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FOSTERING TRANSPARENCY, ACCOUNTABILITY, AND EQUITABLE ROYALTY SHARING OF REVENUE FROM EXTRACTIVES IN UGANDA

Commercial oil accumulations were first discovered in Uganda in 2006 within the Albertine Graben. The exploration and appraisal of the Oil and Gas discoveries in the Albertine Graben have led to an increase in the country’s petroleum resource base from an estimated 3.5 billion barrels of Stock Tank Oil Initially in Place (STOIIP) to the current estimate of 6.5 billion barrels, of which, 1.4 billion barrels are estimated as recoverable. In addition, gas resources are currently estimated at 600 billion standard Cubic Feet (BCF). Sixty percent of the Albertine Graben is still undiscovered, and the nation might benefit from more resources, including the unexplored Hoima, Lake Kyoga, and Moroto, Kadam basins. With these new discoveries in the energy sector, it's incumbent that transparency, accountability, and equitable petroleum royalty sharing between local governments and the central government is prioritised to maintain sustainable growth and overcome the oil curse experienced in oil and mineral-rich countries such as Nigeria that have for years exploited their resources before Uganda. Abundant natural resources can boost economic prosperity, increasing investment in infrastructure, public goods, and international trade. However, transforming sub-soil natural resources into more tangible physical and human capital for faster growth has not been straightforward.¹

Background

The extractive industry of Uganda, documented as early as the 1920s, witnessed a boom in the 1950s with a record 30 per cent of the country's exports and received a further boost when mining revenues increased by 48 per cent between 1995 and 1997.[iii] However, the World Bank reported that the sector's contribution to gross domestic product (GDP) dropped from 6 per cent during the 1970s to below 0.5 per cent in 2010.[iv] Uganda's extractive industry activities have been identified by the Natural Resource Governance Institute as focused on "extraction of cobalt, gold, copper, iron ore, tungsten, steel, tin and other industrial products such as cement, diamonds, salt, and vermiculite".[v] Limestone is sold in local markets, whereas gold, tin, and tungsten are major exports.[vi] Particularly, Uganda's petro industry has been growing since the discovery of viable quantities of oil and gas in 2006. The government has signed production-sharing agreements (PSAs) with oil companies to explore, develop, and produce oil and gas. The Uganda Extractives Industry and Transparency Initiatives (UGETI) noted that between July 2020 and June 2021, the extractives contributed 241.34 billion less than the 436.35 billion declared in the previous year. The oil and gas sector alone had garnered 238.68 billion by June 2021, and URA collected 8.7 billion royalties and distributed 1.34 billion to local governments and landowners. (Thomas Scurfield, Paul Bagabo, Natural Resource Governance Institute). The Domestic Revenue Strategy 2019/2020- 2023/24 indicates that oil and gas are the bedrock of the extractives that will be relied on for revenue generation.

Uganda's oil sector fiscal regime includes production sharing, income tax, royalties, annual surface rentals, and bonus payments. Section 75 of the Public Finance Management Act of 2015 prescribes the revenue sharing from royalties between the central government and between local governments in the production areas;94 % of the royalties are to the central government, while 6% goes to local governments within the petroleum exploration and production areas. 50% of the 6% to local governments shall be shared among the local governments involved in petroleum production and this is based on the level of production of each local government or impact. The remaining 50% of the royalties due to local governments are then shared based on the population size, geographical areas, and terrain. The royalties appropriated to local governments should be included in the annual budgets for the developments and are regarded as locally generated revenue. The Mining and Minerals Act of 2022 revised the mining royalties sharing proportions by giving the Central Government 70%, the Local Government 15%, the sub-county/town council 10%, and owners, lawful or bonafide occupants of the land 5%. In the repealed Mining Act 2003, the Central Government was entitled to 80%, Local Governments 10%, sub-county/town councils 7%, and owners or lawful occupiers of land with minerals 3%.

The benefits and challenges

Globally, the countries that have done well in the oil and gas sector are those whose citizens have participated. The government and the oil companies are committed to promoting national content development in implementing the oil and gas projects, safeguarding the environment, and fast-tracking the land acquisition processes, in line with international best practices. This includes ensuring that the projects are implemented while considering the environment and biodiversity stakes, the local community rights, and within the stringent environment and social performance standards of the International Finance Cooperation.

The size of Uganda’s economy, as reported by the Ministry of Finance Planning and Economic Development, is US $45.7 billion, with expected domestic revenue of US $6 Billion (13% of GDP) in 2022/23. The economy is dominated by the services sector, which accounts for 41.5%, followed by industry, which accounts for 26.8%, and the agriculture sector, which accounts for 24.1%. The country recorded a trade deficit of US$413.80 million in May 2022. In addition, the country has very high levels of unemployment.

Close to US$20bn is going to be injected into the projects. This is almost half of Uganda’s GDP in 2021, according to the UBOS statistical abstract for 2021/22. The investment will have a ripple effect-employment and contracts for Ugandans, plus stimulate other sectors, which will provide goods and services. Using the prevailing crude oil prices, the government would earn close to $70bn over the projects’ lifetime. The frameworks for the country’s oil and gas sector now in place, together with the activities being implemented, make it clear that the oil and gas industry will transform Uganda’s economy and improve the well-being of its citizens. The established Environment and Social Impact Assessment (ESIA) processes have also fully addressed the perceived environmental impacts to the highest international standards.

The significant investment that has now been unlocked into Uganda’s economy includes the implementation of the Tilenga Project in Buliisa and Nwoya districts (approximately US$4 billion); the Kingfisher Project in Hoima and Kikuube Districts (approximately US$1.5 billion); and, the East African Crude Oil Pipeline (EACOP) (approx. US$3.6bn). This is in addition to what the Government is already investing in the required support infrastructure, including Hoima International Airport (over US$500m) and 700 km of oil roads. By the end of the construction phase, Uganda’s Gross Domestic Product (GDP) will be significantly boosted by close to USD 9 Billion through sectoral linkages.

Another key benefit from the oil and gas sector is the employment of about 14,000 people who will be directly employed by the oil companies, while about 45,000 people will be indirectly employed by the contractors. An additional 105,000 people will benefit from induced employment using other services by the oil and gas sector. Ugandan nationals directly employed by the oil companies as of September 2021 stand at 81%, with 59% in management, 75% technical and 100% of their support staff.

Some countries have been intentional with the discovery of oil in their countries. For instance, Norway established a fund. Norway's petroleum wealth has funded high-quality education, healthcare, and infrastructure, contributing to a high standard of living and low poverty rates. The Petroleum Fund can also be seen as a fiscal management tool to ensure transparency in using petroleum revenues. The resources in the funds are included in a coherent budgetary process.

Oil, gas, and mining revenues should spur economic growth and social development in developing countries. In practice, however, economies that are overly dependent on oil and mineral wealth have often encouraged authoritarian rather than democratic governance, particularly in countries with weak legal or regulatory frameworks. Profits from natural resources allow ruling elites to consolidate power through patronage systems, while revenue mismanagement may fuel devastating spirals of corruption, conflict, and poverty. iii However, history has shown that the mismanagement of resource revenues can lead to corruption, inequality, and environmental degradation. For example, despite being one of Africa's largest oil producers, Nigeria has struggled with corruption and mismanagement in its oil sector. This has led to widespread poverty, inadequate public services, and underdevelopment in many parts of the country. Therefore, learning from the experiences of other oil-producing countries, Uganda must establish a robust framework that fosters good governance and benefits all citizens.

Transparency, accountability, and equity

Sustainable Development Goal 16 underscores the need to ‘promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.² The words transparency and accountability are quite ambiguous, given the numerous definitions assigned to each. Transparency and accountability are mechanisms designed to mitigate development failures and democratic deficits. In the extractives sector, transparency mechanisms open communication channels and promote scrutiny over resource revenues and the resource extraction processes.³ Accountability ensures that concerns are addressed through the government's responsiveness to the needs of its citizens.⁴ Discussions on transparency and accountability in natural resource governance emerged in the historical context of a “resource curse”. In the private sector, transparency and accountability are linked to corporate social responsibility (CSR), which mainly focuses on community-level charity projects and does not synergise deeply rooted socio-political issues.⁵ There are several international initiatives underway to promote accountability and transparency, such as the Extractive Industries Transparency Initiative (EITI), the Publish What You Pay (PWYP) Coalition and Transparency International’s Revenue Transparency Project.

The Ugandan government has taken several measures to ensure transparency of its natural resources to the public and civil societies. These measures include implementation of the EITI, revenue management, RGI, citizen participation and multi-stakeholder engagement, and the Kimberley Process. These measures ensure that the revenues generated by extractive industries are used for their intended purposes and that the public and civil societies have access to information on the revenues generated by extractive industries. This is coupled with the creation of the Petroleum Authority of Uganda in 2013, an independent regulatory authority tasked with regulating and monitoring the petroleum sector, ensuring that operations are conducted by best practices, and safeguarding the country's interests.

Local governments should have an oversight role, which includes overseeing tax collection, distribution, and expenditure. Efficient oversight mechanisms, such as legislative committees and independent regulatory bodies, should be put in place to ensure that local interests are represented.

Equitable petroleum and mining royalties distribution between the central government and local communities is paramount. Local governments must receive a fair portion of the proceeds because they frequently suffer the brunt of the negative social and environmental effects of petroleum and mining activity.

The government ensures equity in royalty sharing by sharing oil royalty revenues with local governments, CDAs, withholding tax, transparency, and civil society. These measures ensure that local communities benefit from the revenues generated by extractive industries and that the revenues are used for their intended purposes.

Challenges faced by sector affecting local governments

Information asymmetry between the elite and ordinary citizens. There is a general lack of information on industry operators and their obligations and how the funds from the government in the form of royalties are allocated, disbursed and reconciled. Relatedly, the government has failed to fully disclose the details of extractive industries, for example, production details, licenses, disclosure of beneficial ownership information, etc. This information gap exacerbates the poor relationship between the government and the citizens. According to Thomas Scurfield and Paul Bagabo, (2022), the local governments have scarce details about sharing royalty revenues with the central government. This has frustrated local officials’ planning and their management of public expectations.⁶ In 2016, Global Financial Integrity indicated that Uganda was yet to share the details of the contracts with oil companies. Yet contract transparency is essential for ensuring that petroleum royalty sharing is equitable.⁷

Similarly, due to the limited data and information on the sector, it has been marred with corruption and many leakages. The PAC Committee on Finance Planning and Economic Development reported that 600 billion shillings had been lost in the export of gold in 2021. This is because there is a lot of smuggling in the sector and under-declaration of extraction.

The Uganda Revenue Authority, during the Mining conference convened by ACODE, indicated that they do not have the expertise to value the minerals. This fog makes the taxation process difficult and easy for the taxes of those operating in the sector to be undervalued. This directly affects the amount of royalties that local governments will eventually get.

Recommendations

Civil Society Organizations should conduct public awareness campaigns to educate local communities about their rights, revenue-sharing processes, and how petroleum and mining royalties can benefit them. This can help foster understanding and support for the equitable distribution of funds.

The Ministry of Energy and Mineral Development should implement mechanisms that ensure the disclosure of contracts, payments, and production data. It has published petroleum agreements, production-sharing agreements, and annual reports, allowing citizens and stakeholders to access information related to the sector's operations.

• The MoEMD should implement a digital platform that provides real-time updates on petroleum operations, revenues collected, and disbursements. This empowers citizens, civil society organizations, and watchdog groups to monitor and scrutinise the sector, ensuring that discrepancies or irregularities are promptly identified and addressed.
• MoEMD and MoLG should invest in building the capacity of local government officials, civil society, and relevant stakeholders to understand and effectively participate in the management of petroleum resources and revenue sharing.
• MoEMD should partner with international organizations and NGOs to independently audit petroleum revenue flows. This external validation enhances credibility and provides an unbiased assessment of the revenue management process.
• Local Governments should revitalise the revenue enhancement committees to oversee tax collection, distribution, and expenditure with efficient oversight mechanisms. Local governments should have a role in this oversight to ensure their interests are represented. Furthermore, adopting effective anti-corruption measures is crucial, such as enacting and enforcing ordinances that criminalise corruption, bribery, and related offenses.
• MoFPED should provide timely information on royalties to local governments so that they are provisioned for in the districts' annual budgets in extractive sectors. This enables them to invest in infrastructure, education, healthcare, and other essential services that improve the quality of life for their constituents.

Conclusion

On her journey to develop her petroleum and mineral resources, Uganda has a unique opportunity to avoid the resource curse that has plagued other nations, and this has to be done by preventing revenue leakages. To prevent revenue leakage, both the central and local governments need to identify the causes, implement automation, streamline processes, and improve data accuracy and communication. These measures will ensure that all revenue is accounted for and that there are no leakages in the revenue generation process from the extractive industries. With this done, Uganda will be assured that the petroleum and mineral sector catalyses positive change and sustainable development.

© 2024 Advocates Coalition for Development & Environment. All Rights Reserved

Plot 96, Kanjokya Street. Box 29836, Kampala-UGANDA
Tel: +256(0) 312812150 Email: acode@acode-u.org

www.acode-u.org

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