AN ANALYSIS OF FOREIGN DIRECT INVESTMENT REGULATION IN THE

AN ANALYSIS OF FOREIGN DIRECT INVESTMENT REGULATION IN THE
AN ANALYSIS OF FOREIGN DIRECT
INVESTMENT REGULATION IN THE
PETROLEUM SECTOR IN UGANDA
Submitted in partial fulfilment of the requirement of the
degree of LLM
(International Trade and Investments in Africa)
By
Jacob Ssali
Faculty of Law, University of Pretoria
May 2014
© University of Pretoria
DECLARATION
I, Jacob Ssali, declare that An Analysis Of Foreign Direct Investment Regulation In The
Petroleum Sector In Uganda is my own work and that it has not been submitted before for any
degree or examination in any other university, and that all sources I have used or quoted have
been indicated and acknowledged as complete references.
Signed: ___________________________ Jacob Ssali June 2014
Signed: ______________________________ Dr Femi June 2014
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ACKNOWLEDGEMENTS
I am greatly indebted to the Almighty God, for the invincible arm of support he has provided,
and for answering my prayers at all times.
I am also eternally grateful to Prof. Frans Vileon without whom I would never have got the
opportunity to do this LLM and the entire Centre for Human Rights family that natured me for
two years.
I would like to thank Dr Femi and his team that put our course together, I am grateful for all the
hard work you put in to make sure we were comfortable in our studies. In the same thought I
would like to thank all the lecturers that taught me through this course. You not only empowered
us but inspired us. I am eternally grateful.
I am also grateful to the Makerere University Institute for Social Research library for allowing
me to use their facilities for my research and assisting me where possible in the past 5 months.
Irene, Halima, and Susan thank you so much for your help. In the same light I would like to
thank my uncle Mr Joseph Kalyebi who has guided me through all my research. I am so grateful
for all your help including the sleepless nights. Thank you and God bless you.
I would also like to thank my great friends who have been there for me though out the entirety of
my course, Angela Bukenya, Eric Lwanga, Martin Nsibirwa, Yvone Oyeike, Armand Tanor,
Patience Monera, Kithue Masu thank you for your counsel and encouragement.
I would like to abundantly thank Mr George William Semivule and Mrs Helen Semivule, my
lovely parents; and my entire family for instilling in me, the love of God and the passion for
education. Thank you for the endless love and the financial and moral support. Additionally, I
would like to thank, Dr Dunstan Lumu, Mrs Tengiwe Lumu, my guardians and their family for
the support they have provided me at all times in South Africa.
I would also like to thank my classmates for the great friendship we shared. I will cherish all the
moments we shared though out the year.
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© University of Pretoria
DEDICATION
This work is affectionately dedicated to my parents, Mr and Mrs Semiivule and my guardians,
Dr. and Mrs Lumu, who continue to nurture my dream. To my entire family that has been there
for me through it all, my nephew and niece, Asha and Abigail, and to Prof. Frans Vileon, who
gave me
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© University of Pretoria
TABLE OF CONTENTS
DECLARATION ............................................................................................................................ 2
ACRONYMS .................................................................................................................................. 8
CHAPTER ONE ............................................................................................................................. 9
1.1 INTRODUCTION .................................................................................................................... 9
1.2 PROBLEM STATEMENT ................................................................................................................... 11
1.3 RESEARCH QUESTIONS................................................................................................................... 11
1.4 THESIS STATEMENT ........................................................................................................................ 12
1.5 JUSTIFICATION ................................................................................................................................. 12
1.6 LITERETURE REVIEW ........................................................................................................ 13
1.7 RESEARCH METHODOLOGY............................................................................................ 16
1.8 CHAPTER OVERVIEW ...................................................................................................................... 16
CHAPTER TWO .......................................................................................................................... 18
FOREIGN DIRECT INVESTMENT AS A CONCEPT AND ITS RELEVANCE IN UGANDA
........................................................................................................Error! Bookmark not defined.
2.1 INTRODUCTION OF FOREIGN DIRECT INVESTMENT AS A CONCEPT ................... 18
2.2 DEFINITION OF FDI ............................................................................................................ 19
2.3 HISTORY OF FDI .................................................................................................................. 20
2.4 IMPORTANCE OF FDI TO THE ECONOMY ..................................................................... 21
2.4.1 Trade and investment ........................................................................................................... 22
2.4.2 Technology transfer ............................................................................................................. 22
2.4.3 Human capital enhancement ................................................................................................ 23
2.4.4 Competition.......................................................................................................................... 23
2.4.5 Enterprise development ....................................................................................................... 24
2.5 FDI AND REGULATION ...................................................................................................... 24
2.7 FDI IN UGANDA................................................................................................................... 26
2.6.1 The Amin Era ....................................................................................................................... 27
2.6.2 The period from 1986 to 2013 ............................................................................................. 28
2.7 CONCLUSION ....................................................................................................................... 29
CHAPTER THREE ...................................................................................................................... 31
REGULATION OF FDI IN THE PETROLEUM SECTOR IN UGANDA Error! Bookmark not
defined.
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3.1 INTRODUCTION .................................................................................................................. 31
3.2 THE PETROLEUM INDUSTRY........................................................................................... 32
3.3 HISTORY OF THE PETROLEUM SECTOR IN UGANDA ............................................... 32
3.3.1 History and current developments of the legal framework in the petroleum sector ............ 35
3.4 KEY LEGAL ASPECTS OF THE PETROLEUM SECTOR ................................................ 37
3.4.1 Capital investment regulations. ............................................................................................ 38
3.4.2 Petroleum licensing .............................................................................................................. 38
3.4.2.1 Petroleum exploration licence........................................................................................... 39
3.4.2.2 Petroleum production licence ........................................................................................... 40
3.4.3 Production sharing agreements ............................................................................................ 41
3.4.4 Transfer of interests ............................................................................................................. 43
3.4.5 Local content requirements .................................................................................................. 43
3.4.6. Taxation .............................................................................................................................. 45
3.4.7 Environment and wildlife impact issues .............................................................................. 47
3.5 CONCLUSION ....................................................................................................................... 49
CHAPTER FOUR ......................................................................................................................... 50
IMPORTANT LEGAL GAPS IN THE FDI REGULATORY FRAMEWORK IN THE
PETROLEUM SECTOR IN UGANDA. ...................................................................................... 50
4.1 INTRODUCTION .................................................................................................................. 50
4.2 PRODUCTION SHARING AGREEMENTS ...................................................................................... 51
4.2.1 Secrecy in the Oil Sector.................................................................................................................... 51
4.2.2 Capital Gains Tax (CGT) ..................................................................................................... 51
4.2.3 Signature Bonuses:............................................................................................................... 52
4.2.4 Foreign arbitration and Uganda‘s sovereignty ..................................................................... 53
4.3 THE PETROLEUM LAWS ................................................................................................... 53
4.3.1 Institutional governance ....................................................................................................... 53
4.3.1.1 Ministerial control and executive interference ................................................................. 53
4.3.1.2 National Oil Company (NOC) .......................................................................................... 54
4.3.2 Parliamentary oversight ....................................................................................................... 56
4.3.3 Transparency of information................................................................................................ 57
4.3.4 Lack of clarity on financial management............................................................................. 58
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4.4 CORRUPTION ..................................................................................................................................... 59
4.5 LOCAL CONTENT.............................................................................................................................. 60
4.5.1 Local content as a company requirement............................................................................. 60
4.5.2 Human capital empowerment ............................................................................................................ 62
4.6 ENVIRONMENTAL ISSUES................................................................................................ 63
4.7 LAND RIGHTS AND COMPENSATION ............................................................................ 65
4.7.1 Property rights ...................................................................................................................... 65
4.7.2 Land valuation and compensation...................................................................................................... 66
4.7.3 Land grabbing .................................................................................................................................... 67
4.8 SOLUTIONS TO THE OUTSTANDING LEGAL GAPS IN THE REGULATORY
FRAMEWORK OF FDI IN THE PETROLEUM SECTOR. ....................................................... 68
4.8.1 Production Sharing Agreements .......................................................................................... 68
4.8.2 The laws ............................................................................................................................... 69
4.8.2.1 Ministerial powers and executive interference ................................................................. 69
4.8.2.2 Petroleum Authority.......................................................................................................... 70
4.8.2.3 National Oil Company ...................................................................................................... 70
4.8.2.4 Parliamentary oversight .................................................................................................... 71
4.8.2.5 Transparency of information............................................................................................. 71
4.8.3 Local content issue. .............................................................................................................. 72
4.8.4 Environmental issues ........................................................................................................... 73
4.8.5 Land issues and compensation ............................................................................................. 74
4.9 MINERAL RICH AFRICA AND THE RESOURCE CURSE .............................................. 75
4.9.1 The Oil Curse ....................................................................................................................... 76
4.10 LESSONS FROM NORWAY .............................................................................................. 78
$.11 CONCLUSION ..................................................................................................................... 80
CHAPTER 5 ................................................................................................................................. 81
CONCLUSION ............................................................................................................................. 81
5.1 INTRODUCTION .................................................................................................................. 81
5.2 CONCLUSION ....................................................................................................................... 81
BIBLIOGRAPHY ......................................................................................................................... 84
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ACRONYMS
CMC
Common Man‘s Chatter
FDI
Foreign direct investment
FIA
Foreign Investment (protection) Act
IC
Investment Code
IMF
International Monetary Fund
LCRs
Local content requirements
MEMD
Ministry of Energy and Mineral Development
Midstream Act
Petroleum (Refining, Gas processing and Conversion, Transportation and
Storage) Act of 2013
MOU
Memorandum of Understanding
NP
Nakivubo Pronouncement
OECD
Organization for Economic Co-operation and Development
PAU
Petroleum Authority of Uganda
PEPD
Petroleum Exploration and Production Department
PSA
Production Sharing Agreement
TICAF
Tororo Industrial Chemicals and Fertilisers
UDC
Uganda Development Corporation
UIA
Uganda Investment Authority
UNCTAD
United Nations Conference on Trade and Development
Upstream Act
Petroleum (Exploration, Development Production and Value Addition)
Act of 2013
URA
Uganda Revenue Authority
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CHAPTER ONE
1.1 Introduction
Foreign direct investment (FDI) is one of the important tools that developing countries use to
foster economic growth. FDI is the transfer of intangible assets from a natural person or
company whose majority of shares are directly or indirectly held by natural persons of foreign
nationality into a host country with the specific purpose of generating wealth under a total or
partial control of the owner of the assets.1FDI comprises of not only the initial transactions
establishing the relationship between the investor and enterprise but also all the subsequent
transactions between them and among affiliated enterprises both incorporated and not
incorporated.2
Governments in many developing countries are now giving new attention to the potential for
private FDI in their economies. The main reason being the desire for those countries to extend
their market- price, grow their private sector and mitigate the external debt problem by attracting
more private foreign investment.3
Many African countries are now focusing on FDI attraction and trying to cut down on reliance
on foreign loans. FDI has an advantage over foreign loans from a balance of payments
standpoint.4 Equity investment requires payment only when it earns profits unlike debt that
requires payment irrespective of the status of the economy. 5 The host country can also control
payments unlike the debts whose payment standards are set by international markets.6 Whereas
in servicing a debt, the interest paid is of no significant value to the country, the FDI earnings are
usually reinvested and only part is repatriated. With FDI both commercial and exchange rate risk
is passed on to the investor rather than it being borne by the host country.7
1
M Sornarajah International law on foreign investment (2004) 4.
B Sodersten& G Reed International economics (1994) 501.
3
MB Obwona ‗Determinants of FDI and their impact on economic growth in Uganda‘ (2001) African Development
Bank 47.
4
Obwona (n 3 above) 47
5
Obwona (n 3 above) 47.
6
Obwona (n 3 above) 47.
7
Obwona (n 3 above) 47.
2
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Uganda, like many developing African countries, in an attempt to accelerate growth and
development, embarked on a campaign to attract foreign investment.8 This has been done
through massive advertising campaigns and creation of different incentives to attract investors.
This is based on the perception that the current resource gap can be filled by the foreign private
investment.9Ideally, some of the benefits of FDI to the Ugandan economy include; availability of
foreign exchange, skills transfer, access to foreign markets, technology transfer, and diversity of
goods and services on the market, among others.10
FDI in Uganda is regulated by the Investment Code (IC) of 1999, the Act governing Investment
in Uganda.11 It replaced earlier statutes that included the Foreign Investment Decree 1977 and
the FIA. However the privileges and the property rights enjoyed under the previous laws by the
licence holders was to continue with amendments reviewed under the Code.12 The new law also
provided for the creation of the Uganda Investment Authority (UIA) as the regulatory authority
on investments in Uganda. It is the institution that creates procedures for investment in Uganda.13
Due to the above legal and structural reforms, Uganda has steadily been able to attract more FDI.
In 2012, Uganda saw an increase in their FDI inflow to the tune of 1.7 billion dollars. This
increase is mainly attributed to the discovery of oil and its subsequent exploration. With the
establishment of the petroleum sector, more FDI is expected to flow into the country.14
While the petroleum sector is still in its infancy, the search for oil in Uganda dates back to the
early 1920s.15Due to political instability over years, it stalled only resuming in 1992. Petroleum
reserves were discovered in 2006, and it is estimated to produce approximately 200,000 barrels
of oil per day at peak capacity.16
After the discovery of oil, the government embarked on legal reforms to regulate the new sectors
in the petroleum industry. So far, the Petroleum (Exploration, Development Production and
8
Obwona (n 3 above) 47.
Obwona (n 3 above) 47.
10
Obwona (n 3 above) 48.
11
Obwona (n 3 above) 52.
12
Obwona (n 3 above) 52.
13
Obwona (n 3 above) 52.
14
‘Uganda top investment destination in East Africa‘ Daily Monitor 4 July 2013.
15
http://www.petroleum.go.ug/page.php?k=abthistory (Accessed 20 November 2013).
16
See n15 above.
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Value Addition) Act 2013, Petroleum (Refining, Gas processing and Conversion,
Transportation and Storage) Act 2013 have been enacted. More laws are being prepared like
the Public Finance Bill 2012. These laws are to provide the principle legal framework
governing the petroleum sector in Uganda.
1.2 Problem Statement
The significance of FDI in Uganda can not be understated. With the country attracting 1.7 billion
dollars in 2012,17 clearly it shows that FDI is important to the country‘s economic development.
Uganda‘s current increase in FDI inflow coincides with the establishment of the petroleum sector
and all the current holders of oil exploration licences are foreign investors. FDI poses potential
risks especially in the petroleum sector if it is not well regulated. The issue of regulation of FDI
in the sector has not been analysed as the regulatory framework is fragmented as opposed to a
unified system. It is through this system that the government must find the right regulatory
framework that can fully utilise the benefits that come with petroleum for the development of
Uganda.
The above underscores the necessity to explore the efficacy of the current FDI regulations in
relation to the newly established petroleum sector. This will be the point of focus of this mini
dissertation.
1.3 Research Questions
In trying to analyse FDI regulation in the petroleum sector in Uganda the following questions are
going to be dealt with in this study:
17

What is FDI and why is it important in Uganda?

How is FDI regulated in the petroleum sector in Uganda?
See n 14 above
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
What are the current legal gaps in the FDI regulations in thepetroleum sector in Uganda
and how can these gaps be plugged?
1.4 Thesis Statement
This study argues that the FDI inflow into the petroleum industry is regulated by a raft of rules
which pose potential risks to the wellness of the new industry and the economy as a whole; the
there are many critical gaps in the legal and regulatory framework in extant which must
addressed to prevent Uganda from being vulnerable to the resource curse syndrome that may be
difficult to reverse.
1.5 Justification
There is no doubt that encouraging FDI is of importance to the country as it increases real
income resulting from the investment once the value added output by foreign capital is greater
than the amount appropriated by the investor.18 Social returns will exceed private returns. Given
that foreign investment raises productivity and this increase is not completely appropriated by
the investor, the greater product will be shared with others and some other income groups will
benefit directly.19 Domestic labour will benefit directly in form of higher real wages; consumers
by way of lower prices and government will receive higher tax revenue. These arguments do not
suggest there are no demerits to FDI.20 There is a school of thought that FDI leads to the
domination of the domestic economy by foreigners; creates distortions in the domestic labour
market by paying higher wages; but most especially for Uganda due to the establishment of the
petroleum sector and the subsequent high FDI investment into the sector, there is a fear that if
18
Obwona (n 3 above) 48.
Obwona (n 3 above) 48.
20
Obwona (n 3 above) 48.
19
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FDI regulation is not well established and streamlined it may lead the country into a resource
curse21 or the famous Dutch disease22.
The study will attempt to analyse this framework and attempt to address the gaps therein, which
has not been addressed in any existing literature.
1.6 Literature Review
There has been considerable interest in the development of FDI in many developing countries
and evidence of the role of FDI in the economic development of a country is well documented.
FDI has various definitions but the most widely accepted from the United Nations Conference on
Trade and Development (UNCTAD) is:23
―An investment made to acquire lasting interest in enterprises operating outside of the economy
of the investor‖
Krishnan states that FDI is increasingly becoming an overwhelmingly important factor for
international trade.24 Most of the nations are doing their best to invite more and more FDI from
the globe. And indeed the global flow of FDI is consistently increasing. In fact international
economic bodies like World Trade Organizations (WTO) are encouraging FDI flow at all fronts.
Many economic analysts held critical views about FDI in the past but latest trends in
international trade have proved beyond doubts that FDI can be used by host economies as an
effective tool to gain multiple benefits.25
21
The resource curse, also known as the paradox of plenty, refers to the paradox that countries and regions with an
abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to
have less economic growth and worse development outcomes than those without those resources.
22
Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign
currency, such as the discovery of large oil reserves.
23
http://unctad.org/en/Pages/DIAE/Foreign-Direct-Investment-%28FDI%29.aspx (Accessed 24November 2013)
24
http://ssrn.com/abstract=1521590(Accessed 12 February 2014)
25
See n 24 above
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Sun argues that there is ample evidence that FDI is a key ingredient to sustainable economic
growth.26 Going far beyond simple financing, FDI is instrumental in the rapid and efficient
cross-border transfer and adoption of best practice ranging from technological, managerial,
to environmental and social standards, which is the essence of economic development.27
Even during economic crisis, which tend to happen more frequently in a globalizing world
economy, FDI has proven to be more stable than other forms of investment and helps host
countries ride out crisis and return to growth.28
Sun, however, contends that FDI does not come without pre-conditions, nor can host
countries reap all the benefits of FDI automatically. Just like any other business people,
foreign investors are driven by profits.29 They go to places where the net profitability is
highest, not inevitably where costs are lowest; and they transmit best practice when it is
advantageous for them to do so, not necessarily when host countries need it.30 Hence,
national governments have an important task to create the pre-conditions for beneficial
FDI to enter and play its catalyst role in the host countries’ economic development.31 This is
particularly pertinent now, when the prospect of maintaining high levels of international
investment is less certain than just a few years ago.32
Sun thus advises that a sound policy and regulatory framework and efficient supporting
institutions to enforce the relevant laws and regulations are imperative for FDI to enter and
thrive.33 Sun argues that in a globalized competitive market, the difference between
countries in how conducive their investment climate may be, including how an investor is
received, how many administrative and regulatory obstacles an investor has to overcome
to enter and operate, and how commercial disputes are handled through the judicial
26
X Sun ‗How to Promote FDI? The Regulatory and Institutional Environment for Attracting FDI‘ (2002) Foreign
Investment Advisory Service 2
27
Sun (n 26 above) 2
28
Sun (n 26 above) 2
29
Sun (n 26 above) 2
30
Sun (n 26 above) 2
31
Sun (n 26 above) 2
32
Sun (n 26 above) 2
33
Sun (n 26 above) 2
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system have a huge impact on where the investor will go and how much contribution the
investment will make to the host economy.34
Parker adds that the aim of regulation is to establish a policy environment that sustains market
incentives and investor confidence.35 For this to be achieved, the regulator needs to be shielded
from political interference, and the government needs to support a regulatory environment that is
transparent, consistent and accountable.36
There have also been very many scholars that have made significant work on the regulation of
the oil mining sector in many different countries. Many others have dealt with the different
problems that come with poor regulation of the sector.
Humphreys contends that with oil prices becoming increasingly volatile, demand for energy
rising in china and India, and instability affecting key oil producers in the Middle East, there is a
wave of interest in new oil-producing countries especially in Africa.37 So there is potential for
these emerging producers to greatly benefit from the rising demand if well prepared.
Humphreys adds that, unfortunately, many African oil producers such as Sudan and several West
African countries are often better known for poverty, civil conflict and political instability than
for sound resources management policies.38 For these countries, absorbing substantial new
capital inflows without succumbing to civil disorder or corruption poses quite a challenge one
made even more difficult by the set of economic and political distortions collectively known as
the ―resource curse.39
As many of the above authors have showed, there is a need to have a robust regulatory
framework to deal with the demands of the petroleum sector. This is more so in African
countries like Uganda as most, if not all, investment into the sector is being made by foreign
34
Sun (n 26 above) 2
D Parker; C Kirkpatrick & YF Zhang, ‗Foreign direct investment in infrastructure in developing countries: does
regulation make a difference?‘(2006) 1 Transnational Corporations 15
36
Parker et al (n 35 above) 15
37
http://www.eisourcebook.org/515_HumphreysWhatistheProblemwithNaturalResourceWealth.html (Accessed 12
September 2013)
38
See n 37 above
39
See n 37 above
35
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companies. Thus, there is a need to analyze the efficacy of the regulatory framework of this FDI
inflow in the petroleum sector as this issue has not been fully explored.
1.7 Research Methodology
The research is a library and desktop based research. It involves a descriptive and analytical
exploration of primary and secondary sources. It relies on both published and unpublished
material. The materials used include different laws, books, reports, newspaper clippings,
conference and seminar reports, journal articles, websites and internet sources are used as an
input in the research among others.
1.8 Chapter Overview
The work is divided into the following chapters as set out below:
1.
Introduction and background
The chapter provides a general back ground to the research, the rationale for the research and
what the research seeks to achieve. The chapter also details the questions this research attempts
to answer and the difficulties that may be faced in answering those questions. The chapter also
shows the proposed approach and methodology to answering the research questions.
2.
Concept of Foreign Direct Investment and its relevance in Uganda
The chapter gives a clear understanding of FDI generally and its relevance to developing
countries in Africa. It further goes to discuss the history and relevance of FDI to Uganda. It also
discusses the progressive development of FDI and its current status in Uganda.
3.
Regulation of FDI in Uganda’s Petroleum Industry
This chapter discusses the current regulatory framework for FDI in the petroleum sector. The
framework if segmented and it is an amalgamation of different laws and regulations. This
chapter will systematically discuss the laws and regulations establishing the whole regulatory
structure.
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4.
Current important legal gaps in the regulatory framework of FDI in the petroleum
sector in Uganda.
This chapter discusses important legal gaps that need to be dealt with and looks at solutions to
these different legal gaps. These issues are an integral part of the regulatory framework and are
ideal for a well functioning regulatory system in the petroleum sector.
5.
Summary and conclusion
This chapter provides a summary of the discussions in chapter 2, 3 and 4. It concludes and
makes recommendations on how Uganda can optimise FDI through a sound legal and
regulatory framework.
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CHAPTER TWO
CONCEPT OF FOREIGN DIRECT INVESTMENT AND ITS RELEVANCE
IN UGANDA
2.1 Introduction
This chapter gives a basic background of FDI as a concept, the importance of FDI to an
economy, why there is a need to regulate FDI and the best practices in regulation thereof. It
further discusses FDI in Uganda, looking at its historical background, the laws and regulatory
framework and its current status in the country.
Foreign Direct Investment (FDI) as a concept is very important to a nation‘s economy. Although
its impact and relevance to a nation has been a point of debate for decades, it is however
undeniable that FDI plays a crucial role in the economic growth of developing economies like
Uganda.40
FDI, however, does not come without concerns for a host country. It is argued by some scholars
that FDI does not necessarily have a positive impact on a host country‘s economy.41 Poor
management of FDI inflow into a country may have a negative effect on a country‘s economy
like environmental degradation, failure of local business due to crowding in, and investment
flight all of which culminate into the host country not benefiting from the FDI. Thus, there is a
need to have good regulation and proper institutional structures to deal with the inflow of FDI in
the host country. Uganda too as a developing nation has over time created regulations to deal
with FDI. In the past five years FDI inflow in Uganda has been on the rise. This is partly due to
the discovery of petroleum and the establishment of the petroleum sector in the country.
40
Sun (n 26 above) 2
Sun (n 26 above) 2
41
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2.2 Definition of FDI
Foreign Direct Investment (FDI) does not have a lone definition, but rather different definitions
that are widely accepted. According to United Nations Conference on Trade and Development
(UNCTAD),42FDI can be defined as:
An investment made to acquire lasting interest in enterprises operating outside of the economy of
the investor
The International Monetary Fund (IMF) defines a foreign direct investment enterprise as:43
an incorporated or unincorporated enterprise in which a foreign investor owns 10 per cent or
more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of
an unincorporated enterprise.
The Organisation for Economic Co-operation and Development (OECD) defines FDI as44:
Cross-border investment by a resident entity in one economy with the objective of obtaining a
lasting interest in an enterprise resident in another economy. The lasting interest implies the
existence of a long-term relationship between the direct investor and the enterprise and a
significant degree of influence by the direct investor on the management of the enterprise.
Ownership of at least 10% of the voting power, representing the influence by the investor, is the
basic criterion used.
Apart from international organisations, some scholars too have come up with a definition of FDI.
According to Sornarajah FDI is defined as45:
The transfer of intangible assets from a natural person or company whose majority of shares are
directly or indirectly held by natural persons of foreign nationality into a host country with the
specific purpose of generating wealth under a total or partial control of the owner of the assets.
42
See n 23 above
http://www.imf.org/external/np/cmcg/2003/eng/091803.HTM(Accessed 24 November 2013)
44
http://www.oecd-ilibrary.org/sites/factbook-2013-en/04/02/01/index.html?itemId=/content/chapter/factbook-201334-en(Accessed 24 November 2013)
45
Sornarajah (n 1 above) 4
43
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A foreign direct investor as defined by OECD is an individual, an incorporated or unincorporated
public or private enterprise, a government, a group of related individuals, or a group of related
incorporated and/or unincorporated enterprises which has a direct investment enterprise that is, a
subsidiary associate or branch operating in a country other than the country or countries of
residence of the foreign direct investor or investors46
2.3 History of FDI
The concept of FDI can actually be said to be as old as trade itself, for it dates back to the ancient
ages from the inception of trade between nations.47 This is evidenced by trade routes in history
between Europe, Asia and North Africa like the Silk route (mainly connecting Changan of
Modern China with Asia Minor and the Mediterranean), Spice route (mainly between the Indian
subcontinent and Europe), Incense route (mainly between Arabia and Greco-Roman region)48and
the Trans Mediterranean trade during Biblical times49.
During the twentieth century with the European scramble for colonial territories, the colonial
masters of the day took initiative to invest in the colonies. In East Africa, the British invested in
infrastructure like roads and a railway connecting Mombasa to Nairobi and Kampala to make it
easy to move raw materials like cotton, coffee and metals like copper and tin for export to
Britain.50
On attaining independence, many countries were faced with a daunting problem of where to
source the funding to sustain their development projects as many colonial masters pulled out
their funding, and thus got involved in international trade and later FDI. The rapid growth of
Asian nations is testament to this evolving phenomenon. The emergence of South Korea,
46
‗OECD Benchmark Definition Of Foreign Direct Investment‘ Organisation for Economic Co-Operation And
Development (OECD) (1999) 8
47
See n 24 above
http://www.metmuseum.org/toah/hd/trade/hd_trade.htm (Accessed 14 January 2014)
49
Temin ‗Mediterranean Trade In Biblical Times‘(2003) Massachusetts Institute of Technology Department of
Economics Working Paper Series03
50
http://en.wikipedia.org/wiki/Uganda_Railway (Accessed 14 January 2014)
48
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Taiwan, and Singapore, among others, brought added advantages for investments, both inwards
as well as outwards.51
In recent years, FDI inflow has increased exponentially in Africa. This has mainly been due to
relative peace in many of the nations on the African continent and the emergence of more
sources of FDI with China investing aggressively in Africa.52 The largest amount of FDI inflow
into Africa goes to the countries with natural resources and has boosted their economies and
elevated their place on the international market, while in others it has plunged them into
socioeconomic disaster.
2.4 Importance of FDI to the economy
The significant impact of FDI to the economy of a host country is a point of contention for many
a time because it is hard to compute. Some scholars argue that FDI inflow does not necessarily
have a positive impact on a host country‘s economy and the level of FDI into a country‘s
economy does not equal to its economic growth rate.53In recent years a view is evolving which
suggests that FDI is positively correlated with growth, reinforced by the developments in growth
theory which indicates that FDI promotes improvements in technology, efficiency, and
productivity in stimulating growth.54
From this perspective, FDI relates with positive growth rate through its role as a conduit for
transferring technologies from industrialized to developing economies.55 On the other hand,
opponents of FDI have argued that FDI would increase dependency and, subsequently,
vulnerability of the host countries on the FDI-exporting developed countries.56
There is no universally accepted criterion for choice of factors that determine economic growth
in a country but for the purposes of this research, different parameters will be considered: The
51
See n 24 above
http://www.eurekalert.org/pub_releases/2010-09/adb-cat091310.php (Accessed 19 January 2014)
53
M Busse& J L Groizard ‗Foreign Direct Investment, Regulations and Growth‘ 10 (2008) The World Economy
journal862
54
Sun (n 26 above) 2
55
EG Lim ‗Determinants of, and the Relation Between, Foreign Investment and Growth: A Summary of the Recent
Literature‘ (2001), IMF Working Paper 3
56
I Yussof& R Ismail, ‗Human Resource Competitiveness And Inflow Of Foreign Direct Investment To The Asean
Region‘ (2002) 9 Asia-Pacific Development Journal 1
52
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major parameters of an economy which are affected by FDI flow are: Trade and investment;
Technology transfer; Human capital enhancement; Competition; Enterprise development. 57
2.4.1 Trade and investment
Inward FDI contributes greatly to the integration of the host country into the world economy
through import and export. In a globalised world with a high level of interregional,
intercontinental and world trade foreign investment creates an avenue for a country to indulge in
import and export. This in the long run improves the country‘s import export margins thus
creating benefit to the host nation. 58
FDI may however adversely affect local markets. The foreign investors may prefer to buy out
local businesses, collapsing them or leading to asset stripping.59 In some cases the host country
may not gain value as FDI inflows equal to outflows. Many foreign investors usually prefer to
import all their raw materials and equipment and thus ignore locally made products.60 This
creates not only the exhaustion of foreign exchange reserves but a negative trade imbalance in
the economy.61
2.4.2 Technology transfer
This does not merely refer to the technology itself but includes the organizational and
management skills.62 The foreign investors share their technology with the host country as the
parent companies support their subsidiaries with human resource, infrastructure, and training,
among others. In cases of a new sector it helps the host country establish a business
infrastructure for the sector.
57
‗Foreign Direct Investment for development maximizing benefits, minimizing costs: Overview‘ (2002) Organisation
for Economic Co-Operation And Development(OECD) 9
58
I Yussof& R Ismail, (n 56 above) 10
See n 24 above
60
See n 24 above
61
http://www.tearfund.org/webdocs/Website/Campaigning/Policy%20and%20research/Investment%20and%20devel
opment%20paper.pdf ( Accessed on 20 February 2014)
62
‗Trade and foreign direct investment‘ , WTO News Press/57, October 1996
59
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Such developments can have a positive impact on a country‘s socioeconomic structure only if
there are spillovers from the investment. In terms of FDI, spillovers means benefits from the
technologies of investor‘s enterprise to the local economy.63
There are some concerns about technology transfer issues. Many times there arise disputes
pertaining to intellectual property rights violations. To keep the technological edge, many
enterprises demand stricter laws for protecting intellectual property rights.64 Some governments
prohibit their enterprises from transferring some dual use sensitive technologies to strategically
hostile nations for the fear of proliferation of destructive technologies.
2.4.3 Human capital enhancement
This involves creating employment and intellectual assets by imparting training and education by
the investor in the host nation through training and on-the-job learning.65 Those investors may
also have a positive influence on human capital enhancement in other local enterprises with
which they interact and develop links which have positive effects on human resource
development of the host economy.66 FDI can compensate for critical management gaps,
facilitating employment of local labor and transferring skills to local managers and
entrepreneurs.67
2.4.4 Competition
It must be noted that there is no universally accepted way of measuring the level of competition
in a given country‘s market. However, inward FDI may lead to an increase in competition in the
host country‘s market. The subsidiaries of foreign enterprises can catalyze economic
development by inspiring domestic competition and thereby leading eventually to higher
productivity and competitive prices.68
At the same time, inward FDI might be a threat to the local enterprises. Foreign technology or
organizational techniques may actually be inappropriate to local needs, capital intensive and
63
See n 24 above.
P Nunnenkamp & J Spatz, ‗Intellectual Property Rights and Foreign Direct Investment: The Role of Industry and
Host-Country Characteristics‘ (2003) 1167 Kiel Working Paper 37.
65
See n 24 above.
66
I Yussof & R Ismail, (n 56above) 14.
67
See n 44 above.
68
I Yussof & R Ismail, (n 56 above) 16.
64
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have a negative effect on local competitors of the host economy, especially smaller business who
are less able to make equivalent adaptations to compete with bigger and advanced subsidiaries of
foreign investors69
2.4.5 Enterprise development
Inward FDI has the capacity to positively influence enterprise development in host countries.70
Especially in the mergers and acquisitions FDI, the acquiring foreign investor makes efforts to
raise efficiency and reduce costs in the acquired enterprise of the host economy.71Also,
efficiency gains may occur in unrelated enterprises through demonstration effects and other
spillovers similar to those that lead to technology and human capital spillovers.72
There are some possible negative impacts on growth of national economy as well. Large amount
of FDI, in the absence of proper holistic strategy, can create the problems of ―Crowding out‖ in
the host economy.73 ―Crowding in‖ and ―Crowding out‖ are two very critical phenomena
associated with FDI in host economy. When FDI companies enhances the competitiveness
within the local economy and produces overall results which are good for economy, it is called
―Crowding in‖.74 ―Crowding out‖ occurs when the FDI company is too big and powerful for the
local businesses and aggressive tactics of FDI company dominates the whole market, strafing the
local competitors75 Hence, FDI may become threat to local businesses and it can seriously
jeopardize the nations‘ native local companies.
2.5 FDI and regulation
For an investor to invest in a host country, they have to be sure of guarantee on return on
investment as they are fully motivated by profit. On the other hand, the host country must ensure
that FDI inflow does not create a distortion to the local economy. The government of the host
country needs to look for a balance between these two important aspects. For the government to
69
‗Foreign Direct Investment: A lead driver for sustainable development?‘ (2002) 1 Economic Briefing Series 3.
See n 24 above.
71
See n 24 above.
72
See n 24 above.
73
See n 24 above.
74
See n 24 above.
75
‗Foreign Direct Investment: A Lead Driver for Sustainable Development?‘(2002) 1Economic Briefing Series,
Towards Earth Summit 4.
70
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create the balance it must invest in a sound and efficient policy and regulatory framework that
have political and macroeconomic stability and a diligent physical and social infrastructure to
compliment the policies that are created.
A sound policy and regulatory framework as well as efficient supporting institutions to enforce
the relevant laws and regulations are imperative for FDI to enter and thrive.76Especially in a
globalized competitive market, the difference between countries in how conducive their
investment climate may be, including how an investor is received, how many administrative and
regulatory obstacles an investor has to overcome to enter and operate, and how commercial
disputes are handled through the judiciary system, have a huge impact on where the investor will
go and how much contribution the investment will make to the host economy. 77
An adequate physical and social infrastructure complements a good policy and regulatory
framework to create the necessary environment for attracting FDI. 78These include the quantity
and quality of roads and communication systems, skilled labor, as well as the efficiency with
which public services are delivered.79 They are also important if the full potential benefits of FDI
presence are to be realized.80
Therefore, a sound policy, regulatory and institutional environment for FDI is one part of the
larger investment climate that affects all private investors, both foreign and domestic. 81 To
encourage investment, the policies and practices should aim to reduce investor costs and the
perceived risks associated with the investment, as well as creating an investment climate
conducive for the domestic economy to benefit from such investments.82Over the last decade or
two, more and more developing countries have liberalized their economic policies. Lower tariffs,
fewer quantitative restrictions, and currency convertibility have helped to encourage trade flows,
and the importance of FDI in GDP has risen almost everywhere, thanks to fewer sectoral
76
Sun (n 26 above)
Sun (n 26 above)
78
Sun (n 26 above)
79
Sun (n 26 above)
80
Sun (n 26 above)
81
Sun (n 26 above)
82
Sun (n 26 above)
77
2.
2.
2.
2.
2.
3.
3.
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restrictions to foreign investors or the percentage of foreign ownership allowed, and a more
favorable outlook towards FDI in general.83
Although the issue has generated considerable interests among policy analysts in recent years,
there remains an empirical lacuna to link the suitable regulatory policy framework to a country‘s
socioeconomic reality. In the absence of such theoretical guidance, solutions are sought for in
best practice examples of what have worked on the ground.84
2.7 FDI in Uganda
The story of FDI in Uganda goes back to colonial era when the country was a British
protectorate. During that time as was the norm, all development projects in the country were
financed by the British government. On attaining independence in 1962, Uganda was left with a
dilemma of how to fund the on-going development projects as the British withdrew their funding
gradually.85The new government took on the task of sourcing funding for the development
projects. One of the ways in which it hoped to gain funding was through attracting FDI into the
country.
The government‘s intentions were clearly demonstrated by the passing of the Uganda Industrial
Act of 1963 with the main aim of attracting both local and foreign investors.
86
The government
invested in efforts to shift economic dependence from agriculture to industrialisation. This was a
strategic move considering the backward and forward linkages that would be created by the
industrial sector and the economic diversity as it would encourage potential markets for other
sectors and further create employment.
87
The government went on to acquire the Uganda
Development Corporation (UDC) initially formed in 1952 to enhance industrialization by the
British.88The state and a few Asian private investors like Madhivani and Mehta groups
championed economic growth post independence through huge investment into the
83
Sun (n 26 above) 3.
Sun (n 26 above) 2.
85
Obwona (n 3 above) 49.
86
Obwona (n 3 above) 49.
87
Obwona (n 3 above) 49.
88
Obwona (n 3 above) 49.
84
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economy.89The legal protection for FDI against compulsory acquisition by the state and rights to
repatriate capital, interest and dividends was provided under the Foreign Investment Protection
Act of 1964 (FIA).
90
However in subsequent yearswith the government of the day looking to
nationalise the industrial sector, the UDC was used to slowly grab private investments by it being
given a legal right to control 51% of most of the projects it had started like Nyanza Textiles
Industries Limited (NYTIL) and Uganda Cement Industries (UCI), Tororo Industrial Chemicals
and Fertilisers (TICAF) among others.91
Later, in 1968 the government made its biggest step towards nationalisation by the passing of the
Common Man‘s Charter of 1968(CMC) which was viewed as a socialist stand. At that time the
economy was being controlled by a few British-Asian investors who owned most of the
commercial and industrial sectors of the country.92 This was seen by the government as
unsustainable and risky to the long term growth of the country. The government then went ahead
and followed on to the CMC by passing the Nakivubo Pronouncement of 1970 (NP) that outlined
the strategy for implementing the CMC.93The NP increased the control of government in the
major private industries from 51% to 60% and further excluded private companies from external
trade, Foreign investors were unsettled and the political environment was so tense leading to the
overthrow of the civilian government and beginning of one the most interesting and controversial
era in Uganda‘s history, the Amin Era. 94
2.6.1 The Amin Era
This was a period of ‗economic war‘. It all started in 1972 with the expulsion of British-Asians
from the Uganda. This led to the expropriation of all assets and businesses of foreign investors
and the eventual collapse of the industrial sector in Uganda.95 Although at ascension to power
Amin revoked the NP, he later went on to nationalise most of the foreign investors‘ businesses
even those not in the industrial sector.96The nationalised businesses were given to Ugandans
89
Obwona (n 3 above) 49.
Obwona (n 3 above) 49.
91
Obwona (n 3 above) 49.
92
Obwona (n 3 above) 49.
93
Obwona (n 3 above) 50.
94
Obwona (n 3 above) 50.
95
Obwona (n 3 above) 50.
96
Obwona (n 3 above) 50.
90
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while others were put under the UDC. This led to Uganda‘s isolation by the Western world and
further hostilities and economic turmoil97.
With the fall of the industrial sector came a whole lot of economic issues. There were shortages
of products in the market and this led to hikes in prices of almost everything. Due to the isolation
by the West the country lacked foreign currency or credit worthiness and this led to inflation.98
With the government faced with economic meltdown it realised the importance of FDI and
passed the Foreign Investment Decree of 1977 that exempted a foreign investor from import
duty, sales tax on plant and machinery in an investment in an approved enterprise. 99The decree
was not retrospective and applied if investments exceeded US$571,000.100 Theinvestors were
reluctant to take the risk on their money in such a hostile political and economic environment.101
Even after the overthrow of Amin in 1979 the issues that had been created in the economy
coupled with the hostile political climate made investment into the country a very risky business.
FDI reduced significantly during this period until 1986.
2.6.2 The period from 1986 to 2013
In 1986, after a long period of political turmoil and civil war the National Resistance Army
(NRA), a rebel group, finally won the war and swiftly took steps to re-establish a government in
Uganda. This has been followed by a period of relative peace and economic growth and stability.
When the new government took over, it realised the important and urgent need for FDI in the
economy. With this realisation, the government undertook steps to revive the depleted FDI
inflow and also market Uganda as an investment destination.
102
In 1990, the government started
by implementing the law passed by the 1985 parliament to return properties of foreign investors
to their rightful owners.103This was followed by different reforms to enhance investment on a
macroeconomic level. The government through the advice of the IMF and World Bank
undertook structural adjustment programmes to improve the economy, these included: foreign
97
Obwona (n 3 above) 50.
Obwona (n 3 above) 51.
99
Obwona (n 3 above) 51
100
Obwona (n 3 above) 51.
101
Obwona (n 3 above) 51.
102
Obwona (n 3 above) 51.
103
Obwona (n 3 above) 51.
98
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exchange reforms, market liberalization, simplification of administrative procedures and
privatisation and acceding to different regional and international treaties.104
The government also enacted the Investment Code of 1999 (IC) the Act governing investment in
Uganda.105 This Act replaced the earlier statutes that included the Foreign Investment Decree of
1977 and the FIA. However the privileges and the property rights enjoyed under the previous
laws by the licence holders were to continue and be reviewed under the Code.106 The Investment
Code also provided for the creation of the Uganda Investment Authority (UIA) as the regulatory
authority on investments in Uganda. It is the institution that creates procedures for investment in
Uganda.107
According to a joint survey between UIA, Bank of Uganda and Uganda National Bureau of
Statistics about which investments have come in for the period between 1991 and 2012, FDI had
grown tremendously to about $2 billion by 2008, with over 3500 projects licensed.108 With the
discovery of oil and the government decision to invest and exploit the oil, came unprecedented
amounts of FDI inflow. In 2012 Uganda saw an increase of FDI inflow to the tune of 1.7 billion
dollars. This increase is mainly attributed to the discovery of oil and its subsequent exploration.
With the establishment of the petroleum sector, more FDI is expected to flow into the country.109
2.7 Conclusion
It goes without question that FDI is a very important concept in world economics and has been
since the inception of trade itself. As has been clearly shown in this chapter, FDI is not just
limited to the money that gets invested but also comes in different forms with other advantages
like technology transfer, skilling of labour, employment opportunities, increased competition
locally and exposure to international markets among others.
104
Obwona (n 3 above) 52.
Obwona (n 3 above) 52.
106
Obwona (n 3 above) 52.
107
Obwona (n 3 above) 52.
108
http://www.ugandaeconomy.com/invest-uganda/uganda-investment-authority (Accessed 12 January 2014)
109
‘Uganda top investment destination in East Africa‘ Daily Monitor 4 July 2013.
105
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This FDI does not come without conditions as investors also seek for profit for their investment.
If not handled well, FDI inflow may be detrimental to the growth of the host country‘s economy.
So, there is a need for a country to find a balance between investors‘ interests and those of the
nation. There is therefore a need for the government to create regulations supported by the right
regulatory framework to regulate FDI.
In Uganda, like many other African nations, FDI has played an important role in economic
development. Although FDI in Uganda has had a volatile history the government has over the
past 20 years worked towards mending it. This has led to the steady rise of FDI inflow into the
country. With the new petroleum sector the amount has increased to unprecedented amounts.
Although there has been the Investment Code of 1999 complimented by other laws there is no
unified legislation that deals with FDI in Uganda. The rapid increase in FDI means that there is
need for caution regarding FDI itself.
The next chapter will critically analyse the current regulatory structure of FDI in the petroleum
sector in detail. It will start by giving a historical background of the petroleum sector and
progression to its current status. The chapter will also further look into the different relevant laws
in the regulation of FDI in the petroleum sector including the ones that are pending to be passed
by parliament.
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CHAPTER THREE
REGULATION OF FDI IN UGANDA’S PETROLEUM INDUSTRY
3.1 Introduction
This chapter is going to discuss the petroleum sector in Uganda, its history and current
developments, the legal framework of the petroleum sector, the different industrial sectors in the
petroleum sector and their regulation. It will further discuss the regulatory framework for foreign
investment into the petroleum sector including the regulators and important legal aspects in
regulation of foreign investment in the petroleum sector.
The petroleum sector is a very important sector in all petroleum producing nations around the
world, and revenues so huge that if well managed the sector has the potential of drastically
improving a country‘s socioeconomic development.
With the discovery and exploitation of the petroleum resource in Uganda come the questions on
whether the country has a ready and efficient regulatory framework in place to deal with the new
developments in the sector as the laws in place at time of discovery only dealt with the lower
stream areas of the petroleum sector.
In light of the discovery and exploitation of the petroleum resource in the country the Ugandan
government has taken steps to establish a regulatory and institutional framework to deal with the
new demands in the petroleum sector.
It should however be noted, that since the petroleum sector is dominated by international
companies, the regulation of these companies and foreign investment in the sector is not done by
a single law regulatory framework. Since the petroleum sector affects so many aspects from
environment, wildlife, health, revenue to labour among others, there are different laws and
regulators involved in the regulation of the petroleum sector. This creates a segmented regulatory
system in the petroleum sector.
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3.2 The Petroleum Industry
The petroleum industry includes the processes of exploration, extraction, refining, transporting
and marketing petroleum products.110 The largest volume products of the industry are fuel oil
and petrol. Petroleum is also the raw material for many chemical products, including
pharmaceuticals, solvents, fertilizers, pesticides, and plastics.111 The industry is usually divided
into three major components: upstream, midstream and downstream. Midstream operations are
usually included in the downstream category.112
The world consumes 30 billion barrels of oil per year, with developed nations being the largest
consumers. The United States consumed 25% of the oil produced in 2007. The production,
distribution, refining, and retailing of petroleum taken as a whole represents the world's largest
industry in terms of dollar value.113
Petroleum and the petroleum industry play such a vital role in the world as most world economic
production depends on petroleum products. This is thus a very vital and important sector in any
country‘s economy. This is more so for an oil producing developing country like Uganda.
3.3 History of the Petroleum Sector in Uganda
The hunt for oil in Uganda dates back to the early 1920s, when E.J. Wayland a British geologist
documented the presence of hydrocarbons in the Albertine Graben. These findings were
documented in the publication ―Petroleum in Uganda‖ 1925.114
This initial discovery was followed by preliminary well-drilling in1938 but no testing was done
on this new discovery. Despite the country having vivid signs of oil, Uganda was affected by
World War II and its aftermath115mainly because the British who were the colonial masters of
Uganda at that time were participating in, and later recovering from the World War II.
110
http://en.wikipedia.org/wiki/Petroleum_industry (Accessed 11 April 2014).
See n 110 above.
112
See n 110 above.
113
See n 110 above.
114
http://www.acode-u.org/ugandaoil.html (Accessed on 20 September 2013).
115
http://www.ugandaoilandgas.com/ugandaoilandgas_003.htm (Accessed 20 November 2013).
111
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In the years following the independence of Uganda in 1962, the political turmoil that engulfed
the country rendered the pursuit of oil dormant until the 1980s.116Between 1983 and
1992geologists in Uganda‘s Petroleum Exploration and Production Department (PEPD) engaged
in extensive subsequent ground surveys of the Albertine Graben region.117 The findings revealed
the Albertine Graben located in western Uganda as the basin most primed for oil exploitation.118
These subsequent petroleum discoveries prompted the Ugandan government to sign contracts
with a number of international companies to engage in preliminary exploration and testing.So far
four out of the six exploration areas identified to have good potential for petroleum production in
the country are being licensed to international oil companies with the remaining areas awaiting
licensing by government of the prospective applicants.119 The most visible of these firms is
Tullow oil, which recently consolidated its hold over a handful of oil-rich concessionary blocks
in the Graben.120In March 2011, Tullow signed contracts with Total S.A. of France and CNOOC
Ltd. of China, each of which acquired a one-third interest in exploration areas 1, 2, and 3A.121
While oil production is still a couple of years away, petroleum geologists assert that the
Albertine Graben has huge oil reserves. It is estimated that at peak capacity the combined areas
are expected to produce approximately 200,000 barrels of oil per day.122
So far five Production sharing agreements (PSA) have been signed by the government with
different oil companies all of which are foreign companies and more than four production
licences have been issued. The government in 2014 issued a production licence over the
Kingfisher Field operated by CNOOC. CNOOC has now commenced the development of this
field which is expected to take a period of four years before production can commence. 123The
Ministry of Energy and Mineral Development (MEMD) is also reviewing applications for
116
See n 110 above.
See n 15 above.
118
See n 15 above.
119
See n 110 above.
120
See n 15 above.
121
See n 114 above.
122
See n 15 above.
123
‗Government signs Memorandum of Understanding with the Licensed Oil Companies‘Ministry Of Energy And
Mineral Development Press release 6February 2014
117
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production licenses over eight discoveries in Exploration area 2 operated by Tullow and another
application has been submitted by Total for a field in Albertine Exploration Area124
In February 2014, the Ugandan government signed a Memorandum of Understanding (MoU) on
the Sustainable Development of the Discovered Petroleum Resources in the Albertine Graben
with the Licensed Oil Companies operating in the country, namely; CNOOC Uganda Limited
(CUL), Total E&P Uganda B.V. (TOTAL), Tullow Uganda Operations Pty Limited (TUOPL)
and Tullow Uganda Limited (TUL).125
The purpose of the MoU is to provide a framework for achieving a harmonized
commercialization plan for the development of the discovered petroleum resources in Uganda.126
The plan includes the use of petroleum for power generation, supply of crude oil to the refinery
to be developed in Uganda by the government and export of crude oil through an export pipeline
or any other viable options to be developed by the oil companies.127
The MoU requires the oil companies to support the Ugandan government in its efforts to develop
the refinery including public endorsement of the project.128 It also requires the government to
provide support to the oil companies in acquiring approvals for studies and surveys for an export
pipeline and to initiate discussions with neighboring countries in relation to cross border
frameworks for the pipeline.129
The government is currently in the process of developing Uganda‘s oil refinerywith six firms
shortlisted to submit proposals for the developmentit has also acquired 29 Square kilometers of
land in Hoima district for the project through implementation of a Resettlement Action Plan.130
124
See n 123 above.
See n 123 above.
126
See n 123 above.
127
See n 123 above.
128
See n 123 above.
129
See n 123 above.
130
See n 123 above.
125
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3.3.1 History and current developments of the legal framework in the petroleum
sector
Prior to the discovery of oil reserves and subsequent exploration, the legal framework that was
governing the operations of the petroleum sector included: The Petroleum Exploration and
Production Act of 1985, The Petroleum Exploration and Production Regulations of 1993,
The Uganda Oil Board Act Cap 328, of 1991 And the Petroleum Supply Act of
2003.131However with the discovery of the oil reserves and the government‘s push to start
petroleum production, these laws were found to be inadequate to deal with the new
developments in the sector as they did not cover the midstream petroleum operations,
environmental protection and conservation in addition to the new emerging challenges created by
the discovery of commercial petroleum resources.132
From 2008, the government of Uganda embarked on legal reforms in the petroleum sector to
cater to the new demands of the sector. These included the enactment of new laws and policy,
amendment of complimentary laws and creation of a new institutional framework among others.
The government began by creating the National Oil and Gas Policy for Uganda of 2008 (NOP).
The NOP superseded the Energy Policy for Uganda published in 2002 in matters of exploration,
development, production and utilization of the country‘s oil and gas resources.133 The aim of the
NOP is creating a conducive environment for petroleum exploration in the country and the
anticipated development, production and utilization of any discovered resources, the policy also
seeks to put in place a framework for the efficient management of the oil and gas resources as
well as revenues accruing there from.134 The NOP put in place the guidelines for the creation of
the legal and institutional frameworks in the petroleum sector, financial policy, impact
assessments from environmental to human monitoring and evaluation guidelines for
implementation of the policy.
The NOP was followed by the drafting and enactment of new legislation for the petroleum
sector. The new legislation is intended to cover the upstream, midstream and lower stream
131
See n 114 above
See n 114 above
133
National Oil and Gas Policy For Uganda of 2008, ii
134
See n 133 above, iv
132
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sectors. On 7 December 2012, Parliament passed the Petroleum (Exploration, Development
Production and Value Addition) Act of 2012 (Upstream Act). This Act replaced the
Petroleum exploration and production Act of 1985. The aim of the Act is o regulate the
upstream sector. Under the new Act, the Government has powers to enter into agreements
relating to petroleum activities with any person.
The Minister of Energy and Mineral
Development will be responsible for granting and revoking of licences.135
The new Act also establishes the Petroleum Authority of Uganda (PAU) whose major function
will be to monitor and regulate petroleum activities in Uganda.136 The PAU replaces the PEPD
and takes over its functions.137 The PAU will give directions to licensees on best petroleum
industry practices to ensure proper and optimal production of petroleum and encourage best
conservation practices in licensed areas.138
Uganda will include:
Other functions of the Petroleum Authority of
monitoring and regulation of petroleum activities including reserve
estimation and measurement of the oil and gas produced; reviewing and approving proposed
exploration operations contained in the licensee‘s work program, reviewing and approving
budgets submitted by the licensee; advising the Minister in the negotiation of Production sharing
Agreements
(PSAs);
assessing
production
and
cessation
of
petroleum
activities,
decommissioning and ascertaining cost oil or gas oil due to licensees and administering
petroleum agreements.139
The new Act also provides for the formation of a National Oil Company (NOC). 140 The NOC
shall be a wholly state owned enterprise incorporated under the Companies Act and managed in
accordance with the Companies Act, the Petroleum (Exploration, Development and Production)
Act as well as other laws governing state enterprises.141
In February 2013 the Petroleum (Refining, Gas processing and Conversion, Transportation
and Storage) Act of 2013 (Midstream Act) was passed by parliament. This Act regulates the
midstream activities of the petroleum sector. The objectives of the Act are; to regulate, manage,
135
Petroleum (Exploration, Development and Production) Act of 2012. Section 8.
See n 135 above, Section 9.
137
See n 135 above, Section 10.
138
See n 135 above, Section 15.
139
See n 135 above, Section 10.
140
See n 135 above, Section 42.
141
See n 135 above, Section 42(2).
136
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coordinate and monitor midstream operations; to enable the construction, placement and
ownership of facilities; to provide for third party access to facilities, and to regulate tariffs for
facilities.142
The law also provides for an open, transparent and competitive process for licensing by the
Minister; provide for additional and particular health, safety and environment regulations not
sufficiently regulated in other laws; provide for cessation of midstream operations under this Act
and decommissioning of facilities; and regulate any other matters related to midstream
operations.143Most importantly it created guidelines for the building of the oil refinery as planned
by the government of Uganda.
The government has tabled the Public Finance Bill of 2012. This bill seeks to regulate
government revenue and expenditure regarding all revenue received by the government and its
subsequent expenditure for all its activities in the country. The bill is aimed at creating and
improving transparency in the government which is one of the major requirements for the
success of oil production and the petroleum sector in any country. There are other laws in
complementary sectors like tax, labour, and environment among others that are being amended
to cater for the new changes in the petroleum sector.
3.4 Key Legal Aspects of the Petroleum Sector
The regulatory framework in the oil sector as earlier discussed is not a single regulatory system
but rather a multiplicity of different legal systems that complement each other to create a
working system. This is mainly due to the many different aspects and stages involved in the
petroleum sector in Uganda. These include the following:
142
143
http://www.petroleum.go.ug/page.php?k=regacts&id=5(Accessed on 25March 2014)
See n 142 above.
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3.4.1 Capital investment regulations.
All investments in Uganda are regulated by the investment Code Act of 1991. The Act requires
any investor operating a business in Uganda to be in possession of an investment licence issued
by the Uganda Investment Authority (UIA) in accordance to the Act.144
A foreign investor is defined as a person who is not a citizen of Uganda or a company in which
more than 50 percent of the shares are held by a person who is not a citizen of Uganda or a
partnership in which the majority of partners are not citizens of Uganda.145
A foreign investor is required to incorporate a company with the Registrar General as is required
by law and deposit a sum of one hundred thousand United States dollars or its equivalent in
Uganda shillings at the Bank of Uganda (BoU).146
The Act protects any licensed investor from their enterprise, right or interest over property
forming the enterprise from compulsory acquisition unless it is in accordance with the
constitution of Uganda.147 Where any acquisition takes place, the investor is compensated in
respect to the fair market value of the enterprise or interest at the time of the acquisition. 148 The
compensation is freely transferable out of Uganda.149
3.4.2 Petroleum licensing
Following the acquisition of an investment licence and tax reference number, an investor is
required to apply for a licence before commencing with any activities in the petroleum sector.
Petroleum licences in Uganda are issued in accordance with the Upstream Act and the Midstream
Act. These Acts confer the powers to issue a licence to the Minister of Energy and Mineral
Development.150 There are two types of licences issued in this regard so far. The petroleum
exploration licence and the petroleum production licence.
144
Investment Code Act of 1991 section 10(1).
See n 144 above , section 9(1).
146
See n 144 above, section 10(5).
147
See n 144 above, section 27(1).
148
See n 144 above, section 27(2).
149
See n 144 above, section 27(3).
150
See n 135 above, Section 8(a).
145
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3.4.2.1 Petroleum exploration licence
Petroleum exploration is the search by petroleum geologists and geophysicists for hydrocarbon
deposits such as oil and natural gas beneath the earth‘s surface.151Petroleum resources are
typically owned by the government of the host country, in which case oil companies must
negotiate terms for a lease of these rights .In most nations the government issues licences to
explore, develop and produce its oil and gas resources, which are typically administered by the
oil ministry.152
In Uganda like many other countries the issuing of licences is done by the Minister of the
MEMD. Under the Upstream Act the minister with the approval of cabinet, announces areas
open for bidding in exploration licensing rounds, to be published in The Gazette and national and
international newspapers.153 Any party affected by the proposed exploration activity shall have
an opportunity to object to the grant of the exploration licence.154
The minister, however, may receive direct applications for exploration licences in exceptional
circumstances where: Invitations for bids have been sent out three times and no application has
been received; the application for reservoir within a licensed block which extends into an
unlicensed block; or to promote national participation and interest.155
The licensee has the exclusive right to carryout both the primary explorations and any
subsequent extensions; explore the licensed area, using acceptable methods of exploration for the
purpose of identifying prospects; and carry out any other exploration activity necessary.156
Under the Act, a petroleum exploration licence remains in force for a period not exceeding 2
years after the date of the grant of the licence, subject to renewal for a period not exceeding two
years.157 Holders of petroleum licences can apply for renewal of the petroleum exploration
licence, not later than ninety days before the licence is due to expire.158 The petroleum
151
http://en.wikipedia.org/wiki/Hydrocarbon_exploration(Accessed on 29March 2014).
See n 151 above.
153
See n 135 above, Section 52.
154
See n 135 above, Section 55.
155
See n 135 above, Section 53.
156
See n 135 above, Section 65.
157
See n 135 above, Section 61.
158
See n 135 above, Section 62 (1) &(2).
152
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exploration licence can not be renewed more than twice to the same holder or if the holder is in
default regarding the required conditions set in the licence.159
Upon discovery of petroleum, a licensee must immediately notify the Petroleum Authority of
particulars of the discovery and evaluate the discovery,
160
and in that regard, may apply for a
grant of a petroleum production licence.
3.4.2.2 Petroleum production licence
The application for a petroleum production licence must generally be made within two years
from the date on which the technical evaluation of test results was submitted to the Petroleum
Authority.161
A petroleum production licence is granted to the holder of a petroleum exploration licence, who
has made a discovery of petroleum in an exploration area over any Block or blocks in the areas
which, following appraisal, can be shown to contain a petroleum reservoir or part of a petroleum
reservoir.162
However, a person may apply for the grant of a petroleum production licence for an area or a
block that contains a petroleum reservoir or part of a petroleum reservoir eventhough they do not
hold a petroleum exploration licence in respect of that block.163
The licence may also be granted jointly to the applicant and the National Oil Company, with the
interest granted to the National Oil Company being such percentage as is specified by the
minister with the approval of the cabinet.164
The Minister may in consultation with the Petroleum Authority and upon the approval of cabinet,
grant to the applicant a petroleum production license.165 A petroleum production licence is
granted for a period of twenty years, extendable by five years.166
159
See n 135 above, Section 64(4).
See n 135 above, Section 66(1).
161
See n 135 above, Section 66(2).
162
See n 135 above, Section 69(1).
163
See n 135 above, Section 69(4).
164
See n 135 above, Section 75(2).
165
See n 135 above, Section 75(1).
166
See n 135 above, Section 77(1).
160
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A petroleum production license confers on the licensee exclusive rights to carry on petroleum
activities in the license area; to sell or otherwise dispose of the licensee‘s share of petroleum
recovered in accordance with the field development plan; and to carry on operations and execute
works in the development area in line with the Act.167
3.4.3 Production sharing agreements
A Production sharing agreement (PSA) is a common type of contract signed between a
government and a resource extraction company or group of companies concerning how much of
the resource (usually oil) extracted from the country each will receive.168 Production sharing
agreements were first used in Bolivia in the early 1950s, although their first implementation
similar to today's was in Indonesia in the 1960s.169
In PSAs, the country's government awards the execution of exploration and production activities
to an oil company.170 The oil company bears the mineral and financial risk of the initiative and
explores, develops and ultimately produces the field as required. 171 When successful, the
company is permitted to use the money from produced oil to recover capital and operational
expenditures, known as "cost oil".172 The remaining money is known as "profit oil", and is split
between the government and the company, typically at a rate of about 80% for the government
and 20% for the company.173 In some PSAs, changes in international oil prices or production rate
can affect the company's share of production.
The government of Uganda used the Production sharing agreements as their basic form of petroleum
agreements with international oil companies. This was mainly due to the absence of laws to
regulate the then new developments that had occurred in the petroleum sector.174
The licensees will be permitted to use the money from produced oil to recover capital and
operational expenditures, known as ―cost oil‖. The remaining amount known as ―profit oil‖ will
be split between the government and the licensees.175
167
See n 135 above, Section 78.
http://en.wikipedia.org/wiki/Production_sharing_agreement#cite_note-1 (Accessed on 20 April 2014 ).
169
http://www.rulg.com/documents/The_Concept_of_Production_Sharing.htm (Accessed on 20 April 2014 ).
170
See n 168 above.
171
See n 168 above.
172
See n 168 above.
173
See n 168 above.
174
http://www.pwc.com/en_TZ/tz/pdf/pwc-oil-and-gas-tax-guide-for-africa-2013.pdf (Accessed 20 September 2013)
168
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The PSAs include royalty and tax payment to be made by the contractors as well as profit
sharing with the government.176 Royalties will be computed on the basis of gross daily
production. Such royalty is to be in kind or cash at the government‘s election. The percentage
can be on an escalating scale as production increases. Royalty rates are biddable and will be set
out in the license or petroleum agreement.177 The contractor is required to pay income tax at the
standard corporation rate tax of 30 per cent on the proceeds of the sale of their share of profit oil
under the petroleum agreement.178For purposes of cost recovery, a ring fence applies around
each contract area. This means that if a contractor has more than one contract area, then cost
recovery shall apply on a contract area by contract area basis.179
All the contractor‘s exploration, development, production and operating expenditure as defined
in the Income Tax Act, are recovered as a percentage of the total gross oil production.
The
PSAs have a limit to the amount of costs that a contractor can recover. If the actual costs
incurred exceed the allowed limit, the balance is carried forward and recovered in future years
against profits from that same contract area until they have been fully recovered. 180 The cost
recovery limit ensures that the government gets a share of the profit in all circumstances where
there is oil production. As a result of the cost recovery limit, the Contractor will always pay tax
on their share of the profit oil as long as there is oil production.181
After deduction of royalty and cost recovery the remaining production is split between the
government and contractor on a sliding scale as set out in a petroleum agreement, with the
government‘s percentage increasing as daily production increases.182
Typical contract terms in the PSAs include bonuses (such as signature bonus), work
commitments, time lines (such as exploration and production periods, extension provisions, etc),
relinquishments‘ and decommissioning rules at the end of exploration and production,
175
See n 174 above.
See n 174 above.
177
See n 135 above, Section 154.
178
See n 174 above.
179
See n 174 above.
180
See n 174 above.
181
See n 174 above.
182
See n 174 above.
176
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guarantees, national content and participation by Ugandans, training and skill transfer, ring
fencing, contract stability, and investment incentives among others.183
3.4.4 Transfer of interests
An investor may wish to sell off their interest in a business or company. The process of doing so
is transfer of interests. In the petroleum sector this interest may be in the form of a licence. Under
the Upstream Act, no licence issued under the Act may not be transferred without the minister‘s
consent.184The minister may not unreasonably withhold consent to a transfer of a licence unless
he or she believes that public interest or safety will be prejudiced by the transfer.185
This transfer is subject to taxation under the Income Tax (Amendment) Act of 2010 at a rate of
30 per cent on capital gain arising on a disposal of a depreciable, intangible or other asset used in
petroleum operations under a petroleum agreement, including the contractor‘s interest in the
agreement to another person and on a gain arising from a transfer of an interest in a petroleum
agreement.186 The buyer is allowed to continue to depreciate any allowable contract expenditure
attributable to the interest at the date of the disposal of an interest in the same manner and on the
same basis as the seller would if the disposal had not occurred. The price paid for the interest
forms the cost base for any future disposal.187
3.4.5 Local content requirements
Local content requirements (LCRs) are imposed to regulate investments with the intention of
promoting growth of domestic manufacturing and creating local employment for the host
country.188 LCRs are an integral part of performance requirements imposed on foreign investors
by the host country which could include export obligations, location of an industry in a less
developed region and mandatory technology transfer.189
183
See n 174 above.
See n 135 above, Section 87(1).
185
See n 135 above, Section 87(5).
186
Income Tax (Amendment) Act of 2010, section 89G.
187
See n 186 above, section 89G(e).
188
http://www.twnside.org.sg/title2/resurgence/2013/269-270/econ3.htm(Accessed on 20 April 2014 ).
189
See n 188 above.
184
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Essentially, local content is about securing direct and indirect opportunities for employment and
procurement to home nationals, at the same time as fostering the development of local skills,
technology transfer, and use of local manpower and local manufacturing in capital projects. 190
Before the discovery of oil and gas in Uganda, there was no specific legislation or deliberate
policy drive to promote local content. And this is not peculiar to Uganda. Local content has,
therefore, almost become synonymous with oil and gas, though it should be broader in coverage
for it to be meaningful and create real in-country value for all stake-holders.191
According to the NOP, national participation through shareholding in licensing, and provision of
goods and services in the oil and gas sector is one of the key avenues for achieving the desired
value creation in Uganda.192All companies in the petroleum sector are required to facilitate
participation of Ugandans in sectors of the economy which are necessary to support the
petroleum sector.
The Upstream Act requires contractors and subcontractors to give preference to goods which are
produced or available in Uganda and services which are rendered by Ugandan citizens and
companies.193
Contractors and subcontractors are required to notify Ugandan citizens and
companies on the quality, health, safety and environment standards required, and notify
Ugandans of the upcoming contracts as early as practicable.194
The Act also provides for technology transfer according to which, oil companies are required to
train local people either in Uganda or abroad through195a clearly defined training programme for
the Ugandan employees of the licensee, may include scholarships and other financial support for
education.196 The Licensees are also required to commit to maximization of knowledge transfer
190
http://www.independent.co.ug/cover-story/8375-ugandas-local-content-and-the-contradiction-of-selfempowerment#sthash.cOIwlqRV.dpuf(Accessed on 20 April 2014).
191
See n 190 above.
192
See n 133 above, ix.
193
See n 135 above, Section 125 (1)&(2).
194
See n 135 above, Section 125 (3).
195
See n 135 above, Section 127(1).
196
See n 135 above, Section 127(2).
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to Ugandans and to establish in Uganda, management and technical capabilities and any
necessary facilities for technical work, including the interpretation of data.197
3.4.6 Taxation
The taxation of petroleum operations in Uganda is based on the concept of economic
rent.198Economic theory focuses on the produce of the earth derived from labour and capital and
landowners through wages, profit and rent.199Therefore, economic rent in the petroleum industry
is the difference between the value of production and the costs to extract it.200
Taxation in Uganda is handled by the Uganda Revenue Authority (URA). The URA was set up
in 1991 by Uganda Revenue Authority Act of 1991 as a central body for the assessment and
collection of specified tax revenue, to administer and enforce laws relating to such Revenue and
to account for all revenue to which those laws apply.
In Uganda, broadly income tax is charged on every person who has chargeable income for the
year of income under the Income Tax Act of 1997 (ITA).Chargeable income of a person for any
given year of income is defined as the gross income of a person for that year less total allowed
deductions.201 The gross income of a person for a year of income is defined as total amount of
business income, employment income and property income derived by a person during the year
of income, other than income exempt from tax.202 Business income is further defined as any
income derived by a person in carrying on a business.203 Therefore on the basis of the above,
provided a Contractor and, or, Subcontractor is carrying on a business in Uganda, the income
they will derive from these operations will be subject to tax in Uganda in accordance with the
above provisions of the Uganda tax law.204
197
See n 135 above, Section 127(3)&(4).
See n 174 above.
199
See n 174 above.
200
See n 174 above.
201
Income Tax Act of 1997 Section 15.
202
See n 202 above, Section 17.
203
See n 202 above, Section 18.
204
See n 174 above.
198
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Taxation of petroleum operations
Petroleum revenues in the petroleum sector include; tax charged on income derived by a person
from petroleum operations, government share of production, signature bonus, surface rentals,
royalties, proceeds from sale of government share of production, and any other duties or fees
payable to the government from contract revenues under the terms of a petroleum agreement. 205
Royalties and cost oil are deducted from gross production in arriving at profit oil which is shared
between the government and the contractors according to the terms of the PSA.206 Contractors
are then taxed on their share of the profit oil in accordance with the ITA. The rate of tax
applicable to the contractor‘s share of the profit oil is standard corporation tax of 30%.207
Part IXA of the ITA contains special provisions relating to the taxation of petroleum operations
and the taxing provisions contained in this part of the ITA together with those contained in the
PSAs prevail over other parts of the ITA, in case of any inconsistency.208
Tax allowable contract expenditures which are deductible from cost oil consist of the sum of: the
petroleum operating expenditures for the year of income; the allowable deductions for
depreciation of petroleum capital expenditure for theyear of income; andthe amount of any
operating loss from previous years of income, determined in accordance with the ITA.209
Petroleum operating expenditures are the contract expenses which qualify as exploration
expenditure and operating expenses while Petroleum capital expenditures‘ are the contract
expenses which qualify as development and production expenditures.210
Principle of ring fencing
Each contract area of a contractor is taxed as if it is a separate taxpayer, that is, it is ring fenced.
Ring fencing puts a limitation on consolidation of income and deductions for tax purposes across
different activities or different projects, undertaken by the same taxpayer. 211Tax deductible costs
or expenditure incurred in respect of a contractor‘s petroleum exploration and development
205
See n 186 above, section 89A(f).
See n 186 above, Section 154.
207
See n 174 above.
208
See n 186 above, Section 89B(4).
209
See n 186 above, Section 89A(f).
210
See n 174 above.
211
See n 174 above.
206
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expenditure in one contract area or block or oil field are only deducted from income derived
from that contract area only.212Losses arising from activities in one contract are only carried
forward and offset against future income derived from petroleum operations of that contract area
only.213
3.4.7 Environment and wildlife impact issues
Environment and wildlife conservation is very important in Uganda. Not only is it an integral
part of Uganda‘s culture and traditions it is also a source of income for many people and the
nation as a whole through tourism.
This issue is even more important in the petroleum sector as the Albertine Graben sits along
major wildlife conservation areas in the form of national game parks but also the Lakes Albert,
George and Edward which are not important water bodies for the country but for the whole Nile
river basin. Any damage caused to these important areas may have a huge negative impact on the
environment and livelihood of the people. This irreversible damage will in turn have a big impact
on the nation as a whole.
In light of the above the government of Uganda showed their intention of controlling and
preventing such damage from occurring in the petroleum sector by making it an objective in the
NOP. It intends“To ensure that oil and gas activities are undertaken in a manner that conserves
the environment and biodiversity”.214
The issues as regards to the environment like in the petroleum sector are regulated by a
multiplicity of regulatory systems and monitored by different institutions that work together
holistically to manage the biodiversity of the country. It is these same institutions that are
mandated to monitor all aspects of the environment in the Albertine Graben. These institutions
are tasked with carrying out the objectives of the NOP.
It is important to note that Uganda is still at the exploration phase and field development plans
for some of the discoveries are under review. No production has yet taken place. During the
212
See n 174 above.
See n 174 above.
214
See n 133 above, ix.
213
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ongoing exploration phase, the operations are closely monitored and the following key actions
are in place to ensure environmental protection both in the current and future phases;215
Environment Impact Assessment (EIA) Studies
The third schedule of the National Environment Act of 1997 requires environmental impact
assessments to be carried out for oil exploration and production activities before
implementation.216 EIAs identify, predict, evaluate and propose mitigation measures for the
likely adverse impacts on the environment due to planned activities/projects. The obligation to
carry out environmental impact assessments lies with the developers, however the National
Environment (Conduct and Certification of Environmental Practitioners) Regulations of 2003
provides for registration and certification of environmental practitioners who carry out
environmental impact studies on behalf of developers.217
The study is done in consultation with the different stakeholders including the district
environment officers, local leaders, community members, PEPD and other relevant government
lead agencies. NEMA oversees the review process in consultation with relevant lead agencies. 218
If the studies conform to the required standards, a decision is taken by NEMA and a conditional
approval is granted to the oil company. Oil exploration activities are closely monitored to ensure
compliance with mitigation measures and their effectiveness, as well as approval conditions and
any other issues of concern that were not anticipated at the time of approval but become
significant during implementation.219
NEMA has also created an Environmental Sensitivity Atlas for the Albertine Graben with the
objective to display, identify and provide the ability to analyse the relative sensitivities
(environmental, biological, geographical, and socio-economic) to oil spill and oil development
within the exploration areas in the Albertine Graben region of western Uganda.220
215
Environmental Management in Uganda‘s Oil and Gas Sector, 5
See n 215 above, 5
217
See n 215 above, 5
218
See n 215 above, 5
219
See n 215 above, 5
220
See n 215 above, 6
216
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Restoration of Drilling and Camp Sites
Oil companies are required to restore oil well sites and oil camp sites with indigenous vegetation
as close as possible to their original status before the operations.
Hazardous Waste Management
Close monitoring of waste management systems of the oil companies is being done in this area.
Wastes generated as a result of ongoing operations are being containerized at specific sites in the
short-term as proper methods of disposal anda long lasting strategy for waste management are
being explored. Waste disposal must be done appropriately and plans are underway to establish
central waste treatment facilities to be located away from water bodies, settlements and fragile
ecosystems.221
3.5 Conclusion
To regulate FDI inflow into the petroleum sector the government of Uganda has gone ahead and
not only enacted new laws to regulate the new developments in the sector but has also taken
steps to amend the complimentary laws that regulate different aspects of the petroleum sector. It
must be noted that the petroleum sector is not regulated by a single law but rather a multiplicity
of laws that are supposed to work harmoniously together to create a single working framework.
Although the government of Uganda has taken steps to regulate the petroleum sector there is a
lot of sceptism that the new regulations as they stand can effectively regulate the petroleum
sector to efficiently benefit the people of Uganda. There are a lot of important legal gaps that
need to be dealt with in order for the country to fully benefit from the petroleum resources.
Failure for the country to deal with these important legal issues will lead the country into the
resource curse direction that many resource rich nations in Africa are experiencing.
It is these important legal gaps that will be dealt with in the next chapter. Further elaboration will
be made about the resource curse and its effects and an example of an African country that can
ideally teach Uganda some lessons in good governance in the resource sector.
221
See n 215 above, 7
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CHAPTER FOUR
IMPORTANT LEGAL GAPS IN THE FDI REGULATORY FRAMEWORK IN
THE PETROLEUM SECTOR IN UGANDA.
4.1 Introduction
This chapter analyses the critical legal issue that need to be dealt with for the success of the
petroleum sector in Uganda. It will also look at the solutions to the current critical gaps in the
legal framework. It will also briefly elaborate on the ―resource curse‖ phenomenon and the
potential disaster it may cause to Uganda‘s economy giving reference to the experience of the
failed resource rich African nations, and the exception to the rule in form of Botswana.
The discovery of petroleum in Uganda elevated the country to one of the resource rich countries
in Africa. If well managed petroleum production has the potential of boosting the economy of the
country. It can also be a curse if its governance framework is flawed and its management is not
transparent and open. As such, the governments of resource-rich countries face the daunting but
surmountable challenge of devising institutional and legal frameworks that ensure maximum
benefit for its citizens.
The experience from oil and mineral producing African countries such as Nigeria, Chad,
Cameron and Angola show that benefits arising from the discovery of oil and minerals is
intuitively linked to the quality of governance in the country which also defines the quality of
governance of the oil and minerals sector.
Since the discovery of petroleum resources in Uganda the government has taken steps to create a
regulatory and institutional framework to govern the new sector. There is however a lot of
sceptism regarding the efficiency of the current regulatory framework. Many believe that the
current framework will not only fail to efficiently regulate the petroleum sector but it may not
now fully allow the country to benefit from the petroleum resource.
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4.2 Production Sharing Agreements
After the discovery of oil, the government of Uganda went ahead and negotiated and further
signed a number of PSAs with different international oil companies. Most of the PSAs were
signed by the government under unclear circumstances. This brought into question the benefit
that the PSAs have for the country. Many believe the government sold the country short in the
PSAs and that the oil companies will benefit more from them than the country itself. A couple
of issues have been sighted regarding the current PSAs in place. These include the following:
4.2.1 Secrecy in the Oil Sector
Despite the existence of Article 41 of the 1995 Constitution and the Access to Information Act of
2005, that provide for the right of all Ugandans to access information in the hands of
government, the government has to date continued to be secretive on all oil development
processes including licensing, PSAs, EIAs, signature bonuses, tax collection and revenue
utilization.222 The parliament of Uganda tried to make oil PSAs a priority topic of discussion but
due to the existence the of confidentiality clauses in the PSAs they could not be discussed. This
secrecy has resulted in speculations, over expectations, conflicts, mistrust, suspicions in the
public and subsequent loss of revenues for the country.223
4.2.2 Capital Gains Tax (CGT)
Despite the existence of the Income Tax Act of 1997 that provides for the payment of CGT, the
government has continuously failed to use such laws and its sovereign powers to collect CGT
from the oil companies that have refused to pay the said taxes despite making billions of dollars
in profits through sale of capital assets. As a result, Ugandans are already losing their oil money
to the companies.224
This is evidenced by the recent cases that the government is involved in regarding tax claims
against Heritage oil an international oil company that sold its stake in different oil fields in the
Albertine Graben to Tullow Oil. It all began on July 26, 2010 when one of the major players in
Uganda‘s petroleum sector, Heritage Oil, sold its exploration licenses in the Albertine Rift to
222
http://www.publishwhatyoupay.org/resources/key-oil-governance-issues-uganda-need-urgent-attention-parliament
(Accessed 15 April 2014).
223
See n 222 above.
224
See n 222 above.
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Tullow Oil.225 Heritage and Tullow together owned a 50 percent stake in two lucrative
exploration blocks.226 With the sale, Tullow became the sole company licensed to operate in
those areas. Tullow purchased Heritage‘s stake for US $1.45 billion, after which Heritage ceased
to operate within Uganda.227
In the aftermath of the deal, however, URA which was acting on behalf of the government of
Uganda requested $434 million or 30 percent of the sale in CGT.228 Heritage disputed the tax,
saying that its lawyers believed that the sale was not taxable, given that the PSAs which the
company signed with the government failed to mention such a payment.229 Heritage further
argued that the sale of its assets to Tullow Oil was not taxable in Uganda because the sale itself
took place outside Uganda in the Channel Islands off the coast of France and because the
company itself is not incorporated in Uganda being domiciled in Mauritius.230 The government
of Uganda, meanwhile, has argued that the assets sold were located in Uganda, and that their sale
was done with the consent of the Ugandan government, making the transaction taxable under
Ugandan law.231 Given these disputes, the government of Uganda is currently locked in a row
with Heritage Oil over the legitimacy of the CGT.232
4.2.3 Signature Bonuses:
A signature bonus is a payment made up front to the host country for the right to develop a block
commercially before work commences.233The Ugandan government has signed PSAs with
signature bonuses but there is a lot of secrecy regarding signature bonuses that were given in the
PSAs signed so far. The signature bonuses are supposed to be accounted for and are meant to
form part of government revenue. The Ugandan government has over the years since signing the
first PSA failed to account for the signature bonuses received from all the signed PSAs.
225
A Izama & H W Mulangwa‗Understanding the tax dispute: Heritage, Tullow, and the government of
Uganda‘(2011) 1 Advocates Coalition for Development and Environment(ACODE)16.
226
Izama & Mulangwa (See n 225 above) 16.
227
Izama & Mulangwa (See n 225 above) 16.
228
Izama & Mulangwa (See n 225 above) 16.
229
Izama & Mulangwa (See n 225 above) 16.
230
Izama & Mulangwa (See n 225 above) 16.
231
Izama & Mulangwa (See n 225 above) 16.
232
Izama & Mulangwa (See n 225 above) 16.
233
http://wiki.answers.com/Q/Did_the_bonus_army_get_their_bonus#slide=1 (Accessed 15 April 2014).
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4.2.4 Foreign arbitration and Uganda’s sovereignty
The government of Uganda has been signing of PSAs which commit the country to arbitration in
foreign jurisdictions.
An example is the disputes between the government of Uganda and
Heritage Oil whose arbitration is in London.234
Signing of oil agreements which commit the Uganda to arbitration in foreign jurisdictions
undermines the country‘s sovereignty and are costly to the Ugandan taxpayers as can be seen
with the Attorney General‘s demand for parliament to endorse 11.9 billion Ugandan shillings for
settling tax conflicts in London.235
4.3 The Petroleum Laws
In line with their constitutionally mandated duty to ―protect important natural resources on
behalf of the Ugandan people, Uganda‘s legislators developed a regulatory framework for
managing Uganda‘s petroleum sector in form of the Upstream and Midstream Acts and the
Public Finance Bill of 2012 currently undergoing amendment. Together, these Acts create a
three-pronged system for regulating Uganda‘s new petroleum sector. A Minister of Energy and
Mineral Development, a Petroleum Authority, and a National Oil Company are tasked with the
duty of overseeing the entire petroleum sector, from exploration and production through eventual
sale on the international market.
Unfortunately, the framework the current legislation creates is full of glaring holes that invite
long-term corruption and abuse which will in turn create irreconcilable consequences that may
lead to the resource curse. The issues or gaps that need to be dealt with are as follows;
4.3.1 Institutional governance
4.3.1.1 Ministerial control and executive interference
The Ministry and Minister are given broad powers in the Acts. As above, the fact that the
Authority receives direction from the Minister and that the Authority Board members are
234
235
Izama & Mulangwa (See n 225 above) 16.
See n 222 above.
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"appointed by the Minister with the approval of Cabinet" leaves the Authority susceptible to
capture by the Ministry, threatening its independence.236
The Minister retains exclusive power to issue and revoke exploration and production licenses,
and the President can remove a Board member from the Petroleum Authority at any time for a
variety of reasons, including the undefined charges of ―incompetence‖ or ―misbehavior.‖237
The Minister also has the sole authority to determine whether or not to declare an area open for
petroleum activities and to review and grant all exploration and production licenses requiring
only the approval of the President and an after-the-fact report to Parliament.238 Furthermore, the
Minister is given the ability to receive direct applications for an oil exploration contract ―in
exceptional circumstances,‖ including when the Minister decides that a secret deal would
enhance ―the participating interest of the State in the promotion of national interest.‖ 239 The
Minister must simply consult with the Authority and gain the approval of the President‘s Cabinet
to award a license with any oil exploration or production company. Finally, any party wishing to
file a grievance regarding an oil exploration or production contract can only lodge a complaint
the Minister, who may review and either uphold or dismiss the objection at his/her discretion. 240
There are neither provisions for a timeline for the introduction of these regulations nor are there
specified timelines for the establishment of the two bodies created by the Acts. The total lack of
substantive checks on the powers of the President and the Minister is also worrying considering
the levels of corruption and political interference in Uganda
4.3.1.2 National Oil Company (NOC)
The NOC was created without sufficient detail on its relationship to the GoU or Parliament.241 It
is therefore unclear whether it will operate entirely as an independent entity, or under close
political or administrative control.242 The legislation does not provide for any corporate
governance structures for the proposed NOC. Additionally, the Companies Act of 1961, under
236
Uganda‘s petroleum legislation: Safeguarding the sector‘(2008) 6 Global Witness.
See n 135 above, Section 18.
238
See n 135 above, Section 52.
239
See n 135 above, Section 53.
240
See n 135 above, Section 55.
241
See n 135 above, Section 45-47.
242
Global Witness (See n 236 above) 6.
237
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which the NOC is supposed to be established, does not have a Corporate Governance
Code.243The Companies (Amendment) Act of 2009 provides for a Code of Corporate
Governance. However, the Code does not sufficiently provide for the corporate governance
needs of State Owned Enterprises.244
It is debatable whether the creation of a NOC is advisable for Uganda. The creation of a NOC is
potentially a hugely costly venture which risks diverting revenue away from government budgets
and public services, not just in the early years but potentially well into the future, if there is no
transparency and strict parliamentary oversight of these bodies.245
Oil companies, whether state-owned or private, domestic or international, require huge amounts
of capital to be competitive. This capital could arguably be much better spent in the Ugandan
context for example with investments in infrastructure, education or healthcare.246The decision to
create a NOC, which will presumably use state money at least initially, if not well into its future,
is one of enormous financial consequence for a country. It should not, therefore, be taken without
a broad-based consensus and strong evidence that there are petroleum reserves in Uganda that
would give the NOC a strong basis on which to grow and be competitive and not a drain on state
resources.247 If such a decision is made, then a whole host of measures to ensure that the NOC
does not become a locus of corruption or inefficiency are needed yet these are not laid out in the
current law.248
Under the current Act, the Minister has the power to issue instructions in respect of the
management of the NOC and to stipulate the ‗rules relating to the duty of secrecy of elected
representatives and employees‘ of the NOC.249Once again this gives the Minister a strong degree
of control over another of the main petroleum institutions in Uganda. Most worryingly, it gives
243
T Kyepa‗Integrating National Oil Companies In The Corporate Governance Discourse: A Comparative Analysis
Of The Norwegian State Oil Company (Statoil) And The Proposed National Oil Company Of Uganda‘Unpublished
thesis, University Of The Western Cape, 112 2011.
244
Kyepa (n 243 above )112.
245
Global Witness (See n 236 above) 7.
246
Global Witness (See n 236 above) 7.
247
Global Witness (See n 236 above) 7.
248
Global Witness (See n 236 above) 7.
249
See n 135 above Sections 47.
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the post-holder the power to silence employees in an institution potentially responsible for
managing huge state interests.250
4.3.2 Parliamentary oversight
Parliamentary oversight of government expenditure and transactions is a constitutional mandate
and important in any democracy and yet the executive in Uganda, in respect of the oil and gas
sector is undermining this role.251By continuing to enter into new agreements in spite of
parliamentary resolutions halting the same, the government is undermining the mandate of the
new institutions being created which will have to operate in an environment already constrained
by exiting agreements.252
While the NOP recognizes inter alia the inadequacies of the legal framework and require the
enactment of new laws to address these challenges, the government still went on to license
companies and sign agreements in the absence of the required adequate laws.253 Activities and
transactions in the sector are moving ahead of the legal framework. A parliamentary moratorium
for halting of any further licensing and signing of agreements until the new laws are enacted has
been ignored by the executive.254 The government entered into PSAs disregarding the
parliamentary moratorium and before the enactment of the required legislations. 255 This
disregard of parliament later became evident in the petroleum laws.
One notable aspect of the current Acts is the absence of a role for Parliament. Cabinet does have
a few rights, for example the approval for exploration licenses.256 Some limited information will
be presented to Parliament. That said, Parliament does not seem to play a role in the most critical
areas such as deciding upon the opening up of new areas for exploration, licensing, contract
allocation, transfer of license among others.257
250
Global Witness (See n 236 above) 7.
http://www.ccgea.org/downloads/CCG%20Oil%20and%20Gas.pdf(Accessed 15 April 2014).
252
See n 251 above.
253
See n 251 above.
254
See n 251 above.
255
See n 251 above.
256
See n 135 above, Sections 59(1).
257
Global Witness (See n 236 above) 7.
251
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4.3.3 Transparency of information
Although the petroleum laws have made some steps on transparency of information, they
however, suffer from several major weaknesses therefore creates a potentially significant
loopholes.258The lists of items to be disclosed are relatively good, and do go some way towards
meeting best practice but they are not exhaustive and subsequent clauses in both petroleum Acts
severely restrict information. Section 149 of the Upstream Act indicates that unless a disclosure
is agreed to by the third party, the Minister must keep all information submitted to him/her
confidential and cannot reproduce or disclose unless the category of information is specifically
mentioned in the Act or Access to Information Act.259
The lack of a role prescribed for Parliament, already covered earlier, undermines parliament‘s
abilities to play their part in the democratic process. It is not at all clear what information
parliamentarians will have access to.260 For example, it‘s unclear on whether they would be able
to view documents like minutes from the Petroleum Authority Board meetings.261
There is no whistleblower provision in the petroleum laws. This is of particular concern in
relation to Sections 33 and 150 in the Upstream Act and 78 in the Mid-stream Act which prohibit
public servants from disclosing information about the sector even if it is in the public interest i.e.
cases of corruption or negligence. Whistleblower protection is vital in ensuring that matters of
public interest come to light.262
The Minister is allowed to demand information relating to the petroleum sector from anyone who
has it. Whilst this has obvious advantages for the government, it could also be interpreted to
obligate journalists or Non Government Organisations to hand over information which could
jeopardize sources. It would be valuable to insert an exemption or safeguard.263
258
Global Witness (See n 236 above) 11.
Global Witness (See n 236 above) 11.
260
Global Witness (See n 236 above) 11.
261
Global Witness (See n 236 above) 11.
262
Global Witness (See n 236 above) 12.
263
Global Witness (See n 236 above) 12.
259
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4.3.4 Lack of clarity on financial management
Finances in the petroleum sector will be regulated by the Public Finance Bill currently under
debate. The bill would establish a Petroleum Fund to handle the collection and investment of all
oil revenues collected by the government of Uganda. The Minister would manage the Fund,
overseeing ―the transfer into and the disbursements from the Petroleum Fund.‖
This Bill has, however, doubts about the government‘s commitment to budget discipline. The
Bill presents loopholes for government to spend without parliamentary scrutiny. 264 The Bill
creates a Contingencies Fund and also gives the Finance Minister powers to create special funds,
whose purpose is overlapping and ambiguous.265 The contingencies Fund is supposed to finance
supplementary budgets whose purpose will only be known after spending the funds. 266 This
contingencies Fund will be replenished with an amount equivalent to 3.5 % of the approved
annual budget.267The rationale of this Bill is to circumvent parliamentary scrutiny so that the
government can spend as it chooses. This Bill also seeks to revise the ceiling for 3
supplementary budgets from 3% to 10%.
This Bill has also ring-fenced 25 districts and allocated them a share of 7% of revenue arising
from petroleum production.268The same ―OIL DISTRICTS‖ have been designated special
planning areas in the country‘s new Vision 2040 which was launched on 28th April 2013;
meaning that they are likely to be top beneficiaries of the government‘s plan to spend oil revenue
on infrastructure development.269This Bill does not explain how the OIL DISTRICTS‖ were
determined beyond their location within the petroleum exploration and production areas of
Uganda. 270.
264
See n 251 above.
See n 251 above.
266
See n 251 above.
267
See n 251 above.
268
See n 251 above.
269
See n 251 above.
270
See n 251 above.
265
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4.4 Corruption
As Uganda prepares to welcome oil into its economy, the country‘s efforts to create an effective
regulatory framework for managing the petroleum sector are complicated by a deeply rooted
culture of corruption in the country.271
A series of studies by international watchdog groups have exposed the rampant corruption that
typifies Ugandan daily life. In Transparency International‘s 2012 East African Bribery Index,
Uganda was named the most corrupt country in the region. 272 In the survey, nearly 50 percent of
Ugandan citizens reported that bribes were either expected or demanded in normal interactions
between private citizens and government service delivery institutions.273
More comprehensive surveys conducted by Afrobarometer in Uganda expose the extent of
corruption in even greater detail.274 Within the 2012, 16 percent of respondents reported paying a
bribe to get access to water or sanitation services, 30 percent to get treatments at a local clinic or
hospital, and 18 percent to get a place for their child in primary school 275 86 % of Ugandans
think that the president of Uganda is corrupt, with similar views of members of parliament (90
percent), local government officials and police (89 percent), and judges and magistrates (86
percent).276
All evidence from the study of resource-rich African states shows that the resource curse strikes
most lethally at political systems unable to contain corruption and abuse of power even in the
absence of valuable natural resources.277 Unfortunately, all evidence points to Uganda as such a
state. The regulation of resource markets must be viewed in a relative light: the more corruption
and malpractice that is embedded in a society‘s political fabric, the more vigorous the regulatory
framework will be required to stop corruption from infecting a new resource sector.278
271
J Mosbacher ‗Fighting the Resource Curse: Uganda‘s Pivotal Moment‘ (2013) 47The Washington Quarterly.
Mosbacher ( n 271 above) 48.
273
Mosbacher ( n 271 above) 48.
274
Mosbacher ( n 271 above) 48.
275
Mosbacher ( n 271 above) 48.
276
Mosbacher ( n 271 above) 48.
277
Mosbacher ( n 271 above) 48.
278
Mosbacher ( n 271 above) 48.
272
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Because Uganda is so corrupt, the petroleum sector demands Africa‘s most comprehensive
regulatory framework to successfully curb abuse and translate revenues into long-term positive
outcomes.279 So far, the efforts of Ugandan policymakers to create such a framework have fallen
far short of this requirement. If policymakers fail to immediately address the obvious holes in
this framework, Uganda is destined to be cursed by oil.280
4.5 Local Content
Lately, local content has become a topical issue, and many countries are enacting laws to make it
mandatory for all stakeholders of specified industries. It has become a very important issue due
to the fact that in this day and age, every country in theory would like its citizens to capture the
commanding heights of its economy and in that way keep its wealth within its borders, as well as
providing jobs to the ever-increasing populations in many of these resource-rich developing
countries.281 This can be achieved through capacity building; creating and supporting Small
market enterprises (SMEs) as well as building a local products and services pool.282
Uganda does not have a standing legislation on local content. It is only stipulated in has come to
legislating for local content is in Section 125 of the Upstream Act. Not only is the current
legislation insufficient in regulating local content issues that arise in the petroleum sector but
also in its current wording, the law may impose significant challenges and limits in the
realization of the intended objectives of local content promotion.283The concept is vague and
unclear; it has no definition in the Upstream Act. This already shows a lack of clarity on the
concept.284
4.5.1 Local content as a company requirement
The Upstream Act does not define what constitutes a ―Ugandan company‖. It can therefore be
presumed that a company that is locally registered in Uganda is a ―Ugandan company‖ rather
279
Mosbacher ( n 271 above) 48.
Mosbacher ( n 271 above) 48.
281
See n 190 above.
282
See n 190 above.
283
See n 190 above.
284
See n 190 above.
280
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than taking into account the nature of ownership, the degree of control of such a company and
the actual degree of in-country value addition plus the levels of participation by Ugandans.285
The Act does not state whether such a company must be a ―citizen‖ within the meaning of the
Land Act of 1998 or the Companies Act of 1961.286Within the strict interpretation of the law is
any company locally registered in Uganda regardless of ownership or control is a ―Ugandan
company‖.287 The effect of the current wording in the Upstream Act is that the company must be
have a 48% local ownership or must be a joint venture. The reality is not many ‗Ugandan
companies‘ can afford to buy a 48% stake in a foreign company worth billions of dollars. In
addition, many of these foreign companies are listed companies so entering such joint ventures
would require jumping over complex, exhausting and expensive regulatory hurdles.288
The major obstacle in the realization of the local content policy is that the International oil
companies have well established supply chain networks. They therefore prefer to deal with
global suppliers or to award major service contracts to international specialist firms whose
financial strength, reputation and technical capabilities have been time-tested and proven.289 The
petroleum industry is no place for taking a gamble with any service provider who comes along.
This is counterproductive to the objectives of the laws that is to encourage local participation in
the petroleum sector,
In order to realize the objective of the current laws, the best way is to create synergies through
joint ventures with foreign companies that have the financial muscle. But the contradiction is that
this would be promoting exactly what the spirit of the law seeks to stop. This is because joint
ventures by their very nature are a synergy between ―equals‖. 290 So the presumption that a
―Ugandan Company‖ with no experience at all would enter into a venture with an international
powerhouse like Halliburton for instance to provide a service that for all intents and purposes, is
financed and technically-supported by Halliburton but the sharing is almost equal, is desirable
285
See n 190 above.
See n 190 above.
287
See n 190 above.
288
See n 190 above.
289
See n 190 above.
290
See n 190 above.
286
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but far from achievable.291 This is because it would practically be difficult to have foreign
investors who are willing to participate in a ‗joint venture‘ where they contribute all the value
inputs and at the end of the day cede nearly half of the rewards to a local partner who contributed
nothing.292
4.5.2 Human capital empowerment
The local content regime‘s core objective is empowering Ugandans as the engine for their own
wealth generation, the ultimate sustainable economic development model. Short of that, ‗local
firms‘ that are all but foreign in outlook save for their residence in Uganda, will continuously
win local bids; have their foreign experts execute the work and earn proceeds under the pretext
of being ‗local.‘293
There are already doubts about the current local content approach. For instance, one of the
international oil companies operating in Uganda raised many eye-brows when it applied for over
5,000 work permits for its foreign nationals in 2013.294 It is questionable that all these jobs
cannot be done by Ugandans.
Uganda like most developing countries has over the years embraced the culture of ―business
cartels‖.295 A few powerful and well-connected business players have taken the country an
economic hostage in the sense that the same names appear in every public procurement and any
―outsiders‖ stand virtually no chance against this oligopolistic cartel. 296 In a way, they have been
the face of ―local content‖ in Uganda and there is every indication that they will continue to be
the major players in any ―local content‖ regime for some time.297 In instances where the interests
of these cartels are threatened, where a genuinely robust local content law seeks to spread the
291
See n 190 above.
See n 190 above.
293
See n 190 above.
294
See n 190 above.
295
See n 190 above.
296
See n 190 above.
297
See n 190 above.
292
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benefits of economic empowerment, they would block it if only to protect their privileges and
sense of entitlement.298
The risk Uganda then faces due to the insufficient current local content regime is that, just to
meet the legal requirement elect to offer ―free stakes‖ of up to 48% to a ―local trusted partner‖
complicit in the avoidance of the hard task of realizing local content requirements.299 The locals
and the foreign entities would effectively be subverting the law and engaging in ―subversive
compliance‖ but complying within the meaning of the law. This will undoubtedly enrich a few
well-connected people at the expense of Ugandans. That would be counter-productive to the
object and purpose of the law.300
4.6 Environmental Issues
As earlier established in the previous chapter, the upstream activities in the petroleum sector are
all taking place in environmentally sensitive areas of the Albertine Graben.
The Albertine Graben is an ecologically sensitive region that is also rich in biodiversity. With 39
wildlife-protected areas, the region is a tourism hot spot rich in all sorts of animal, bird and plant
life.301 NEMA in 2012 stated that the region has 14 percent of all African reptiles (175 species),
19 percent of amphibians (119 species), 35 percent of butterflies (1,300 species), 52 percent of
birds (1,061 species), 39 percent of mammals (402 species), 14 percent of plants and more than
400 fish species.302 Yet, the oil and gas activities could result in habitat destruction, as well as,
water and soil contamination that could lead to a loss of plant and animal life. 303 The biggest
risks to biodiversity in the Albertine rift arise from four sources: seismic surveys, oil pad
construction, drill waste and waste pits, and oil spills.304
Whereas the already existing legislation on the environment have capacities to control pollution
during oil exploration, it is reported that local people are already affected by the strong bad smell
298
See n 190 above.
See n 190 above.
300
See n 190 above.
301
J Mawejje& L Bategeka ‗Community expectations and environmental aspects in Uganda‘s oil and gas
sector‘(2013) 39 The Economic Policy Research Centre(EPRC)Policy Brief 2.
302
Mawejje& Bategeka ( n 301 above) 2.
303
Mawejje& Bategeka ( n 301 above) 2.
304
Mawejje& Bategeka ( n 301 above) 2.
299
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from the mud pits that are dug during oil exploration and moreover the mud pits have been
deposed properly.305There are already cases of irresponsible dumping, for example, the Action
Aid owned publication, Oil in Uganda (2012), reported in May 2012 that Heritage Oil illegally
dumped, untreated waste in a farmer‘s garden for a nominal compensation of some U.S. $300.306
Such irresponsible handling of waste has very serious implications for environmental
sustainability and public health and does not auger well for intergenerational equity. 307
Despite assurances by the Government of Uganda and the various private oil companies
operating in the region that the environment will not be seriously compromised, communities in
the Albertine valley continue to express fears regarding the potential environmental impacts of
oil exploration and development.308 In particular, the planned construction of a refinery raises
major environmental concerns to the people of the area with regard to proper waste
management.309
It is the mandate of NEMA to ensure environmental sustainability. However, the institution is
faced with numerous capacity constraints, which hinder its efficiency in overseeing the activities
in the Albertine Graben.310 Such capacity to oversee all petroleum activities would require
availability of people with the appropriate training and skills, and the right type of technology
and equipment.311 In addition, the agency must also be provided with enough financial resources
so that it can perform its duties effectively. Of course, the staff must also be adequately
constrained by the law so that they do not engage in behaviors like corruption) that compromise
the agency‘s ability to carry out its functions.312
The current EIA reports have no mitigation measures and monitoring for the identified impacts.
They lack comprehensive environmental management plans to deal with biodiversity, air quality,
water, fisheries, wastes, oil spills and pollution, affected communities and tourism among
305
See n 251 above.
Mawejje& Bategeka ( n 301 above) 1.
307
Mawejje& Bategeka ( n 301 above) 1.
308
Mawejje& Bategeka ( n 301 above) 1.
309
Mawejje& Bategeka ( n 301 above) 1.
310
Mawejje& Bategeka ( n 301 above) 2.
311
Mawejje& Bategeka ( n 301 above) 2.
312
Mawejje& Bategeka ( n 301 above) 3.
306
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others.313There is no Strategic Environmental Impact Assessment and yet a number of oil drilling
sites have already been commissioned. There is limited public participation in the processes of
EIA and most documents such as EIA reports are written in English an official language and yet
some Ugandans especially in rural areas cannot read it.314
4.7 Land Rights and Compensation
The discovery of oil has largely been in conservation areas but has raised local community
concerns in these areas about their involvement in the decision-making process and revenue
sharing.315It has also escalated resource-based conflicts especially in land. Local district
governments, landowners and traditional kingdoms in these areas are going to be impacted by
the operations of the industry players in their areas. There are environmental concerns in these
areas.316
4.7.1 Property rights
Property rights including land ownership and utilization in the Albertine region are being
threatened and impacts on associated human rights like livelihood and sustainable development.
Across much of Uganda, people do not see land as a mere commodity, property to be bought and
sold, but as more deeply connected with their way of life, traditions and culture. 317 This is the
same predicament that befalls the people in the Albertine Graben.
Along the Albertine area, large tracts of land were gazetted as forest or game conservation areas.
In much of Bunyoro, people were left to meet their needs from a relatively narrow corridor
between gazetted land to the east and Lake Albert to the west.318 Combined with the fact that the
kingdom was forced to cede land to Buganda as a penalty for resisting colonial occupation and as
a reward to Buganda‘s leaders for their help in bringing Bunyoro and other areas under British
313
See n 251above.
See n 251 above.
315
See n 251 above.
316
See n 251 above.
317
http://www.oilinuganda.org/features/land/land-oil-and-dispossession.html(Accessed 15 April 2014).
318
See n 317 above.
314
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rule, this created a lasting sense of historical grievance.319 The discovery of oil in Bunyoro could
not help but bring those grievances to the fore.320
Uganda‘s 1995 Constitution and the Land Act of 1998 confirmed the four kinds of tenure
instituted under British rule: mailo, freehold, leasehold and customary, but government policy
has been to encourage a shift from customary to freehold.321 A family that has inherited
customary rights may apply to the local Land Board to have a freehold title issued. This,
however, has proceeded only very slowly. The process involves significant costs, as the land
must first be surveyed and demarcated, and other community members must recognise the
family‘s claims.322 Many families, in any case, cannot see point of obtaining a piece of paper to
formalise their tenure. Yet this leaves them vulnerable to outside entrepreneurs, developers and
speculators. This has been the case in the Albertine region as many people are being relocated
from their homes without adequate compensation and yet they leave behind their ancestral land
full of heritage and history.
The government of Uganda launched a Resettlement Action Plan in 2012 for the people being
displaced on the land gazetted for the oil refinery.323 However the process is moving slower than
earlier anticipated and it has not put in place efforts to consult with those being evacuated about
where to be relocated and their needs in order to cater for their lost livelihood. This current
policy on compensation and relocation does not cater for such issues.
4.7.2 Land valuation and compensation
Land valuation and compensation are largely lacking and this could spark off discontentment and
conflicts among various actors. This is still a thorny issue in the oil region mainly due to the slow
process and the lack of clarity regarding the way compensation is calculated.
This issue of compensation has ended in a number of law suits by the people in the oil region. In
Nebbi District on the shores of Lake Albert it is claimed that since Total E&P began exploring in
319
See n 317 above.
See n 317 above.
321
See n 317 above.
322
See n 317 above.
323
See n 317 above.
320
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the area, many gardens and homesteads have been destroyed in the process of surveying,
building access roads and constructing oil well pads.324 Residents expected compensation but,
according to some, what they received was not equitable. Some of the residents claim that the
compensation given can not equate to the amount they would get from the sale of their farm
produce.325 They state that a grown mango tree can fetch up to 120,000 shillings but they are
being given 80,000 shillings. Furthermore a cassava garden which is a source of food and
income is being compensated at only 120,000. 326
The lack of local engagement in the compensation and further lack of transparency and clarity in
the process coupled with the slow process creates difficulty for the people who are directly
involved in the process and who are most vulnerable, the local residents in the Albertine region.
4.7.3 Land grabbing
Land grabbing cases continue to rise, sparking off conflicts between the indigenous Banyoro and
immigrants. Due to the discovery of oil in the area, naturally the value for land in that area
increased. There have been claims that local business men in the area are working for wealthy
political families to buy and grab local farmers land.327 Without a proper government framework
to control land grabs and protect the local population, many people have not been compensated
or lost their land.
324
http://www.oilinuganda.org/features/compensation-remains-thorny-issue-in-oil-regions.html (Accessed 15 April
2014).
325
See n 324 above.
326
See n 324 above.
327
See n 324 above.
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4.8 SOLUTIONS TO THE OUTSTANDING LEGAL GAPS IN THE
REGULATORY FRAMEWORK OF FDI IN THE PETROLEUM SECTOR.
Whether a country avoids the oil curse is largely dependent on how the sector is managed from
the time of discovery, exploration and extraction. It is therefore important that at the very initial
stages of the sector, the institutional and legal frameworks to manage the sector are strong
enough to cater for all the critical issues in the sector such as environmental, economic, political
governance and security concerns.328
Uganda‘s petroleum sector will force her policymakers down one of three paths. The first is to
continue down the current road, likely dooming Uganda to a place among Africa‘s resourcecursed states.329 Alternatively, Ugandan legislators could work immediately to shore up the many
existing holes in the current regulatory framework and create a far more substantive series of
checks on corrupt behavior in the oil sector.330
In its current form the regulatory framework is very shallow and has very critical legal gaps
which must be addressed. To address these legal gaps the government must learn from
international best practices and other countries experiences in establishing this sector. The
current legal gaps can be corrected in the following ways:
4.8.1 Production Sharing Agreements
Transparency is an important aspect when a country is establishing the resource industry. Clearly
Uganda is lacking in this regard. The solution for transparency of PSAs is twofold. It can follow
the example of countries like Liberia where confidentiality clauses are omitted from the PSAs or
follow Norway‘s lead by turning their PSAs into national laws that are accessible to the general
public.331
The lack of clarity regarding CGT is costing the Ugandan government a lot of money not only in
loss of revenue but in litigation fees. The government should clearly state that all transactions are
subject to capital gains tax in the PSAs. It can further use a positive ruling in the Heritage case to
328
See n 251 above.
Mosbacher ( n 271 above) 50.
330
Mosbacher ( n 271 above) 50.
331
See n 222 above.
329
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enforce payment of capital gains tax on any subsequent transactions of the same nature in the
petroleum sector.332
The government should have all PSAs subject to Ugandan law. Adjudication and arbitration
should be done in Uganda to reduce on the costs. The government should also enact or adopt
international arbitration and dispute resolution procedures to guide the parties in case of conflict
as the case was with Heritage oil.
4.8.2 The laws
The current regulatory framework is deeply flawed, but a series of amendments would make the
framework more likely to achieve its stated goals. These reforms would have to start by limiting
the current powers of the Minister of Energy and Mineral Development 333, separation of powers
and functions of the institutions, clarity of functions of those institutions, reducing executive
interference among others in the following ways;
4.8.2.1 Ministerial powers and executive interference
The first step would be to abolish the discretionary ability of the Minister of Energy and Mineral
Development to issue and revoke contracts for oil exploration, production, and export. This
should be replaced by a formalized process for awarding contracts based on competitive auction
overseen by an independent committee.
The government must provide a strong role for Parliament in the management of the petroleum
sector by giving them the explicit power in the legislation to approve new acreage, regulations,
licenses and contracts and play a greater oversight role.334 There should be a parliamentary
committee that makes the decisions and the minister only implements those decisions.
The appointment of the members of the board of the NOC and the National oil Authority must be
vetted and approved by the parliament instead of the president and the minister. This will curtail
the interference of the executive in the work of these different institutions.
332
Izama & Mulangwa (See n 225 above) 16.
Mosbacher ( n 271 above) 50.
334
Global Witness ( n 236 above) 3.
333
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4.8.2.2 Petroleum Authority
The scope and function of the Petroleum Authority should also be amended to more closely
resemble Botswana‘s auditing and investigatory body, the Directorate on Corruption and
Economic Crimes (DCEC).335 This would require disentangling the Petroleum Authority from
the influence of both the Minister and the President by moving to Parliament the power to
appoint and remove the Authority‘s Board of Directors.
The DCEC was created by Botswana‘s National Assembly and empowered to independently
investigate and prevent economic and political malpractice.336 Since that time, the DCEC has
played a vital investigative role in protecting the diamond sector from corruption.337 Botswana
was rated the least-corrupt African country in Transparency International‘s most recent
―Corruption Perceptions Index,‖338and ranks fourth out of 46 countries in sub-Saharan Africa in
the World Bank–International Finance Corporation‘s most recent ―Doing Business‖ report.339
Just as notable as the DCEC‘s success at checking the powers of other government agencies are
the ways in which the powers of the DCEC itself are in turn checked. The DCEC does not play a
part in the prosecution of cases for which it collects evidence, leaving that power solely to the
judicial branch.340 This demonstrates Botswana‘s deep appreciation of the importance of
separated and balanced government power.341
4.8.2.3 National Oil Company
A separate law needs creating that specifically describes how to structure the NOC in addition to
a good corporate governance framework in order to establish the NOC in a proper and effective
manner. It can do this by looking at OECD procedure on corporate governance that is widely
accepted as the international best practices. The government can also learn from Norway whose
335
Mosbacher ( n 271 above) 51.
Mosbacher ( n 271 above) 51.
337
Mosbacher ( n 271 above) 47.
338
http://cpi.transparency.org/cpi2012/results/ (Accessed 15 April 2014).
339
http://www.doingbusiness.org/rankings (Accessed 15 April 2014).
340
Mosbacher ( n 271 above) 47.
341
http://wbi.worldbank.org/wbi/document/anti-corruption-commissions-panacea-or-real-medicinefightcorruption(Accessed 15 April 2014).
336
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corporate governance framework is similar to the OECD framework. 342 The Norway example
will be explained in further detail later in this chapter.
4.8.2.4 Parliamentary oversight
The legislation should provide Parliament with a far more comprehensive oversight role in the
major decisions in the petroleum sector, such as over licensing, as is the case in other petroleum
producing countries.343 Consideration should be given to whether there is a need for other
oversight and monitoring bodies.
A number of countries, ranging from Azerbaijan, Bolivia, Liberia and Ghana, require
parliamentary approval of major natural resource contracts, including petroleum agreements.
Parliamentary approval would be a more robust check and provide a more directly democratic
branch of government to be involved in the most important decisions.344
4.8.2.5 Transparency of information
The government should make all documents and information relating to the petroleum sector
public unless they fall within a narrowly defined commercial confidentiality provision relating to
bidding strategies or proprietary technology.345
The exemption for ‗commercial confidentiality‘ should be clarified and sharply limited. The laws
should also explicitly state that financial benefits to the government and the Ugandan people
arising from these contracts must be disclosed to the public.346 This can be done either through a
yearly report by the Government, some other regular disclosure by a third party or, preferably,
through the disclosure of the entire contract.347The laws would also benefit from a firm
commitment to financial transparency which is currently missing.
In line with the government‘s commitment to transparency, there must be protection for whistle
blowers. This must be encouraged as part of the checks and balances in the petroleum sector to
prevent corruption and unscrupulous behavior by the executive.
342
Kyepa (n 243 above )90.
Global Witness (n 236 above) 7.
344
Global Witness (n 236 above) 7.
345
Global Witness (n 236 above) 13.
346
Global Witness (n 236 above) 13.
347
Global Witness (n 236 above) 13.
343
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4.8.3 Local content issue.
The government should create more comprehensive local content legislation like Ghana and
Nigeria. It is very evident that the current legislation in place is insufficient to fully realize
Uganda‘s local content ambitions. This legislation should clarify the local content policy of
Uganda and clarify the ambiguities that are in the current legislation.
Uganda must adopt a local content model that can plausibly measure how much, in sustainability
terms. The local content regime‘s core objective must be empowering Ugandans as the engine
for their own wealth generation for ultimate sustainable economic development.348 To guarantee
the success of such a model it is paramount to encourage accountability, safeguard against bias
and stave off tensions, there must be total visibility in the criteria for award of contracts, basis for
the award, contract costs and itemization of activities. Closely following the guidelines of the
Extractive Industries Transparency Initiative (EITI) will go a long way to meet this end.
The government of Uganda should create a separate agency responsible for enforcing local
content. The proposed Petroleum Authority of Uganda, under Section 9 of the Upstream Act is
responsible for the promotion and enforcement of local content provisions of the law. 349 The
Authority under Section 13 of the Upstream Act, takes directions from the Minister responsible
for Petroleum activities. An approach akin to Norway‘s Achilles organization, working outside
of government, would be an ideal way to promote objectives without suffering from allegations
of corruption and cronyism.
The government of Uganda can not boost local content unless the businesses are there to support
it. The government should consult with all the stakeholders especially the small businesses on a
framework of how they can benefit from the petroleum sector. The government can take lessons
from Brazil. In Brazil, the national oil company Petrobras set up two funds to stimulate Small
Market Enterprises, of which there are now 14 million, accounting for 21 per cent of the nations
348
349
See n 190 above.
See n 190 above.
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GDP.350 To become a positive example in the African oil and gas sector, Uganda would benefit
from doing the same.351
4.8.4 Environmental issues
The government of Uganda should take the issue of the environment more seriously. This will
take a two way system to solve the impending risks and issues that arise in the petroleum sector
in the Albertine region. It is important that the Government of Uganda set standards for
environmental protection before actual drilling can begin. These standards must reflect generally
accepted best practices, as well as provisions of the Universal Declaration of Human Rights.352
This is in line with the fact that environmental and ecosystem degradation can have a
significantly negative impact on health, reproductive integrity, access to clean water, food
security, and other human rights-related concerns.353
The government must enact standard legislation and policy that deals with issues like EIAs, oil
spill contingency plans, biodiversity, air quality, water, fisheries, pollution and waste
management among others. This must create clarity regarding environmental management in the
region.
Mere enactment of legislation is not enough. Consideration must be made regarding how the
different institutions in charge of implementing the legislation will implement it. What is
required, therefore, is for the Government of Uganda to strengthen the structure of these
institutions by fully staffing them and providing them with enough resources to perform their
jobs effectively.354 Budgetary support could possibly be realized if a percentage of the revenues
collected by URA on environmental levies are channeled to activities that promote
environmental.355 Of course, it is important to note that in addition to providing each of these
public institutions with the resources to perform their functions, they must also be adequately
350
See n 190 above.
See n 190 above.
352
Mawejje& Bategeka
353
Mawejje& Bategeka
354
Mawejje& Bategeka
355
Mawejje& Bategeka
351
( n 301 above) 4.
( n 301 above) 4.
( n 301 above) 3.
( n 301 above) 3.
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constrained by the law so that those who work in them do not engage in behaviors like
corruption that conflict with their ability to serve the public.356
4.8.5 Land issues and compensation
The government must realize that without local people‘s involvement in land issues it is bound to
create bigger problems that can escalate into regional conflicts. Land in Uganda has an integral
historical attachment to the people in the area. The government can not continue to take over
areas without adequate compensation.357
The government must acknowledge the significance of the local traditional rulers and involve
them in important decisions regarding the land. The Albertine region is part of Bunyoro
Kingdom, a kingdom with a very rich tradition and history and a strong patronage from the
subjects.358 The government thus needs the blessings of the king and other traditional rulers for
the activities in this region to be successful.
The government must create a standard policy in consultation with the local communities and
civil society regarding the way compensation will be given for land taken up for petroleum
activities. This will create clarity regarding the compensation issue and reduce on the mistrust
that the local communities have for the government in this region.
The government should take the initiative to look for the most suitable land that these
communities that have been relocated for petroleum activities are to be situated. This reduces on
the conflicts and dissatisfaction of the communities. It makes no sense moving a fishing
community to an area where they can no longer continue with their traditional activities.
It must be a standard part of any oil company‘s commitment to production in the Albertine
region to undertake development projects for the advancement of the local population in the area
of production. These include development of various infrastructural projects in transport and
energy sectors, health centers technical training institutions as part of the companies‘ corporate
social responsibility
356
Mawejje& Bategeka ( n 301 above) 3.
Mawejje& Bategeka ( n 301 above) 3.
358
Mawejje& Bategeka ( n 301 above) 3.
357
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4.9 Mineral Rich Africa and the Resource Curse
No African country of Uganda‘s level of political and economic development has ever seen the
introduction of meaningful oil and gas sector translate into sustained development. Indeed, the
examples of Uganda‘s closest oil-exporting relatives provide a grim perspective on the
foreboding challenge ahead. Oil has been an unquestioned curse to the development stories of
Uganda‘s three closest predecessors: Chad, Sudan, and the Republic of the Congo.359
In all three, the introduction of oil revenues has been strongly correlated with worsened political
and economic outcomes. According to Freedom House, all three countries have seen their levels
of civil and political freedom decay after discovering oil.360 In addition, each country failed to
translate an oil boom into sustainable development. All three experienced a similar surge in
initial economic growth, only to see stagnation to below pre-oil levels within five years.361
None of these nations were able to establish control over the behavior of the executive branch
and deter the corrupt behavior of well-connected elites.362 In each country, oil revenues were
diverted to the military, used to consolidate and strengthen the elite grip on political and
economic power, and underwrote the lavish lifestyles of the best connected and most
powerful.363 For instance, during a 2006 UN General Assembly meeting in London, the
government of the Congo was forced to foot a £130,000 hotel bill racked up by President Denis
Sassou Nguesso and his entourage a bill that was £24,000 larger than the entire £106,000 aid
package given to the Congo by Britain that year.364 In Chad, President Idriss Deby was
discovered to have siphoned $4.5 million of the country‘s first oil revenues for personal and
military use and was later ruled to have done so legally under the country‘s porous legal
framework.365
359
Mosbacher ( n 271 above) 44.
Mosbacher ( n 271 above) 45.
361
Mosbacher ( n 271 above) 45.
362
Mosbacher ( n 271 above) 45.
363
Mosbacher ( n 271 above) 45.
364
DT Rowlands, ‗A New Scramble for Africa‘(2010) 238 Third World Resurgence. 47
365
S Pegg ‗Can Policy Intervention Beat the Resource Curse? Evidence from the Chad-Cameroon Pipeline Project‘
(2005) 418 African Affairs105 1-25
360
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In the absence of the rule of law, multiple layers of checks on power, and other innovative
institutions of accountability, an autocratic ruler and his elite can easily exploit and privately
seize the oil sector and use their newfound wealth to squash competition and strengthen their
already considerable power.366 In addition, the near-total shift of capital investments to oil causes
the new sector to dwarf the main drivers of healthy economic growth, crowding out agriculture
and manufacturing.367 Thus, oil revenues have ended up perverting any hopes of healthy
economic growth while corrupting governance and severing any remaining ties of accountability
between ordinary citizens and their government.368
4.9.1 The Oil Curse
―The oil curse is a shorthand expression that denotes a series of dysfunctions; political,
economic governmental, and security, which are strongly associated with oil dependency. Oil
dependent countries suffer from enclave industrialization, limited economic diversification and
vulnerability to price shocks, decay in their manufacturing and agricultural sectors, declining
terms of trade, misguided economic policies, and a fundamental neglect of human capital.‖369
These states have tended to neglect their human development because they are blinded by their
resource wealth, which transforms them into oil-rentier economies. They also suffer from global
patterns of domination and dependence, in some cases neocolonialism, in all cases multinational
corporate exploitation, and meddling in their governance by international organizations.370
They are, furthermore, post-colonial states, already fragile, that have been weakened by the
corrupting influence of oil money, with their leaders reduced to Kleptocrats, their civilian
regimes transformed into brutal police states, and aggravating a regional tendency of military
rule, their armed forces turned into praetorian cliques, personal despotism and veritable reigns of
terror.371
366
Mosbacher ( n 271 above) 45.
Mosbacher ( n 271 above) 45.
368
Mosbacher ( n 271 above) 45.
369
DA Yates The scramble for African oil; oppression, corruption and war for control of African natural resources
(2012) 1.
370
Yates (n 369 above) 1.
371
Yates (n 369 above) 1.
367
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Beneath these aberrations of state power, live poor and deprived societies that have been
traumatized by centuries of bloody exploitation, handicapped by low levels of education and
health, primitive economies of accumulation, high rates of unemployment, limited capital and
few opportunities for advancement.372 Torn by violent conflicts based on ethnocentrism, unfair
distribution, status frustration and internalized inferiority complexes, the people who live in these
oil-rich countries are prone to rebellion, insurrection, and civil war.373
In all oil-endowed countries, management of the resource has been at the core of socio-economic
and political governance.374 For the curse to become a reality, local people are denied the
opportunity to see how much money there is, where it is coming from and where it is going. It
also becomes a reality in situations where such stats have failed to evolve credible structure to
manage the resource in a way that will ensure fairness and to strike an acceptable balance
between local claim and national interest. 375
The presence of oil and its consequent exploitation creates ―visions of hell on earth as
environments, peoples, and lives are ravaged and destroyed‖.376 The implications of oil
exploration, extraction, transportation, storage and use on the environment are enormous. It is
associated with spillages, explosions, oil leaks, injuries and death, be it in Nigeria, Gulf of
Mexico, North Sea, Middle East, North Africa, or Alaska.377 Inevitably, there is destruction of
farmlands, fishing grounds and pollution of water sources.378
The ―Horner-Dixon Hypothesis‖ suggests that the growth of human population and the economy
will spur ones increasing demands for natural resources, which will create scarcity of such
resources and that this will have profound negative social consequences such as insurrections,
ethnic clashes, urban unrest, and other forms of violence.379 This is in agreement with Sperling et
al who hypothesized that oil-extracting societies often generate internal protest and sometimes
terrorism and war.380 Indeed, there have been violent protests in the Niger Delta381 and Sudan;
372
Yates (n 369 above) 1.
Yates (n 369 above) 1.
374
A Alao Natural resources and conflicts in Africa; The tragedy of endowment (2007) 158
375
Alao (n 374 above)158.
376
Alao (n 374 above)136.
377
Alao (n 374 above)136.
378
Alao (n 374 above)175.
379
Yates (n 369 above)201.
380
Yates (n 369 above)121.
373
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Wars of Secession of Cabinda from Angola, South Sudan from Sudan, and the Niger Delta from
Nigeria382 and wars over oil-rich areas between countries such as Cameroon and Nigeria.383
Oil is also associated with massive corruption by the ruling elite at the detriment of the governed.
Corruption is a behavior that flourishes when government agents have exclusive and wide
discretionary powers, and are not accountable for their acts. Therefore, ―it is a consequence of
bad institutional design, because bad institutions create micro-economic inducements for
corruption.‖ 384
Overall, an exceptional infusion of oil wealth undermines many existing social institutions
within a country. If a society is not already democratic with a diverse and pluralistic set of
institutions, then the exploitation of oil will often damage any movement towards
democratization, lending credence to the saying that ―oil and democracy are not great bed
fellows.‖385 Many leaders in these countries are authoritarian, dictatorial and praetorian
kleptocrats whose only claim to fame is cowing their countries dry by ensuring that oil revenues
flow into their wallets.
4.10 Lessons from Norway
Norway is the clearest illustration of how oil and democracy can be effectively combined. This
seems to be because it possesses a ‗deep democracy‘ with institution a listed patterns of nonviolence resulting from being one of the most equal societies in the world in terms of class and
gender386 Norway remains a nation of stored away wealth, financial stability among
Norwegians.387
Presently, Norway has the world‘s highest human development index (HDI) ranking, out of 169
countries with similar ranking- Saudi Arabia 56, Russia 65 and Nigeria 142.388 On a per car pita
basis, it is the world‘s largest oil and gas producer outside the middle east, it is the 9 th largest oil
381
Yates (n 369 above)202.
Alao (n 374 above)164.
383
Alao (n 374 above)171.
384
Yates (n 369 above) 57.
385
J Urry Societies beyond oil; oil dregs and social futures (2013) 139.
386
Urry (n 385 above)149.
387
Urry (n 385 above)151.
388
Urry (n 385 above)151.
382
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and largest gas exporter in the world ,and its oil revenues are more than 20 percent of Norway‘s
GDP.389
According to foreign policy magazine, Norway is second to the last in its listing of ‗failed states
index‘ for 2011.390 Furthermore, it is judged to be more or less the world‘s best functioning and
stable state; it is tenth best for its perceived lack of corruption, and is ranked the second
wealthiest country in the world.391 No wonder, then, that ―Norway runs a 9 percent state budget
surplus, being the only western country to do so as of 2009.392 Additionally, it is the least country
affected by the international economic crash of 2007/8 onwards, and it successfully maintains a
social democratic welfare model with universal health care, subsidised higher education and
comprehensive social security.393 Not only because of the above but also because of the
measures it has put in place to manage the oil revenues as mentioned below, Norway is an
interesting development model being copied by many countries including Russia and
Scotland.394
To achieve all the above Norway has over the years built institutions and implemented policies
aimed at optimal utilisation of petroleum earnings to benefit all its citizens including its future
generations.395 To begin with, Norway had the advantage of starting its petroleum industry
against the backdrop of a highly competent bureaucracy that was skilled in, among others,
regulation of natural resource industries lie hydro power and mining. 396 Secondly, because the
country was greatly concerned with the negative effects of oil wealth, Norway‘s policy goal was
geared towards maintaining control of the oil sector and not revenue collection.397 Because of
this, the government controls the licencing of the exploration and production of petroleum field s
through state ownership of the manager operators; sixty two per cent ownership in Statoil and a
389
Urry (n 385 above) 151.
Urry (n 385 above) 151.
391
Urry (n 385 above) 149.
392
Urry (n 385 above) 151.
393
Urry (n 385 above) 151.
394
Urry (n 385 above) 151.
395
Kyepa (n 243 above) 90.
396
Kyepa (n 243 above) 90.
397
Kyepa (n 243 above) 90.
390
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hundred per cent in Petoro398 which companies have been beneficiaries of good corporate
governess structures existing in Norway.399
Lastly, to maximise benefit for everybody, Norway established the sovereign wealth fund in
1995, based on taxes, dividends, sales revenues, and licencing fees from the oil. 400 It was
designed to reduce over heating in the economy; provide a cushion for aging population and to
minimise uncertainty from volatile oil prices and deal with the inevitable the declining oil and
gas reserves.401 The fund invests in financial market outside Norway spending more than 4 per
cent of then fund each year.402 By 2010, the fund was the largest in Europe with assets of around
USD$556 billion.403 Globally it is the second only to Abu Dhabi investment authority before
Saudi Arabia that comes in third place.404
4.11 Conclusion
It goes without saying that FDI is very important in Uganda‘s economy, more so in the emerging
petroleum sector that needs a lot of money to set up in all the three sectors of petroleum
production. FDI inflow in the petroleum sector in Uganda has been overwhelming. But with the
high FDI inflow, comes a responsibility by the host country to efficiently regulate the sector in
order to fully benefit from it.
Although Uganda has gone to great length to establish a regulatory and institutional framework
to cater to the sector, there are so many critical gaps that have not been catered for including;
unchecked minister‘s powers and discretion; interference of the executive; lack of transparency
in the activities in the sector; land issue; lack or inefficient environmental management policies;
lack of a clear and efficient fiscal regime to handle oil revenue and security concerns among
others. The next chapter will give a general brief summary of all the previous chapters.
398
Urry (n 368 above) 150
Kyepa (n 226 above ) 90
400
Urry (n 368 above) 150
401
Urry (n 592 above) 150
402
Urry (n 592 above) 150
403
Urry (n 592 above) 150
404
Urry (n 592 above) 150
399
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CHAPTER 5
CONCLUSION
5.1 Introduction
The chapter provides a conclusion and a summary of all the recommendations arising out of the
substantive chapters, that is, chapters 2 to 4. It amalgamates all the recommendations therein, to
provide a unified proposal on the way forward;
5.2 Conclusion
In this research it has been established that FDI is an important aspect to any country‘s economy,
more so to the economy of a developing country like Uganda. Although its definition varies, FDI
is not a new concept but is as old as trade itself and although the concept has evolved over years
its significance is very important.
In the case of Uganda FDI can be traced back to colonial times when the colonial masters
invested in their colonies. In Uganda the British invested in the country‘s socioeconomic
infrastructure. On attaining independence, the country had to start sourcing for investment as the
British stopped investing in the country. Since then the governments of Uganda over the years
have been sourcing for FDI investment into the country. Due to the different changes in
government FDI inflow into the economy of Uganda has been volatile and inconsistent.
Since 1988, after years of political turmoil and civil war, the newly established stable
government took on the task to attract FDI into Uganda. That included creating policy and
establishment of the Uganda Investment Authority. Since then FDI inflow has gradually
increased, but over the past 5 years it has sky rocketed to unprecedented proportion and this is
mainly due to the discovery of oil in the country.
In this research it has been established that although the discovery of oil in Uganda has been
recent, its exploration dates back to the 1920s. The explorations slowed down and were only
resumed in the late 1980s by the PEPD. Since the discovery of oil, the government has taken
steps to accommodate the new developments in the petroleum sector. These have been in the
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form of the NOP, new laws like the Upstream and Midstream Acts and the amendments to the
complementary legislation that regulates activities in the petroleum sector.
In this research it has been established that the petroleum sector in Uganda does not have one
standing regulatory framework. Due to the different stakeholders in the sector, its regulatory
framework is comprised of an amalgamation of laws and regulation that are supposed to work
together harmoniously in regulating the sector. So in effect FDI regulation in the petroleum
sector is regulated by a multiplicity of rules that form the regulatory framework. In this the
government has gone a long way in creating a sufficient regulatory framework to regulate FDI in
the petroleum sector.
It has also been established that although the government has created a regulatory framework to
manage FDI in the sector, this research has shown that there are very important legal gaps that
affect the efficacy of the current regulatory framework in the petroleum sector, these include;
unchecked minister‘s powers and discretion; interference of the executive; lack of transparency
in the activities in the sector; land issue; lack or inefficient environmental management policies;
lack of a clear and efficient fiscal regime to handle oil revenue and security concerns among
others.
The failure to address the issues above will plunge the country into a resource curse that is very
hard to reverse. The resource curse tears the entire fabric of society and the result is that the same
society that was supposed to benefit from the resources of the country ends up losing the benefit
to a small elite group of people in the country, the effect of this is the high likelihood of the
internal conflict mass irreversible environmental degradation, low socio infrastructural
development among others. This is evidenced by the resource rich African countries that have
witnessed slow socioeconomic growth while their dictatorial governments became richer.
In order to prevent the resource curse phenomenon from occurring in Uganda, the legislators in
the country will have to make a positive step towards creating a system that is not only
transparent but accountable. In order to do this there need to be checks and balances that need to
be created and inserted into amendments of the laws that have been created; parliamentary
involvement in the major decisions in the petroleum sector should be paramount; there must be
clarity of the roles and duties of institutions involved in the sector; public involvement and
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discussion should be encouraged; PSAs should be made public; environmental issues should be
resolved before production starts and land and local content issues should be resolved among
others.
There have been countries with great resources and yet they have been failures economically like
Equatorial Guinea and Republic of Congo. An example that Uganda can emulate in Africa is
Botswana. This country was able to create a system that allowed for transparency and
accountability and it has been able to greatly enhance growth of the country. With such an
example Uganda has the potential of fully benefiting from the petroleum resource. Uganda can
also learn from the international best practice of Norway.
In conclusion, the struggle to create a regulatory framework capable of fighting impending issues
in Uganda‘s petroleum sector is quite literally a battle for Uganda‘s future. Furthermore,
Uganda‘s future as an oil exporter will have implications that reach far beyond its own borders.
As East Africa becomes a major player in the world‘s oil market over the next decade, Uganda‘s
example will set a standard for how the region‘s citizens can expect their oil sectors to be
managed. Structuring a new regulatory framework presents an opportunity for Ugandan
legislators to steward the country away from its corrupt past toward a new era of democratic
governance and unencumbered economic growth.
In the absence of earnest reform, Uganda‘s current regulatory framework is unlikely to stop
corruption and abuse. The country‘s political leaders face a choice: they either boldly alters the
structure of the current framework to separate and check the powers of actors within the system,
or Uganda‘s future as an oil exporter will likely look very similar to that of her resource cursed
African forbearers.
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BIBLIOGRAPHY
BOOKS
Alao A (2007) Natural resources and conflicts in Africa; The tragedy of endowment University
of Rochester Press: New York
Humphreys M; Sachs JD; Stiglitz JE; eds (2007) „Escaping the Resource Curse‟ Columbia
University Press: New York
http://www.eisourcebook.org/515_HumphreysWhatistheProblemwithNaturalResourceWealth.ht
ml (Accessed 12 September 2013 )
Sodersten B &Reed G (1994) International economics St Martine‘s Press: New York
Sornarajah M (2004) International law on foreign investment Cambridge University press:
Cambridge
Urry J (2013) Societies beyond oil; oil dregs and social futures Zed books: London
Yates DA (2012) The scramble for African oil; oppression, corruption and war for control of
African natural resources Pluto Press: London.
JOURNAL ARTICLES
Busse, M &Groizard, JL ‗Foreign Direct Investment, Regulations and Growth‘ 10 (2008) The
World Economy journal862
Izama A &Mulangwa H W ‗Understanding the tax dispute: Heritage, Tullow, and the
government of Uganda‘(2011) Advocates Coalition for Development and Environment
(ACODE)16
Kolstad, CD: Ulen, TS & Johnson GV ‗Ex post liability for harm vs. ex ante safety regulation:
substitutes or complements?‘(1999) 80 The American Economic Review 4.
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Krishnan A ‗Legal Regulation of Foreign Direct Investment and its Role in the Growth of
National Economies‘ (2008) http://ssrn.com/abstract=1521590( Accessed 12 February 2014)
Parker D; Kirkpatrick, C &Zhang, YF‗Foreign direct investment in infrastructure in developing
countries: does regulation make a difference?‘(2006) 1 Transnational Corporations 15.
Pegg S ‗Can Policy Intervention Beat the Resource Curse? Evidence from theChad-Cameroon
Pipeline Project‘ (2005) 418 African Affairs105 1-25
http://afraf.oxfordjournals.org/content/105/418/1.abstract (Accessed 15 Apri
Mosbacher J ‗Fighting the Resource Curse: Uganda‘s Pivotal Moment‘ (2013) The Washington Quarterly
Rowlands DT ‗A New Scramble for Africa‘(2010) 238 Third World Resurgence. 47
http://www.twnside.org.sg/title2/resurgence/2010/238-239/view1.htm .(Accessed 15 April 2014)
Yussof , I& Ismail, R ‗Human Resource Competitiveness And Inflow Of Foreign Direct
Investment To The Asean Region‘ (2002) 9 Asia-Pacific Development Journal 1.
WORKING PAPERS
‗Evans RB ‗Investment anddevelopment; A discussion paper on investment, development and
the poor‘ Tearfund
discussionpaperhttp://www.tearfund.org/webdocs/Website/Campaigning/Policy%20and%20rese
arch/Investment%20and%20development%20paper.pdf(Accessed 20 February 2014)
‗Foreign Direct Investment for development maximising benefits, minimising costs: Overview‘
(2002) Organisation for Economic Co-Operation and Development(OECD)
‗Foreign Direct Investment: A Lead Driver for Sustainable Development?‘ (2002) 1 Economic
Briefing Series 3
‗Foreign Direct Investment: A Lead Driver for Sustainable Development?‘( 2002) 1 Economic
Briefing Series, Towards Earth Summit 4
‗Governance and Policy Issues in Uganda‘s Oil and Gas Sub-Sector‘ (2011) Center for
Constitutional Governance
(CCG)http://www.ccgea.org/downloads/CCG%20Oil%20and%20Gas.pdf(Accessed 15 April 2014)
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Heilbrunn J R ‗Anti-Corruption Commissions: Panacea or Real Medicine to Fight Corruption‘
(2004) World Bank, working paper, 11, http://wbi.worldbank.org/wbi/document/anti-corruptioncommissions-panacea-or-real-medicine-fightcorruption (Accessed 15 April 2014)
Lim, EG ‗Determinants of, and the Relation Between, Foreign Investment and Growth: A
Summary of the Recent Literature‘ (2001), IMF Working Paper 3.
Mawejje J&Bategeka L ‗Community expectations and environmental aspects in Uganda‘s oil
and gas sector‘(2013) EPRCPolicy Brief 39
Nunnenkamp, P &Spatz, J, ‗Intellectual Property Rights and Foreign Direct Investment: The
Role of Industry and Host-Country Characteristics‘ (2003) 1167 Kiel Working Paper 37.
Obwona, M.B ‗Determinants of FDI and their impact on economic growth in Uganda‘ (2001)
African Development Bank.
‗OECD
Benchmark Definition Of Foreign Direct Investment‘Organisation for Economic Co-
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(2002) Foreign Investment Advisory Service
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DISSERTATION
Kyepa T ‗Integrating National Oil Companies In The Corporate Governance Discourse: A
Comparative Analysis Of The Norwegian State Oil Company (Statoil) And The Proposed
National Oil Company Of Uganda‘Unpublished thesis, University Of The Western Cape 2011
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LAWS
The Petroleum (Exploration, Development, Production and Value Addition) Act of 2012
TheInvestment Code Act of 1991
TheIncome
Tax (Amendment) Act of 2010
TheUganda Revenue Authority Act of 1991
TheIncome Tax Act of 1997
TheValue Added Tax Act of 1996 Section 11
TheNational
Environment (Conduct and Certification of Environmental Practitioners)
Regulations of 2003
NATIONAL POLICIES
Environmental Management in Uganda‘s Oil and Gas Sector, 2
National Oil and Gas Policy For Uganda of 2008, ii, iv
INTERNATIONAL AND REGIONAL POLICIES
East African Common Market Protocol of 2009
INTERNET SOURCES
An introduction to Petroleum
http://www.petroleum.co.uk/(Accessed 11 April 2014)
China aggressively trading and investing in Africa
http://www.eurekalert.org/pub_releases/2010-09/adb-cat091310.php (Accessed 19 January 2014)
―Corruption Perceptions Index 2012,‖ Transparency International
http://cpi.transparency.org/cpi2012/results/ (Accessed 15 April 2014)
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Definition of 'Upstream'
http://www.investopedia.com/terms/u/upstream.asp(Accessed 25 March 2014)
Defining Upstream Oil & Gas
http://www.psgdover.com/en/oil-and-gas/oil-gas-market-overview/oil-gas-upstream(Accessed on
25 March 2014)
―Economy Rankings,‖ Doing Business project, World Bank–International Finance Corporation,
http://www.doingbusiness.org/rankings (Accessed 15 April 2014)
Foreign Direct Investment
http://unctad.org/en/Pages/DIAE/Foreign-Direct-Investment-%28FDI%29.aspx (Accessed
24November 2013)
Foreign Direct Investment
http://www.oecd-ilibrary.org/sites/factbook-2013en/04/02/01/index.html?itemId=/content/chapter/factbook-2013-34-en (Accessed 24 November
2013)
Foreign Direct Investment in Emerging Market Countries—Report of the Working Group of the
Capital Markets Consultative Group
http://www.imf.org/external/np/cmcg/2003/eng/091803.HTM(Accessed 24 November 2013)
Global trade war over local-content requirements
http://www.twnside.org.sg/title2/resurgence/2013/269-270/econ3.htm (Accessed on 20 April
2014)
Government signs Memorandum of Understanding with the Licensed Oil
Companieshttp://www.petroleum.go.ug/page.php?k=curnews&id=78(Accessed 20 February
2014)
History and Development of Oil & Gas in Uganda
http://www.acode-u.org/ugandaoil.html (Accessed 20 September 2013)
Hydrocarbon exploration
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http://en.wikipedia.org/wiki/Hydrocarbon_exploration(Accessed on 29 March 2014)
Key oil governance issues in Uganda that need urgent attention of
parliamenthttp://www.publishwhatyoupay.org/resources/key-oil-governance-issues-ugandaneed-urgent-attention-parliament (Accessed 15 April 2014)
Land, oil and dispossession
http://www.oilinuganda.org/features/land/land-oil-and-dispossession.html(Accessed 15 April
2014)
Midstream
http://en.wikipedia.org/wiki/Midstream_%28petroleum_industry%29(Accessed on 25 March
2014)
Petroleum Definition
http://chemistry.about.com/od/chemistryglossary/g/Petroleum-Definition.htm(Accessed 11 April
2014)
Petroleum industry
http://en.wikipedia.org/wiki/Petroleum_industry(Accessed 11 April 2014)
Production sharing agreement
http://en.wikipedia.org/wiki/Production_sharing_agreement#cite_note-1(Accessed on 20 April
2014 )
PWC Oil and Gas Tax guidelines for Africa 2013
http://www.pwc.com/en_TZ/tz/pdf/pwc-oil-and-gas-tax-guide-for-africa-2013.pdf(Accessed 20
September 2013)
Roles and objectives of UIA
http://www.ugandainvest.go.ug/index.php/role-and-objectives(Accessed 20 December 2013)
The Concept of Production Sharing
http://www.rulg.com/documents/The_Concept_of_Production_Sharing.htm (Accessed on 20
April 2014)
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The history and progress of petroleum exploration and development in Uganda
http://www.petrleum.go.ug/page.php?k=abthistory(Accessed 20 November 2013)
The National Oil and Gas Policy
http://gov.ug/about-uganda/government-policies/national-oil-and-gas-policy(Accessed 20
November 2013)
The Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act 2013
http://www.petroleum.go.ug/page.php?k=regacts&id=5(Accessed 25 March 2014)
Trade Routes between Europe and Asia during Antiquity
http://www.metmuseum.org/toah/hd/trade/hd_trade.htm(Accessed 24 November 2013)
Why would anyone invest in Uganda?
http://www.ugandaeconomy.com/invest-uganda/uganda-investment-authority (Accessed 20
December 2013)
Uganda Investment Authority
http://www.ugandaeconomy.com/invest-uganda/uganda-investment-authority (Accessed 12
January 2014)
Uganda Railway
http://en.wikipedia.org/wiki/Uganda_Railway(Accessed 24 November 2013)
Uganda‘s local content and the contradiction of self empowerment
http://www.independent.co.ug/cover-story/8375-ugandas-local-content-and-the-contradiction-ofself-empowerment#sthash.cOIwlqRV.dpuf(Accessed on 20 April 2014)
NEWPAPERS
‗Uganda top investment destination in East Africa‘ Daily Monitor 4 July 2013
‗Trade and foreign direct investment‘ WTO News Press/57, October 1996
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‘Government
signs Memorandum of Understanding with the Licensed Oil Companies‘Ministry
Of Energy And Mineral Development Press release 6February 2014
‗NEMA drafts oil spill contingency plan‘New Vision 22 April 2013
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