Economic Diversification and Growth

Chapter 3
are required to notify suppliers of upcoming contracts, to
report on achievements in utilizing Ugandan goods and services
during the calendar year, and to propose a detailed program
for recruitment and training of Ugandans.
3.22. Nevertheless, the Upstream Act suffers from some
weaknesses, particularly in the definition of preference
for local services and ownership rules. First, the requirement
to “give preference” to local firms is very broad. It
is easy to avoid and difficult to enforce. Second, while
the Act requires IOCs and their EPCs to inform suppliers
of upcoming contracts as early as practicable, there is no
specific timeline, and IOCs can provide this information
too late for suppliers to be able to act on it. Third, the Act
does not provide the definition of an indigenous company
for the calculation of national content. When reporting on
national content, IOCs use their own definition, which may
be biased. Fourth, the Upstream Act requirement on share
capital of joint ventures with Ugandan companies may be
too restrictive. The Act stipulates that when the goods and
services required by the contactor or licensee are not available
in Uganda, they shall be provided by a company having
formed a joint venture with a Ugandan company, whose
share is at least forty eight percent of the joint venture. This
may prevent the creation of joint ventures, if local companies
do not have enough capital. It may also encourage
questionable practices (for example, shell companies) rather
than address the goals of national economic development.
Ownership of a company is less important than the content
provided. A multinational company which does not have any
local shareholding may still provide technology transfer,
employment and sourcing of local goods/services to carry
out production. More flexibility needs to be given to attract
such firms.
3.23. The government’s national content policy for oil
and gas favors nationalization, rather than localization.
Even Brazil and Malaysia that have relatively sophisticated
economies appreciate the effects of localization on the transfer
of skills and technology that eventually leads to a strong
national system of innovation. Box 3.3 illustrates some of
Brazil’s best practices in this area.
3.24. The present legislation does not define which local
sourcing model should be implemented. In the absence
of specific definitions, IOCs develop their own rules.
According to local suppliers, IOCs and their contractors add
10 points for local content in their bid evaluations, regardless
of the percentage of ownership or the type of industry.
The Petroleum Exploration and Production Department
(PEPD) is in the process of developing regulations for
national content, and specific targets may be defined. If the
targets are consistent with local capacity, they can be beneficial
as local suppliers will be capable of supplying the goods
and services in adequate quality and quantity. Nevertheless,
an analysis will be needed to determine realistic targets.
3.25. The government should draw lessons from the experience
of many local sourcing policies involving margins
of preference and local content targets. Brazil and Ghana
defined specific targets for a certain volume of goods in a
particular industry to be sourced from local suppliers, but
so far no conclusive results are available to determine if
these targets benefited the economy or led to unproductive
practices. Angola and Ghana used 10 percent as the margin
of preference for domestic suppliers. A more stringent form
of domestic preference places restrictions on operators and
only national firms are eligible to tender for certain categories
of goods and services. While this policy may affect
the decisions and strategies of the companies with respect
to incorporation of local subsidiaries, it does not necessarily
preclude the award of contracts on an uncompetitive basis
if, for example, goods and services on the restricted list are
available in-the country at prices and quality that are competitive
with international suppliers. Nevertheless, margins
of preference entail distortions and inefficiency, which need
to be carefully analyzed and weighed against alternative
approaches.
3.26. Finally, the government may wish to implement
local sourcing policies through contract awards and contract
execution. To facilitate local sourcing, some countries
reduced pre-qualification criteria for vendors, created specific
tender evaluation criteria/weightings, and vetoed contract
awards on the basis of insufficient local content and/
or inadequate local content plans. Introducing flexibility in
prequalification criteria is important. Some criteria can be
relaxed without sacrificing quality and safety and this would
open the door for a number of strong local suppliers. The
challenge is to strike the right balance between quality and
flexibility. Supplier databases detailing local capabilities
would be useful to check the availability of local suppliers
and decide whether pre-qualification criteria should be
reduced. The vetoing of contract awards is a controversial
policy, as it will be hard to determine that the veto was exercised
with due regard to the principle of internationally competitive
bidding.
3.27. Opportunities for Ugandan entrepreneurs to get
involved in the petroleum sector will be available for a
very short time, but local constraints may prevent local
entrepreneurs from seizing these opportunities. CNOOC
was awarded a production license last year and the award of
licenses to Total and Tullow is underway. Consequently, the
construction phase during which most of the contracts will
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Uganda Country Economic Memorandum: Economic Diversification and Growth in the Era of Oil and Volatility