Oil sector: local businesses accuse banks of frustrating their participation

 Ronald Aheebwa (not real name), was recently awarded a contract to supply 80 chickens per week for a period of 10 months to feed oil workers. But because he had only 400 chickens, and did not have resources to expand his business to be able to meet his contractual obligations, he gave up the opportunity.

With no plan in place for expanding his business capacity as Uganda embarks on the development phase to extract its 6.5 billion barrels of oil in place, Aheebwa is frustrated. And he is not alone.

Many small business people like him in the oil-rich Bunyoro sub region have been looking forward to similar business opportunities in the oil and gas industry, but do not have the required capacity to supply goods and services in the highly capital-intensive industry.

They blame the high interest rates on commercial bank loans and absence of collateral security required by financial institutions in order to consider their loan requests, as major barriers to business growth.

A recent study by Financial Sector Deepening (FSD) Uganda said that 74% of Small Medium Enterprises (SMEs) struggle for financial credit, while a 2015 World Bank report noted that the country’s banking system does not favour small enterprises. The World Bank also noted that the money lending institutions consider the oil and gas industry suppliers risky.

As a result, some of the businesses that recently got contracts like Aheebwa, have decided to create a novation to other much bigger businesses with capacity.

 “I gave up on the loan after being tossed up and down. The bank asked for so many documents as well as collateral which I did not have,” argued Aheebwa.

Other factors cited as hindering local participation in the oil sector include meeting the industry specific standards and the knowledge on how to prepare bids.

This comes after the oil companies reached a Final Investment Decision (FID) in February 2022, which will see $10b worth of investment poured into the Ugandan economy.

The investment will include a refinery, a multi-purpose pipeline, a 1,445 kilometre crude oil export pipeline from Hoima district in Uganda to Tanzania, two central processing facilities at Kingfisher and Tilenga in Kikuube and Buliisa districts, respectively.

The Petroleum Authority of Uganda (PAU) hopes that 40 per cent of the monies to be invested during the development phase will be retained through national content.

During oil production, people in their thousands are expected to pour into the oil-rich Albertine region seeking opportunities in the sector. This in turn is anticipated to create a huge demand for services such as foodstuffs, Information and Communication Technology (ICT), logistics, supply of building materials, iron and steel, accommodation, leisure and transport, among others.

Experts say the participation of local businesses will boost their competitiveness and Uganda’s growth Domestic Product (GDP) by 20 per cent by end of the construction phase, employing 14,000 people directly and 45,000 people indirectly.

Geofrey Beraheru, an educationist in Hoima City, says individuals may not manage to penetrate and do meaningful business with the big investors unless there is an arrangement like a local big bank which is able to offer loans at the lowest interest rate like 1% to smallholders.

Beraheru says the government would rather understand that credit is relevant for locals’ participation in the sector, calling for a need to lift limitations on credit granting by commercial banks.

The local businesses that mainly fall in the sub-contracting category-Tier 2 and 3, during the just concluded Oil 8th annual oil and gas convention decried the same. They said most banks are not willing to lend to them especially if it is a new investor.

Elly Karuhanga, the Private Sector Foundation Uganda Chairman appealed to the banking industry to fulfill their promise to help the local investors meet their needs.

Experts say easing lending in an economy, leads to high profits of businesses, wages and creates more employment which significantly alleviates poverty.

In popular discourse, limited access to debt to run successful businesses and take up such contracts is high interest rates caused by government borrowing locally through the Bank of Uganda (BoU) to fund the national budget.

Dr. Lawrence Bategeka, an economist, says borrowing locally has made BoU to compete for loans with the private sector which he terms as crowding out potential local borrowers.

Bategeka a former Hoima Municipality legislator and vice chairperson committee on national economy, adds: “The government should only borrow internationally or from the central bank and “cautiously” if the assessment of inflation is correct and in agreement with key players in the monitory world to only fund productive sectors such as infrastructure.”

The economist says because banks have realised the government is a risk free and safe client to lend, it now finds it inappropriate to loan local businesses.

He says if at all they do so, it is at a high interest rate which in the end affects businesses from growing and investing.

“If they were competing for clients, they would automatically bring the interest rates down.”

Uganda has a budget of sh43 trillion and yet can collect only sh21 trillion in taxes, borrowing the rest locally from commercial banks.

Uganda’s commercial lending rate to businesses stands at 20% per annum which makes one borrowing sh6b to incur an interest rate of sh1.2b.

Bategeka, who once headed the economic policy research centre at Makerere University, advises the government to run a balanced budget as it was in the 1990s.

With the matter of high interest rates on loans unresolved, this shows foreign dominated firms are favoured over local SMEs because their countries of origin have incentivised credit.

Dr. Ezra Suruma, a former minister of finance in his article: “Ugandans will remain poor until they own their bank,” which was published in the Observer on February 1, 2022, emphasises the importance of accessing capital to harness the natural resources for it is becoming hard to apply for a bank loan because most people lack land-collateral.

The government has fallen victim to the fact that it cannot borrow or finance its own oil exploration without the lack of a locally owned bank.

Reports indicate that many financiers have turned away from financing the $4b crude oil export pipeline which is an important infrastructure in kick-starting Uganda’s oil production journey poised for 2025.

Over sh871b being spent in construction of a 700km critical road network to facilitate oil production in the oil-rich Albertine Graben, 95 per cent of the projects went to foreign firms who have capacity and easy access to credit.

Betty Namubiru, a national content manager at PAU, the sector regulator, says they equally appreciate the challenge of financing, imploring local firms to enter into joint venture partnerships with international companies since they come with the necessary capital and technical capacity.

Namubiru told the Albertine Journal that they are fast-tracking efforts to start a local content fund as a sustainable approach.

She says the fund will be pegged at 1 percent of each contract awarded to any business in the oil industry as long as one is registered with the National Supplier Database.

However, the local content fund needs a policy implying if no quick action is taken, this will continue to conspire and makes local businesses prone to missing access to billions in contracts.

The local content manager explains that they engaged banks to come up with packages to facilitate the growth of local businesses, tied with a component for the oil and gas industry.

At the oil and gas convention, Equity Group Chief Executive Officer (CEO), James Mwangi said the Kenyan originated Bank had set aside $6b to facilitate the growth of businesses in East Africa, with a component for the oil and gas industry in Uganda.

“We have entered a Memorandum of Understanding (MOU) with the Uganda National Oil Company (UNOC) and it (MOU) says any company that gets a contract will get funding as long as they show that they need the money,” he said.

Vaita Isingoma, the Executive Director for Kitara Development Initiative (KITADI) which is among other local companies that have been contracted to undertake some of the activities in the sector at Kingfisher Oil field, says the problem is that most local firms lack formal contracts which have heavy impacts on Ugandans.

According to him, the majority of the local firms fall into sub-contracting and yet banks only need a signed contract, clarity on the modes of payment and the period to be considered to access credit.

He calls on the oil firms to introduce advance payment and address delayed payments to enable local contractors meet their contractual obligations.

Sources say 90% of the companies are informal and have in the past silently decried delayed payment from the main contractors in the sector.

For example, sources say, those which sub-contracted to supply tents to a certain firm contracted to conduct financial literacy in September last year under the Tilenga project have never been paid for their services rendered.

So far, contracts worth $5b have been awarded to Chinese and British oil field services firms ahead of rigorous civil works scheduled for 2023.

On the other hand, contracts worth $449m (sh1.5 trillions) under the Tilenga development project have been awarded to local companies.

Reports indicate that foreign originated Banks operating in Uganda such as Bank of Africa Uganda, Stanbic and DFCU, are seeking new foreign currency deposits to reap from fresh lending opportunities offered by the signing of the FID in Uganda’s oil sector.

This is also meant to tap lending prospects during the rollout of the African Continental Free Trade Area (AfCFTA).

AfCFTA is an arrangement which is estimated to cover 1.3 billion people across Africa, with a combined gross domestic product (GDP) of $3 trillion, is meant to support only SMEs to export duty-free goods across borders.

The Government of Uganda launched a $500,000 project to enhance the capacity of SMEs targeting businesses along the East African Crude Oil Pipeline (EACOP) route.

With funding from the African Development Bank (ADB), the grant was provided in response to a request from Uganda and Tanzania for assistance in preparing local business communities to be able to retain a portion of the billions investment in the construction of the EACOP.

On February 23, 2022, PAU signed a contract with Stanbic Business Incubator Limited (SBIL) and other partners to build the capacity of over 200 Ugandan enterprises along the crude export oil pipeline route to compete for contracts to supply Uganda’s oil and gas sector, and other related opportunities.

Bategeka who says local SMEs are not ready since there is nobody talking to and handholding them, advises the government to revive national banks, elevate and capitalise those on tier one to commercial statuses to increase their volume to lend large monies as a way of cushioning local businesses from high interest rates and increase local debt uptake.

Bategeka and Luka Jovita Okumu in their paper authored in December 2010 titled: “Banking Sector Liberalisation in Uganda: Process, Results and Policy Options” established that the majority of the rural population is under-banked. The rural households are largely dependent on informal sources of finance to meet their consumption and investment needs. The microfinance institutions serving the rural population charge very high interest rates and other transaction costs.

“Foreign banks dominate the domestic banking system in Uganda. They have a tendency to “cherry pick” the most lucrative bank transactions. They provide bank services to a niche market consisting of big corporations and high income households located in urban areas,” the paper added.

Bategeka and Okumu conclude by advising that the government should play a major role in providing access to banking services in the under-banked rural areas through tax and other policy measures.

However, Charles Kansiime, a resident of the oil-rich Buliisa district says whether or not to (benefit) from oil and gas all hinges on individual responsibility.

“Money follows development. One can only be given money with collateral like a land title and a house,” he says.