extractive Industries and Society 2 (2015) 46-55 Contents lists available at ScienceDirect The Extractive Industries and Society ELSEVIER journal homepage: www.clsevier.com/locatelexis Original Article Will Uganda succumb to the resource curse? Critical reflections David Ross Olanya Cu Univers, Publ Aaminsrtion and Managemen, Ai Rad, Cl Uganda ARTICLE INFO ApsTRACT ‘ace ry Received 10 November 2013 Received in evad form 30 September 2014 ‘Aalble oline 7 November 2014 Few resource-rich countries in sub-Saharan AMfica have experienced significant growth and social transformation. tn Uganda, one ofthe region's newest petro-states, the government favors using revenue to improve infrastructure and generate industrial development. However, there is growing skepticism surrounding this approach. Asis highlighted in this paper, concerns about prudent management of oil revenue in Uganda are very real because ofthe country’s degre of vulneral iy toa ier specifically its weak institutions and governance, socal fagmentatin, lack of polit Accountabity and the opacity of Production Sharing Agreements (PSAs) signed by politicians and ole fares "© 2014 Elsevier Ld. Al Caveman 1. Introduction 2017, and Uganda's net oil revenue will be approximately USS84 ‘The conventional view on natural resource wealth is that itis a catalyst for development. The revenues derived once the wealth is extracted can easily be converted to schools, infrastructure, and other capital stocks that directly contribute to national wellbeing. Recent studies, however, have shown precisely the opposite Phenomenon, with disappointing performances in many resource- rich countries (Davis and Tilton, 2005; Ross, 2001). This wealth, therefore, is often associated with a natural “resource curse, situations characterized by abnormally slow economic growth (Sachs and Warner, 1997)as well as corruption and at times, armed conflict (Collier and Hoeffler, 2004). Economic and fiscal reliance fon resource wealth can perpetuate authoritarianism in developing countries (Haber and Menaldo, 2010) and provide a steady stream of revenue to corrupt regimes that marginalize their populations (Mahdavy, 1970), Natural resource wealth increases the power of the state bureaucracies of such countries and reduces the need for faxation (Huntington, 1991}, In_most cases, weak institutions precede the discovery of oll andjor other minerals (Haber etal 2003), which explains why these policymakers tend to increase spending when commodity prices are high and why they are tunable to reduce expenditures when the prices decline (Pegs, 2010) In Uganda, there are an estimated 35 billion barrels of recoverable oil. Commercial production is expected to start by sail adres: davidolanyatyaoo co.uk eps door 0.1016. 2is2014.09 002 22L4-7OOX{o 2014 Elser Ll ght reserved billion. The royalty rate is 12.5 percent, the government’ share is 675 percent, the company’s share is 325 percent, and the corporate tax is 30 percent. The government will retain 93 percent of the revenue from royalties, and the remaining 7 percent will be shared among the districts in exploration and production areas. Uganda's reserves compare favorably to several countries in sub- Saharan Africa, including Chad (1.5 billion barrels). Republic of Congo (1.9 billion), Equatorial Guinea (1.7 billion), Gabon (3.7 billion), Ghana (5 billion) and South Sudan (6.7 billion) (Twinoburye, 2013). The British company Tullow Oil has been granted an exploration license that covers an area of150 square kilometers adjacent to the Murchison Falls National Park, and the French company Total and Chinese National Offshore Oil Corporation have each acquired one third of Tullow’s oilfield (Gelb and Majerowicz, 2011). This article critically reflects on the Hirschman’s (1981) Staple ‘Thesis in an attempt to broaden understanding of the potential, resource curse emerging in Uganda. After reviewing Staple Thesis, the article reviews the literature on the resource curse, drawing on key elements to frame the Uganda case. In addition, this article critically assesses Uganda's oil regimes in relation to practices in other countries. Referring to growth in the early stage of production that relies, mostly on a sequence of staple activities, Hirschman (1981) wonslered about the circumstances in which one thing would lead {o another, which was a way of describing how growth experience in.a country is concretely shaped by specific primary products that are successively linked to export markets. inthis regard, certainBR olonyo/ he Batracive mdr and Sait 2 (2015) 45-55 ” characteristics of leading activites are conducive for providing stimuli, The effects of interactions between the leading sector and ‘other sectors are divided into production, consumption, and fiscal linkages. The efficiency of fiscal linkages is the mast important determinant of ultimate benefits, and such efficiency can only be accomplished through taxation and productive investment. Considering forward and backward linkages, Hirschian (1981) argued that fiscal linkages are outside linkages by definition and associated with direct participation of the state in the income stream generated by the staple export. Forward linkages have Potential significance in staple-based economic development. Inside linkages occur when a state has developed the entre- preneurship initiatives of the old agents and attempts to disrupt the existing status quo. Outside linkages have the advantage of ‘mobilizing new agents and preventing a concentration of ‘economic power and wealth, According to Hirschman’s analysis, ‘outside linkages lead to the provision of public goods by the state; however, a state that only knows how to tax a staple may be very far from making effective contributions to development. Hirsch- ‘man argued that promoting irrigation, transportation and educa- ton is good for the staple product. Fiscal linkages have a better chance of emerging if enclave resources are owned by foreigners because the enclave will be taxed more readily than when the resource extraction in question is in the form of an activity with dense networks. Taxing a foreign company is easier than assessing nationals, who in addition 10 ‘owning the resources, may run or control the government and may resist paying taxes (llischman, 1981). Thus, the possibility of politicians-turned-businesspersons owning a share of oil compa- nies increases the degree of tax resistance. As such, the ability of the state to tax a new staple and invest in a productive manner determines the possibility of fiscal linkages, which raises the following question: what conditions are favorable for fiscal linkages? The ability to tax must develop before the ability to invest. According to ‘staple thesis development hinges on the establishment of successive activities rather than a single focus, ‘which was aptly demonstrated by the experiences a series of high income countries, notably the United States, Canada, and Australia (Reynolds, 1979), ‘According to staple thesis, ‘backward areas’ commonly form ‘with initial stimult contributed by primary product exports that attract capital and labor and induce a diversified production structure (Innis, 1930; Watkins, 1953), This process is explained by the resource curse literature, which is reviewed briefly below. 2. A critical review of resource curse literature The conventional view considers mineral wealth to be a profitable asset that can increase a country's natural stock of capital because it helps in the conversion process and brings in new technologies which improve technical efficiency (dle Ferranti eta, 2002; Wright and Czelusta, 2004). This has been witnessed in the historical development ofthe United Kingdom, United States, and Germany. More recently, mineral wealth has provided a platform {or economic growth in Australia, Canada, Chile, Malaysia, Peru, Netherlands and Botswana (UNCTAD, 2002), Proponents ofthe ‘alternative view of the resource curse point ‘to how economic growth in many mineral-rich countries has been negligible over extended periods; growth has in some cases even been negative (Auty, 1990,1993). A greater dependence on ‘minerals, itis argued, is associated with slower economic growth after the usual determinants of growth are controlled for (Sachs and Warner, 1999, 2001), the implication being that minerals are negatively associated with economic development. Mineral-rich counties, it is further contested, experience inadequate invest- ‘ment in education (Gylfason, 2001), increased risk of civil war (Collier and Hoeffler, 2000; Ross, 2004), difficulty in establishing andjor consolidating democratic forms of governance (Ross, 2001), and increased cotruption that negatively affects the quality of institutions (Sachs and Warner, 1995, 2001), ‘The argument can also be extended to the type of governance that is required and not limited to whether mineral-rich countries an achieve the desired governance (Davis and Tilton, 2005), ‘Whether minerals should be exploited is a matter of policy choice {or a host country. Mineral wealth does; however. appear to have impeded long-term economic development in the Central African Republic, Democratic Republic of Congo, Guinea, Liberia, Niger and Sierra Leone (UNCTAD, 2002). The means by which mineral wealth impedes economic development include declining terms of trade, volatile markets, the Dutch disease, nature of mining, and use of rents. In the case of the former, the prices of primary commodities tend to fall relative to those of manufactured goods over time, implying that there is need to increase the amount of exports fora given basket of manufactured imports, which was the central argument raised by Presbisci (1950) and Singer (1950) in the 1950s, This situation makes it dificult to rely on revenues from the ‘mineral sector when pursuing effective planning for economic development. The Dutch Disease remains a popular explanation for the poor performance of many resource-rich countries (Pegs, 2010), and it occurs because of resource movement and spending, effects (Corden and Neary, 1982:827). The resource movernent effect occurs when a booming extractive sector draws capital and labor away from other sectors (Davis and Tilton, 2005), which requires costly adjustments in agriculture and manufacturing (Gary and Karl, 2003). The spending effect occurs wien the extra income derived from the booming resource rents is spent on domestic goods and services, which raises their prices (Corden and "Neary, 1982:827). However, the Dutch Disease does not provide an adequate explanation for the numerous economic problems ia resource-rich countries (Sala-i-Martin and Subramanian, 2003), and by encouraging resource mobility, the disease actually benefits 2 country (Davis and Tilton, 2005), ‘The nature of mining affects surrounding communities in terms ‘of environmental impacts and other social costs. The revenues may allow governments to mollify dissent and avoid accountability (sham et al, 2003) because revenue flows into domestic economies are not restricted (Ross, 1999; World Bank, 2002) and enrich a number of contractors and politicians (Gelb, 1988; ‘Martin, 2008). Those who rule often assume that they ‘own’ the natural resources, and therefore assign themselves property rights ‘over the natural resources (Karl, 1997). The absence of incentives to tax weakens the administrative reach of the state (CGD, 2004), and politcal accountability is minimized (Le Billion, 2005; Ross, 1999}. Although there is more evidence from the poorest countries portraying mining as a curse, such evidence can also be challenged as ivelevant, such as when the revenues (taxation and royalties) from mining are used to support education, public health, infrastructure development and investments are made that stimulate development (Davis and Tilton, 2005) Collier and Hoefer (2002) have shown that a country that has, ‘natural resources that contribute approximately 26 percent of the GOP faces a probability of civil conflict of 26 percent, whereas a country that has no natural resources faces a probability of civil conflict of 0.5 percent, Similarly, high expectations and subsequent disappointments from poor performance lead to political instabil- ity as small groups become ticher while the rest of the population descends into poverty (Collier, 1999). However, within the conflict dimension, the relationships between natural resources and conflict remain poorly understood and controversial (Ross, 2004). Mehilum et al. (2005) argued that the main reason for Conflict is found in the quality of institutions, which is defined as the human-devised constraints that structure political, economic“6 DR. olay The extractive nde and Scety 2 (2015) 4-55 and social interactions (North, 1990) A country with low institutional quality may make bad policy choices that_may promote inefficiency and politically irrelevant policies (Robinson et al. 2006). In addition, the quality of institutions determines a country’s level of income (Easterly and Levine (2003); unfortu- nately, mineral-rich countries have little incentive to develop quality institutions because strong institutions demand higher accountability (Karl, 1997). Di John (2010) argued against the proposition that oil abundance induces extraordinary corruption, rent-seeking behav- ior and centralized interventionism because there is a lack of comparative or historical evidence. Instead, the extent to which ‘mineral abundance generates development depends largely on the nature of the state and its politics as well as the structure of ‘ownership in the export sector. For example, the United States, Canada, Sweden, Netherlands, Australia, and Malaysia all began as ‘mineral-dominant economies in the early stages of development with less diversified economies (Findlay and Lundhal, 1999). The ‘resource curse’ fails to explain the possibility that_mineral abundance can be central to the development of manufacturing (Weibgt and Czelusta, 2007), and it cannot explain the long-term variations and changes in the growth of certain resource-rich economies in Africa (Botswana, Angola and Nigeria) as well as the economic growth in non-mineral economies (China, Malawi, Tanzania), including the recent growth accelerations in aid- dependent economies (Uganda, Mozambique, Tanzania and Ghana). Mineral-abundant economies also do not appear to be ‘more corrupt than non-mineral economies, and yet liberal policies insuch countries matter more than the level of rent (Di John, 2010). Previous discussions have shawn that most of the studies found in the literature are concerned with the potential channel of causation (Sachs and Warner, 1995; Leite and Weidman, 1998): this article, however, is concerned with the channel that etermines institutional quality and governing regimes in the context of staple thesis, specifically, its application to Uganda 3. Explanations for relative success and failure Scholars have suggested that variations in national economies. may occur because of polices (Shaxson, 2005; World Bank, 2002) institutions (Acemoglu et al, 2001, 2003; Evans, 1995; North, 1990) and state building (Karl, 1997; Ross, 2001}: or even political inclusiveness (Poteete, 2009). These cases of success and failures are particularly evident in the cases of Botswana, Nigeria, and Chad. When Botswana won its independence in 1966, it was a poor country that depended on cattle exports, remittances from migrant laborers in South Africa and foreign’ ald (Auty, 2001). When diamond mining commenced in 1971 at Orapa and then at Letlhakane, Botswana changed dramatically. ls highest average ‘growth of 6.31 percent of GDP was recorded from 1960 to 2003, (World Bank, 2005). The government introduced and maintained a stable real exchange rate with the South Aftican Rand until the 1990s. When the Pula began to appreciate against export currencies, the government devalued the Pula by 12.5 percent trough the introduction of a erawling peg (Gaolathe, 2005) Additionally, currency reserves helped Botswana to stabilize its domestic spending when diamond prices dropped in the 1980s (Hermans, 1997). Botswana's relative success can be attributed to the (a) relative stability of its real exchange rate; (b) accumulation of foreign reserves; (c) relative balanced pattern of growth, and (d) survival of multiparty elections through the formation of a broad, stable political coalition (Auty, 2001; Poteete, 2003), The Botswana Democratic Party (BDP) adopted policies that balanced appeals from different constituencies (Doner et al, 2005; Molomo, 2000). ‘There are eight ethnic Tswana mera: the Bakweneng, Bamalete, BamaNgwato, BaNgwaketse, BaRolong, BaTawana and BaTlokwa (Tlou, 1985), The BOP has closed ties with the BamaNgwato and Bakwena in the central districts (Rule, 1999), although it has limited support in the non-Tswana populations in the northeast and northwest. The revenues fiom the diamond industry were invested in foreign capital markets, and a limited amount was invested or consumed at home, which reduced the spending effect (Norberg and Blomstrom, 1993:176). Botswana also created a separate development fund, the finances from which can only be used on projects that are approved by the National Development Plan (NDP) (Leith, 2005). By the end of 2006, it had a significant stock of reserves, amounting to approximately 75 percent of GDP (Delechat and Gaertner, 2008:5) However, many authors have been critical of Botswana's, success story and caution against the proposition that it avoided the resource curse. Believing Botswana to be “an African Miracle” (Samatar, 1999), Pegg (2010) implies, may be misleading. The Author argues that, many of the explanations for the country’s Apparent success in evading a resource curse are not related to diamond revenues or the Dutch Disease, and that Botswana is unlikely to succeed in diversifying its economy away from the diamond in the near future. Although Botswana's policies have hhad a positive effect, it has done little to diversify its economy (Hudson, 2004; Hillbom, 2008). Despite attempts to diversify, by 2004, mining and quarrying still accounted for only 3.1 percent of {otal formal-sector employment (8000 employees) (IMF, 2007:26)but an enormous 35.64 percent of national GDP (Fiscal 2000/1-2004/05). Manufacturing, on the other hand, accounted for only 4.6 percent of the GDP over the same period, despite ‘employing 30,000 people. Agriculture was growing by8.3 percent per year by the 1970s before diamond production began to boom, but slowed down considerably in the 1990s, during which time it declined on average by 1.2 percent annually (Good 2005; Leith, 2005). During the fiscal period 2000/01-2006[07, Botswana spent ‘on average 9.19 percent ofits GDP on education, 3.46 percent on health, 326 percent on defense, but only 1.4 percent on agriculture, forestry and fishing’ (IMP, 2007-72), however agriculture accounts for 70 percent of the labor force (Sarrat land Jiwanji, 2001:15). Failure to pursue agriculturally based strategies, therefore, has produced Dutch Disease-type effects (Pegg, 2010; Love, 1994). The Pula also appreciated during Botswana's boom from 1982 to 1987 (Mogotsi, 2002:144) This is highlighted in depth in a study by the IMF (IMF, 2007), which explains how, prior to the devaluation of the Pula in 2004, it had appreciated by more than 20 percent against the Rand vis-a-vis the exchange rate level in the 1980s. The real exchange rate depreciated after the initial boom, but the government's recurrent spending did not (Mogotsi, 2002:144-146). The rapid expansion of construction in the late 1980s into the 1990s was a symptom of over-consumption of resource booms (Atkinson and Hamilton, 2003), [Nigeria has approximately 36 billion barrels of crude oil reserve and 19.2 billion cubic meters of natural gas. Petroleum products provide 70 percent of the country’s revenues and provide at least 95 percent of ts foreign exchange earnings (Jegede etal, 2013). It | estimated that Nigeria has produced approximately US$600 billion in ol since 1956 (Atakpu, 2007). However, since the 1960s, the oil sector has been associated with fund mismanagement, political decay, human rights violations, violence and the loss of livelihood in the Niger Delta (Gary and Karl, 2003), From 1973 to 1980, Nigeria experienced years with two ol price shocks, and the capital stock grew at an average of 14 percent per year, representing the country's threefold increase in capital stock in eight years. Asa result, public investment asa share of GDP rose by 7 percent and public shares in capital formation increased from 20 percent to 55 percent (Sala-i-Martin and Subramanian, 2003:14). Unfortunately, this growth was not followed by qualityBR olonyo/ he Batracive mdr and Sait 2 (2015) 45-55 © investments and capacity utilization, which averaged appro ‘mately 77 percent in 1975 and declined rapidly to approximately 50 percent in 1983, Since the 1980s, capacity utilization has never exceeded 40 percent and has languished at approximately 35 percent. Nigeria overinvested in physical capital that did not lead toan increase in productivity. According to Bevan et al.(1999), skillful civil service did not accomplish the powerful political impetus for public investment. Oil revenues were used to finance the construction of the Ajakouta steel complex in the 1970s, but the production plant has not produced any steel Sla-i-Martin and Subramanian (2003) found that Nigeria has suffered from poor institutional quality that has contributed to a lower growth of 05 percent per year. The contribution of agriculture to national GDP declined from 68 percent in 1965 to 35 percent in 1981 (Davis et al, 2001), Jegede et al. (2013) further criticized Nigeria for developing low content requirements and failing to develop its poor research and development capacity; the country stil relies heavily on international companies and oversea contractors for 95 percent of its oil activity. ‘The Chad-Cameron project ran into problems long before oil ‘began flowing in 2003 because the construction activities rapidly ‘outpaced the institutional capacity. Ths situation was worsened ‘when Chad amended Law 001 /PR/99 in 2005 that had been signed with the World Bank, a move which impacted education, health and. social. services, rural development, infrastructure, and fnviconment and water services, The government included provisions for justice, security and territorial administration. In January 2006, the World Bank responded by suspending all new Toans and grants to Chad as well as all disbursements (in the range ‘of USS124 million). Chad's escrow account in London was also closed. Ina show of its sovereignty, Chad's President threatened 10 expel an estimated 200,000 Darfur refugees and cut off all oil supplies until Chad was given access to the frozen funds or the oil consortium paid USS125 million directly to the government because security in the country was worsening as rebels mounted an assault on Ndjamena, This conflict drew the attention of France land the United States. The World Bank then agreed in April 2006 to revise its 2006 budget, which specified that 70 percentof the direct oil revenues would be spent on priority sectors. excluding security After its problematic experience with the World Bank, Chad decided to claim an ownership stake in the oil industry of 60 percent-a figure that was equivalent to the combined shares of Petronas (35 percent) and Chevron (25 percent). The government also switched its diplomatic recognition of Taiwan to China to attract Chinese investments. The President then threatened Petronas and Chevron in August 2006 because they had failed to pay USS450 million they owed in taxes and ordered them out ofthe country. Petronas and Chevron, however, agreed to pay Chad 'Us$289 million in taxes on October 10, 2006, Finally in Septeraber 2006, Chad decided to end the World Bank’s involvement in its oil sector by repaying all of its out-standing debts of USS65.7 million (Pegg, 2009), The case of Chad is illustrated because ofits relevance to Uganda's participation in developing an oil refinery. Having, good institutions in. place before oil wealth arrives is likely 10 generate better results than attempting to create such institutions after oil wealth arrives. In addition, Chad introduced a major design flaw when it failed to account for indirect taxes in its revenue management; indirect taxes were more profitable and contributed 57.06 percent in taxes, whereas direct revenues contributed 38.08 percent (Pee, 2009). In the context of Botswana, Nigeria, Chad, Ghana, Angola, Equatorial Guinea and Guinea, common budgetary instruments 10 _manage ol revenues have been adopted. Since 1994, Botswana has used a Sustainable Budget Index principle in noninvestment spending, and since 2004, Nigeria has adopted an Excess Crude Account (ECA) (IMF, n/d), although it replaced the ECA with a Sovereign Wealth Fund (SWF) in 2011. Ghana has developed a legal Tramework in which 70 percent ofits revenues are allocated to national budgets and the rest are split between a Stabilization Fund and Heritage Fund, Since 2009, Angola has built conscious foreign reserves to help maintain macroeconomic stability in the face of oil volatility. Chad accumulated significant savings from oil revenues ‘uring the period of high prices and was able to maintain spending levels when resource revenues collapsed in 2009. Equatorial Guinea and Guinea have also set up 2 Special Investment Fund. These are good cases from which Uganda can learn. ‘There are other cases which offer valuable lessons for Uganda. ‘razl, for example, nationalized its oll and gas sector in the 1950s through the creation of a state-owned oil company, Petrobras, and developed access to high technology to meet specific domestic needs. An independent National Petroleum Agency was estab- lished to manage competitive licensing.as well as regulations issue tenders, grant concessions for domestic and foreign firms and ‘monitor the activities ofthe oll sector (Jegede et al, 2013)-Trinidad and Tobago, which has 26 trillion cubic feet of proven natural gas reserves, and an estimated 150,000 billion barrels of oil, has adapted a local content and participation policy. The intention was to maximize participation of its national people, enterprises, technology and capital through the development of locally owned bbusinesses and local financing and workforce for al ofthe activities connected to the energy sector throughout the entire value chain ‘within and beyond Trinidad and Tobago. International producers are required to commit to hiring local contractors and firms and ‘annot simply allow their own primary contractors to bring local content to a project; in addition, international companies take advantage of local competence, education and training for strategic ‘skills development. To keep small and medium-scale enterprises competitive, the government has committedUSS2.7 billion annu- ally Co develop business across the country. The Centre for Energy Enterprise Development (CEED) was established to provide small and medium enterprises with advice and tools. 4. Governing the oil regimes in Uganda ‘The current debate in Uganda centers on whether the newly discovered oil can facilitate socio-economic change in the country, specifically tansformitintoa middle income country by 2040. This article examines the debate from the perspective of Staple Thesis Although it is still too early to forecast doubts on the government's intention, skeptics have alteady voiced concerns about the impact of the newly discovered oil. Similar to the other reviewed success stories, Uganda is actively trying t0 avoid a resource curse and has adopted a National Planning Framework, ‘which is a National Development Plan (NDP) with a medium term strategic direction, development priorities and vision to transform Uganda into a modern and prosperous country within 30 years The current theme under the NDP is "Growth, Employment and Socio-Economic Transformation for Prosperity.” Through this framework, the government is committed to using oil revenues for growth by enhancing its infrastructure investments. and industrial development, which is ilustrated in Table 1 ‘As previously indicated, North (1990) defines institutions very broadly as the formal and informal rules governing human interactions. In this article, the intermediate definition of an institution is “the degree to which laws and regulations are fairly applied, and the extent of corruption” (Faison, 2003-36). The ‘quality of institutions can be measured in terms of 1) the quality of governance; (2) extent of legal protection of private poverty; and (3) limits placed on political leaders. Economic outcomes could be substantially improved ifthe quality of institutionsis strengthened (Edison, 2003). Quality institutions override everything else (Rodrik and Subramanian, 2003) and encourage investmentsPy DR. olay The extractive nde and Scety 2 (2015) 4-55 ‘able 1 evelopment indir Boselne Tage (UsS:nitlons) 2040 stats. (U5 mitons) 11 Fer capita income 306 ‘9500 22. Pepalatio Below the poverty 245 3 Tine (3) 38 Sectoral contribution of the ‘DP (2) agricuture 25 0 Inaustry 29 an Services 453 38 44 Labor foe distin inne ‘withthe sectoral tribution (percent) Asrieuture 656 a Industry 75 2% 55 Labor productivity (GDP) er worker - USD gricltore 200 790 Isty 13550 240 Services 1830 25513 65 Manufactured exports a6 3% a 30 ofthe fra export 17 Gross capita oration a 2 aaa 0 ‘Cot the cb? 8 Savings asa ofthe GOP 45 a3 199) Life expeetancy at birt (yeas) 515 8 1010 Matertal morality rate pe 10,000 310 18 THI Under mortal rate per 96 5 ove ithe 1212 _eraey rate (2). * 95 Src: Rational Panning Autorty 2073 (Hip Tw np aTORDOAOO targets om). (North, 1990) and growth (Evans, 2004), Transparency and public accountability are of the utmost important in determining governance outcomes. Table 2 shows Uganda's overall quality of ‘governing.institutions. Uganda's performance has ranged from average to low in relation to leading countries such as Mauritius, Cape Verde, and Botswana because of the quality of institutions, geographical size, resource endowments and political factors. The benefits of oil wealth depend on the level of institutional capacity and role that institutional agents play in minimizing corruption, Unfortunately, there is a functional mismatch in Uganda between the expecta- tions and actual capacity ofthe prevailing administrative systems. However, as explained, the government seems to have committed itself to a particular policy orientation with regard to the oil sector. It has maintained that it will “use the country’s oil and gas resources to contribute to early achievement of poverty reduction and creating lasting value to the society.” Similarly, the President has stated the following: That is nonsense...that the oil will be acurse...No way! The oil, of Uganda cannot be a curse. Oil becomes a curse when you. have useless leaders, and | can assure you that we do not approach that description even by a thousandth of a mile The oil isa blessing for Uganda and money from it will be used for development.’ The Mineral and Energy Minister Irene Muloni consistently reaffirms the government's position on the utilization of oil wealth, stating: * Uganda announces covery avaiable tpl 2a) wande-amnouneesa-cscovery1.2968228 UviDAWvEST, Ugandans are keen to benefit from this resource. We want (0 tuse the revenues accruing from petroleum for infrastructure ‘development, expand electricity both in capacity and in access, ‘make sure the roads ate motorable, there is clean water for drinking and production, schools and hospitals are up and well, facilitated.” ‘The Public Finance Bill 2012 is seen as a positive step toward promoting Uganda's interest because it creates a National Petroleum Fund and National Oil Company. Similar to other countries (Brazil and Chad), the Petroleum Authority will regulate exploration, development and production of oil, whereas the National Oil Company will promote Uganda's commercial interests the oil sector. As stipulated in Clause 44 of the Petroleum Bill 2012, the National Oil Company is tasked with the following responsibilities: 1. manage state commercial interests in the oil sector; 2. manage state participation in the petroleum activities; 3. manage the marketing of the country’s share of petroleum received in kind: manage the business aspects ofthe state's participation; ‘develop in-depth expertise inthe oil and gas sector: ‘optimize value to its stakeholders; administer contracts for joint ventures; Participate in meetings with joint licenses; and investigate and propose new upstream and downstream ventures both locally and internationally. 4 5. 6 7 8 9. Such agencies appear to be positive because they are in line with proponents of Staple Thesis, specifically, calls for creating strong, institutions across multiples agencies, which the govern- ‘ment might not be in a position to control forthe promotion ofits Interests. What is of great concer is whether these agencies are going to serve the public interest or their ownself-vested interests Clause 54.1 confirms the promotion of local content. However, although the government has ereated an independent Petroleum ‘Authority, its power is compromised by the power of the Minister who has the overall authority with regard tothe ol sector and few checks and balances. Clauses 76 and 77 describe the ministerial oversight and responsibility. Unfortunately, the Production Shar- 1g Agreements between the government and oll companies, cluding licensing and revenue sharing, have never been made public. ithough Clause 9is intended to increase the government's power in the oll sector, it also raises concern that the President can appoint his loyalists and most trusted advisors who could abuse their power with regard to the oil sector. The presence of a high degree of corruption, lack of transparency and low quality institutions might all justify the concerns of skeptics. Uganda's former Minister of Energy, Hillary Onek, and the former Prime Minister, Amama Mbabazi, were implicated for accepting bribes from Tullow Oil Limited." In 2012, ‘Transparency Intemational ranked Uganda among the most corrupt countries in East Africa. It is also not a signatory to the Extractive Industries Transparency Initiative (EIT). Although skepticism may be justifiable, it is tov early to conelude that Uganda will not benefit from its newly discovered oll. During the State of the Nation Address of 2013 (State ofthe Nation Address, 2013), the President reaffirmed that the future remains bright: We shall use it for as a finite resource to generate infinite capacity for Ugandans. This is our core view in building long-term * Uganda announces i discovery, svalable at hity|wwivioleozaewsaic) tuands-announceso-tscovery1-2968228 UWwDhWvEST, 3p wir paramentgilenewsleterindex pp home ew) ISiman (ay deceiber-16-2015-foay-december-202013BR olonyo/ he Batracive mdr and Sait 2 (2015) 45-55 st ‘rale2 (ver governance pelorance by cout. AG composite score ann2 Seore/i00 Change sankisz ‘Seoejiog Change ‘oreo 2006 Sore fons 2006, don Country on aon Gouniey zon 1 Maurtiae ws vas zw camba 318 1s 2 Gpeverae ma oa 2 Niger 43 “er 3 hotevana nm ‘a9 23 Djbou i tar 4 Seyehetes na as 30 Sera Leone 481 “49 5 South Arca mar " 31 comorce 3 : 6 Kami fas waz 3 Murari a3 22 + Ghana 63 v0 33 Ethiopia 467 vor ‘ Tamia 27 20 34 ben 466 20 3 Lesotho 6 20 35 Madagascar 461 123 {1 StoTome and Principe 585 na 37 Burund 449 a 12 Zambia 583 aa 33 ba 445 80 Benin 578 39 Tow 44 84 Faye 577 ‘aoa aa 93 15 Morocco 57 Congo 435 a8 16 Senta 502 ‘cine 25 a6 1 Malawi 56 Nigeria 2 saa 18 Dorking Faso 551 Fastra Gina 405 5a 200 Mal 55 Ivory Coa 388 aa x Mozambique 59 Zima jaa na Ager 529 had has ag 2 Kenya sr (Congo, Democratic Republic 328 na 36 Swatlland B Somalis 72 16 Uzanda’s overall score 2006-2011 ‘Aas oes Sey and leaf En = = = 7 7 aription and human rights 53 55 st 51 Sa 8 Seaiable senor opportunity 55 56 s 3 2 St “Source: Mo Trak index of can Covemane® OTE Methodology scored from Oto 100 where 100=Bes. ‘benefits from the oil With the resources from oll and gas, we shall be able to fund all our infrastructures needs. ‘The Petroleum Fund in Uganda is a technocratic management, framework that places revenue management under the ownership and control of the Ministry of Finance, Planning and Economic Development (see Fig. 1) The revenue management framework is consistent with, previous studies that support the need for a centralized decision ‘making unit, and it is intended to minimize the danger of inconsistent decisions made by competing powerful actors, such as autonomous public enterprises or an equally strong executive and legislative branch. Under the Income Tax Act, the 2013 Petroleum Act (Exploration, Development and Production) Act established a Petroleum Fund under the Ministry of Finance, Planning. and Economic Development. Finances would be collected by the Uganda Revenue Authority and deposited inthe Petroleum Fund in the Bank of Uganda, The Petroleum Act (Exploration, Development and Production) Act vested this power in the Ministry of Energy land Mineral Development. ‘Assessing the “resource curse” requires an understanding ofthe quality of institutional and governance capabilities. This line of reasoning is commonly shared among mainstream institutional economists and political scientists. As indicated, a country with existing institutional capacity has a greater likelihood of avoiding, the “resource curse.” The World Bank (2010) argues persuasively ‘that new revenue from resource booms will most likely exacerbate institutional weaknesses and fuel rent seeking and poor gover- hance. With reference to Uganda’ il industry the government has always maintained that it will seek to frst satisfy domestic ‘markets. The government is now constructing an oil refinery project in the Hoima District that covers 29 square miles of land. It is important to examine in more detail each of the influencing, factors that are raising doubts related to the benefits of newly discovered oil in Uganda, namely politcal coalitions, corruption, institutional quality, ethno-politics, land grabbing, and a lack of ‘ansparency in the Production Sharing Agreements, 5. Oil production in Uganda: is.a resource curse on the horizon? 5.1. Political coalitions ‘Uganda was once applauded by the donor community as a gold, standard for a new type of ‘developmental’ African leadership. However, the popularity of the National Resistance Movement (NRM) leadership has reached a level of diminishing returns. The leadership under the NRM is now increasingly entrenched, clientelistic and corrupt (Global Integrity, 2009), and it is more ring-fenced around President Museveni (Global Witness, 2010), Although the link between taxation and accountability is theoretically well established (Brautigam, 2008), there are specie reasons t0 question the ability of this mechanism to function effectively in young democracies. A young democratic country (such as Uganda) without established programmatic politcal parties relies more on personal appeal at the ballot box than a coherent party-platform that is backed by credible campaign promises (Keefer and Viaicu, 2005)-The accountability mechanisms DR. olay The extractive nde and Scety 2 (2015) 4-55 Peeminerrer nema Sow es Senn ELECTRONIC TRANSFER tothe Pero cr ere Peeeeie cere 5. Petroleum “int the Medium Term Expenditure Framework Fig. 1. Usa’ ol revenue management framework. between broken campaign promises (Failure to improve schools and healthcare) and consequences of being voted out of political office might not materialize into systems that rely on patronage and clientelism for political survival. When one considers social fragmentation, Uganda is a fragmented national identity, and newly discovered oil is increasingly becoming relevant to the national ethnicity. The newly discovered oil areas have a history of conflicts that include access to land and inter-ethnic tensions. Environmental and communication management issues are bound to surface between oil companies and local communities. 52. Corruption The government has featured in a number of high profile corruption cases and scandals, such as the GAVI scandal, CHOGM scandal, LCI Bicycle scandal, Temangalo scam, the AIDS Informa- tion Center, National Medical Stores, and 2007 Common Heads of Government Meeting (CHOGM). A report by the Uganda Inspec- torate of Government (IGG 2010) concluded that “Corruption remains an impediment to development and a bartier to poverty reduction in Uganda.” The World Bank reported that Uganda loses approximately USD 200 million annually because of corruption. Corruption in the form of patronage and clientelism is entrenched 4s a tool for rewarding politcal loyalty and securing support for key constituencies in the military and government (Global ‘Witness, 2010), and it has become a critical mechanism through Which the regime stays in power. Procurement in Uganda is associated with collusion, bribes, inducements, political interfer- ence, a lack of supervision and Issuance of false certificates of completion (Transparency International, 2003; 1GG, 2010), Eighty percent of Ugandan firms surveyed reported that they had paid bribes accounting for 7.9 percent of the total costs of investment (Svensson, 2000), Although the NRM members of the Parliamen- {ary Caucus Retreat in January 2013 pledged support forthe party's zero-tolerance policy on corruption, fighting corruption and ensuring accountability against the theft of state resources is challenging because of the entrenched patronage network that ensures loyalty over the duration of the president's long stay in office, Approximately USS12.7 million in donor funds were embezzled from the Office of the Prime Minister (OPM), prompting, serious questions related to Uganda's political commitment in fighting corruption. The stolen donor funds were earmarked for the reconstruction of Northern Uganda under the Peace Recovery and Development Plan (PRDP). The anti-corruption institutions have often targeted low profile cases, whereas the “big fish” have continued to accumulate wealth and power (HRW 2013). Uganda oped the five countries in the East African Community (EAC) considered to be the most corrupt in 2012 (Transparency International, 2012). In public sector corruption, Uganda is ranked 130 out of 176 ona scale of least to most corrupt. In 2073, Uganda recorded the highest corruption ranking (82%) in the East African Community, followed by Tanzania (67%), Kenya (64%), Burundi (60), and Rivanda with the lowest rating, 5.3, Institutional quality According to Staple Thesis, the ability of the state to benefit, from the staple depends on its ability to tax it. Uganda, however, hhas an ineffective tax system that is characterized by tax evasions and arbitrary exemptions that ae primarily related to corruption. ‘The Uganda Revenue Authority (URA) is regarded as the most corrupt institution inthe country and seventh-most corrupt in the EAC (ADB, 2010}. The problem of political patronage extends to the tax system and is associated with exemptions and tax Incentives granted on a political and ad hoc bases, which undermine the fairness and breadth of the tax system, Another concern is the weak capacity of local governments asa platform for aa decentralized development approach. District-evel governments do not have the capacity to manage funds effectively (Moss, 2011), ‘The 2010 dispute between Tullow Oil and the government over the capital gain tax that should have been paid after the sale of Heritage’s assets to Tullow Oil can be considered an institutional weakness in the management contract (Geld and Majerowicz 2011). 5.4, Echno-poltis and oil expectations Social fragmentation is a product of prior low political consolidation and an obstacle to building a state (Migdal, 1988) ‘The presence of political coalitions makes states less predatory (Tomne!l and Lane, 1999), Oil exploration regions tend to have a ‘multiplicity of institutions: cultural institutions, various ethnicBR olonyo/ he Batracive mdr and Sait 2 (2015) 45-55 = groups, and local governments. Bunyoro’s region has a history of ‘marginalization since the colonial period in which land was either {declared public or appropriated by the central government and/or under customary tenure, which remained largely unregistered (Alert International, 2009). The Bunyoro Kingdom rejects the claim made by the Uganda Wild Life Authority (UWA) over sections of oil-rich lands. The Kingdom believes that it has existed for centuries and historically and culturally owns the land where oil has been discovered. They also argue that the government took _most ofthe kingdom's land for wildlife conservation, including the ‘Murchison Falls National Parks and Bugungu and Karuma wildlife reserves. Similarly, the government has allocated substantial parts ‘of other sub-counties to allow forthe establishment ofthe Kinyara sugar factory and other privately owned ranches, which has led t0 the eviction of a number of people without compensation. The region has been characterized by increased land titling and land conflicts. The fraudulent sale of land in areas where oil has been discovered further undermines the confidence and fear of “land arabs" by oil companies or government without compensation. ‘Speculative land buying related to the oll discovery by newcomers fare common practices that frustrate local communities (LA, 2011). Exploration in the Acholi region (eg, Nwoya district) falls ‘under an area that was licensed to Tullow Oil in 2004 and Tower Resources in 2005, The oil exploration hhas also resulted in the Festriction of access to resources on which people depend for their livelihoods. In addition, the expansion of the exploration into gazetted land around prospecting areas has further restricted access to such areas by the local population. 55. Land grabbing and compensation The construction of an oil refinery in Kabaale Parish, Buseruka Sub-county, Hoima District has been associated with the displacement and inadequate compensation of local communities ‘because their means of livelihoods have been changed. The ‘ansition to new means of livelihoods must be managed catefully because these people might have limited knowledge, skills and information. Up to 7000 people across 11 villages have been fected by the oil refinery. and the Government has earmarked approximately USD 30 million of the compensation exercise (The Observer, Tuesday August 13,2013). The problems raised were the low rates of compensation, with people being paid almost nothing. Because the state often uses the law of eminent domain, these people were threatened with having fo leave their land or have it ‘aken without compensation because oil has been discovered, and exploration and production must proceed. The ol refinery plant in the Buseruka Sub-county is associated with of 29 square kilo- meters of land, However, the compensation issue over the oil refinery’s land remains unresolved as the locals demand compen- sation. In addition, residents are spending the compensation ‘money on luxuries and ignoring lessons from a crash course in financial management and investment presented by the govern- ‘ment. The government has paid approximately 800 of the 2473 residents that own property in Kabaale Parish, Hoima District, and these residents will soon leave to make way for the crude il refinery." The financial management training given to the local residents was not adequate, and they have not been able to use their compensation packages to pursue alternative livelihoods Learning isa process that isnot mastered within a week or a month by common people, and such taining without life experience becomes an abstraction. The training provided by the Strategic Friend International did not consider the needs of the locals in projects such as agriculture and poultry farming: instead, residents were encouraged to start trading and engage in transport ht iwwclinegand.or businesses. This situation is complicated by the common allegation ‘that speculators have bought up land in Uganda's ol prospect areas in the hopes of securing generous compensation packages. 5.6. A lack of transparency in the production sharing agreements Oil companies had signed Production Sharing Agreements (PSAs), the details of which, as explained, have remained secret, despite the long-running efforts by civil society activists and some MPs to have them made public. The government has maintained that the terms of the agreements signed with the various companies were good enough. Another area of possible contention is the division of oil revenues between the central government and local governments in oil-producing areas.* It is speculated that 80 percent will go to the Ugandan Government, 17 percent will go to the oil companies, and 3 percent will goto the local landowners. The Ministry of Finance currently appears to favor a 7 percent ceiling on the amount to be allocated to local governments. The government has set up the Kigumba Petroleum Training Institute in the Masindi District, whic has yet to benefit from i in terms of ‘waining in the requited expertise. 6. Conclusion ‘The timing of the newly discovered oil reserves in Uganda is, Fundamental to its transition to a middle-income country by 2040 because it has experienced a wide range of development deficits. Oil wealth cannot be considered as a set of incentives and constraints applicable to all associated parties at all times; rather, the incentives provided by oil rents present options to those in ower that appear to vary depending on the timing. Uganda's timing can be used to improve institutional quality and capacity utilization. The argument for enclaves is irrelevant provided that the oil revenues are used to effectively support education, public health, infrastructure development and other investments. in support of the National Development Plan The worry, however, is that Uganda has a low institutional capacity and quality, and the oil revenues may be mismanaged. The quality of investment is also important sothat a resource curse can be avoided. Concerning the ability to tax the staple, the government has included indirect taxes, which were not collected by Chad despite being a profitable source of government revenue. Uganda has also provided for local content requirements in its oil sector by instituting a state-owned company that will preferen- tially hte national and local companies. This situation is similar to success stories in other countries (Brazil, Trinidad and Tobago). However, the research, innovation and skilled professionals required to produce the spillover effects must be prioritized in forder to fulfill local content requirements. The government's participation in the oil sector reduces its vulnerability to external conditions that may not be useful in promoting national interests. Chad's case is very useful for Uganda because its government ‘moved to acquire 60 percent in the existing oil consortium and eliminated the interference by the World Bank in its national interests (justice, security and tervtorial administration). Uganda, however, must improve on its transparency and accountability and finance its agencies to monitor the el consortium, The government ‘must further ratify the EITI to provide a premise upon which its citizens can be provided with information on haw the government spends the oil revenue; such a proposal can only work wel inthe presence of political commitment. Similar to Botswana, which created a separate development fund that only finances projects that are approved by the National Development Plan as well as a Public Debs Service Fund and Revenue Stabilization Fund, Uganda also has a National Development Plan. Even Botswana, which is “an African model,” was unable to avoid the resource curse, which is4 DR. olay The extractive nde and Scety 2 (2015) 4-55 what most commentators on Botswana had believed: thus, what is in store for Uganda? It is important that improvements be made over time. Currently, the planned developments to avoid the resource curse are adequate to develop an institutional framework to manage the resource revenues predicted under Vision 2040, Botswana man- aged this development, which was adopted by Nigeria, and Ghana, Angola, Chad, Guinea, and Equatorial Guinea have all developed fund management frameworks. However, from an institutional perspective, the level of institutional development in Uganda is discouraging because the degree of institutional quality and capability remains low. Weak institutions preceded the newly discovered oil, but the ability to tax must precede the ability to invest. The ability of the government to participate and negotiate contracts is important. As shown in the literature, institutional Quality has a legacy in development; therefore, the government ‘must focus on developing institutions that are appropriate to ‘manage its resource wealth. 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