No Emperical Literature supports the Ugandan Economic Consolidation arguement

No Emperical Literature supports the Economic Consolidation arguement by Morrison Rwakakamba

On reading Rwakakamba Morrison( a newly appointed special presidential assistant on research) article in the Newvision Thursday 5th september 2013 and in african executive magazine- http://www.africanexecutive.com/modules/magazine/articles.php?article=7437&magazine=455 " on Uganda certainly needs no constitutional crisis" I am only tempted to pen down a response just to enrich the debate. This paper attempts to address issues raised by Angelo in his paper- http://angeloizama.com/2013/08/30/speech-why-uganda-needs-a-constitutional-crisis-legal-and-institutional-limitations-of-ugandas-journey-as-one-of-africas-latest-oil-producers/. While the debate focused on constitutional crisis,Rwakakamba delved to a great extent the economic transformation of the economy from 1986 to date. As an economist,i will  restrict my reaction to the economic arguments by Morrison. Here are my 3 arguements;

1. Morrison is quick to allude to economic consolidation highlighting that Uganda’s economy has grown by 0ver 80 times in 26 years. In essence the economy has grown at 80/26 times annually in nominal terms. This again wouldn’t be the economic consolidation. The measures of economic consolidation range from the basic Income per capita to Human development index. The figures on GDP per capita show that Uganda has grown from about 280 dollars in 1986 to about 560 dollars i.e. is Uganda GDP per capita has only been able to double in 25years or so. If the same trend is one to go by- Uganda would attain lower middle income in next 25 years (at 1000 USD for GDP per capita).The poverty figure comparison with the East Africa economies is only blind at the fact that the rate at which Ugandan government has reduced poverty is slower than the rate at which population is growing. To illustrate the point- in 1986/1990 with about 12/14 million people, our poverty levels were 56% - making it about 7-8 million people poor. Today at 25%-30% of 35 million Ugandans are poor, that 9-10 million poor people. In a nutshell in no empirical literature is it enshrined that Uganda has attained economic consolidation like Morrison stipulates.

2. Uganda debt levels as assessed by IMF and World Bank are sustainable- This is in sync with Morrison's arguements. But we shouldn’t be blind of the fact that there are also key risks. One of them is the rise in domestic borrowing or risein levels of non concessional loans.In this current FY, Uganda intends to borrow 1 Trillion from the Financial Markets domestically. this should have a huge impact on the movement of interest rates and foreign exchange rates.To illustrate this further, the interest bill in the current financial is a significant share of the budget. At almost 1 trillion, this represents 8% of the budget and twice the budget of agriculture that employs 70% of Ugandan labour force. Who are loans trickling down too? Again the interest bill of 1 trillion as a share of the cumulative debt of 15 trillion means that Uganda is paying almost 7% interest annually. By all means this is not concessional rate. Also lets not forget that also notably In mid-1990’s, Uganda was classified as one of the most highly-indebted poor countries with unsustainable debt burden because it could not pay its debt. Following the accumulation of a debt stock of $3.6bn, Uganda became the first eligible country under the World Bank/IMF led Highly-Indebted Poor Countries (HIPC) initiative to reduce the debt burden, to receive a debt relief amounting to $2bn.Unfortunately, the debt stock shot up again in 2006 to $4.1bn prompting another debt cancellation under the enhanced HIPC initiative. Under the initiative, Uganda’s debt burden was reduced from $4.1bn to $1.6bn.

3. The debate on oil benefits to all is a timely one, but unless Uganda addresses its large implementation gap of policies and laws as well the skewedness towards power consolidation, oil will be as good as any revenue flows in an ineffective system.  Again the oil envisaged resources are significant  projected at 3.5 Bn dollars per annum for about  24 years BUT  not sufficient to uplift Ugandans upper middle income( see uganda's fiscal regime note - in my preceeding blog note for my calculations).

In a nutshell the arguements for economic consolidation are flawed, a simple illustration is a detailed review of the MDG progress beyond just the absolute targets but rather the relative progress.

How much worth is our Oil cash ( Published in the Newvision 29th october 2013)

How much worth is our Oil cash

Uganda’s petroleum fiscal regime is a production sharing agreement type with signature bonuses, rentals, royalty, income tax and ring-fence among others.  The fiscal terms applicable to upstream operations are governed by Part IXA of the Income Tax Act, (Cap 340) (ITA), the 2012 Upstream Act) and the terms of any petroleum agreement and. The Ugandan government has, to date, used a production sharing form of petroleum agreement. The principal fiscal terms are as follows:

ü  The government is entitled to a royalty computed as a percentage of gross daily production, such royalty 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 licence or petroleum agreement- current information suggests Based on Gross Total daily Production. Where production (P) does not exceed 2,500 5%, 2,500<P<5,000 7.5%, 5,000<P<7,500 10%, and P>7,500 12.5%. Royalty is paid on a monthly basis.

 

ü  Under a production sharing arrangement, the contractor is entitled to cost recovery from a specified percentage of gross oil or gas production after deduction of any applicable royalty. Cost recovery may be ring-fenced with costs only recoverable from production from the contract area to which they relate. After deduction of Royalty, 60% cost recovery limit is allowed. For Purposes of the estimation below, 40% of the Gross revenue (prior to deducting royalties) is assumed.  Unrecovered costs can typically be carried forward;

 

ü  After deduction of royalty and cost recovery, 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. Available information suggests a 67.5% for government and the remaining share for companies;

 

ü  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. Contract areas are ring fenced for tax purposes with each contract area taxed as if it is a separate tax payer- this protects loss transfer by companies from one project to another to minimize tax payment;

 

ü  Under the 2012 Upstream Act signature bonuses are payable on the award of exploration and production licences and are not cost recoverable. Signature bonuses have, according to media reports, been paid in respect of petroleum agreements entered into under the repealed Petroleum (Exploration and Production) Act (PEPA) regime. It was reported, for example, that the PSAs that were signed on 3 February 2012 by Tullow with CNOOC and Total included a signature bonus of US$500,000 and development bonuses of US$2m;

ü  A licensee must pay an annual charge calculated on the grant of a licence and thereafter annually on the anniversary of the grant until the termination of the licence;

ü  A participation dividend paid by a resident contractor to a non-resident company is liable to a withholding tax at a rate of 15 per cent. A lower rate of withholding tax may apply if the dividend is paid to a resident of a country with whom Uganda has a favourable Double Taxation Agreement. This is indeed a welcome move to mitigate transfer pricing.

ü  Any capital transfer /appreciation/ gains is considered as an income and subjected to 30%.

ü  Thin capitalisation rules- Debt/equity ratio 2:1. Interest is allowed to the extent of the rule.

ü  Excise duty and VAT- Applicable on all procurements subject to the duties.

Despite the aforementioned, Uganda’s fiscal regime provides generous allowable deductions including initial allowances of 75%, decommissioning costs, loss carry forward, tax exemption of machinery and equipment and depreciation allowances.

 

It has been estimated that Uganda has 3.5 billion barrels of oil reserves. Assuming a recovery rate of 50%[1] implies that one billion, seven hundred and fifty thousand barrels of oil will be recovered. At envisaged peak production of 200,000 bpd expected in 2020, then the current deposits would be exhaustible in 24 years earning Uganda 3.6 billion dollars annually[2] based on the calculations in table below.

Annual Profits In USD- peak procuction 200,000 barrels per day
	A	B=12.5% of A	C=40% of A	D=A-B-C	E=67.5% of D	F=32.5% of D	G=30% of F	H=B+E+G	J=H*365
Quantity	(A)Total revenues of 200,000 barrels per day @100USD	(B) Royalties 12.5% of Total Rev	(C) Recovery costs 40% ofgross revenue	Profit Oil	Government share of tax 67,5%	company share 32,5%	company share taxed 30% corporate  tax	Government profit per day	Annual Profit
10000	1 000 000	125 000	400 000	475 000	320 625	154 375	46 313	491 938	179 557 188
20000	2 000 000	250 000	800 000	950 000	641 250	308 750	92 625	983 875	359 114 375
30000	3 000 000	375 000	1 200 000	1 425 000	961 875	463 125	138 938	1 475 813	538 671 563
40000	4 000 000	500 000	1 600 000	1 900 000	1 282 500	617 500	185 250	1 967 750	718 228 750
50000	5 000 000	625 000	2 000 000	2 375 000	1 603 125	771 875	231 563	2 459 688	897 785 938
60000	6 000 000	750 000	2 400 000	2 850 000	1 923 750	926 250	277 875	2 951 625	1 077 343 125
70000	7 000 000	875 000	2 800 000	3 325 000	2 244 375	1 080 625	324 188	3 443 563	1 256 900 313
80000	8 000 000	1 000 000	3 200 000	3 800 000	2 565 000	1 235 000	370 500	3 935 500	1 436 457 500
90000	9 000 000	1 125 000	3 600 000	4 275 000	2 885 625	1 389 375	416 813	4 427 438	1 616 014 688
100000	10 000 000	1 250 000	4 000 000	4 750 000	3 206 250	1 543 750	463 125	4 919 375	1 795 571 875
150000	15 000 000	1 875 000	6 000 000	7 125 000	4 809 375	2 315 625	694 688	7 379 063	2 693 357 813
200000	20 000 000	2 500 000	8 000 000	9 500 000	6 412 500	3 087 500	926 250	9 838 750	3 591 143 750
According to available information, Government will charge Royalties of 5% if production capacity is less than 2500 bpd, 7.5% if production is between 2500 bpd and 5000 bpd, 10% if production is between 7500 bpd and 10,000 bpd, and 12.5% for all quantities above 10,000 bpd. After deducting royalties, the oil companies are supposed to deduct their recoverable costs(40% of gross revenue) to obtain profit oil.  The profit oil is then shared between the government (67.5%) and the oil companies (32.5%) respectively.
Calculation by Enock Twinoburyo

 

 

Oil revenues over the 24 years at peak production of 200,000 bpd, would earn Uganda about 84bn dollars revenue. With a population of 35 million, the latter means $2,400 per capita, or more than 4.5 times GDP per capita at market prices. Thus, the value of the discovered oil is large but far from being large enough to itself lead to a revolutionary change in the living conditions of the average Ugandan. The oil will not make the average Ugandan a rich oil sheik but if the oil re- source is wisely spent, it certainly may make a difference.

 

An assumption can however be made and calculations made for different types of fiscal rules ( suggested saving thresholds for givernment) i.e. Bird in hand or Permanent income hypothesis rule.  To the done at later stage

It is also important- to take stock of how much Uganda has earned so far. Oil in Uganda (www.oilinuganda) estimates that Uganda has got close to 1 billion USD (UGX 2.6 Trillon- which is about 20% of the current Budget of UGX 13.6 trillion). Tullow Transferred two thirds of its rights worth USD 2.9billion ( a third each) to Total and CNOOC. Government levied a capital gains tax of 472.7m in capital gains and Tullow only paid a third of it (USD 141 Million). Tullow is expcted to pay full amount after a London arbitration hearing found that heritage should have paid full amount of capital gains.  According to Bank of Uganda- Uganda has so far received USD 620 Million and should expect another USD 286 Million the balance on capital gains of Tullow’s farm down to CNOOC and Total.  According to Tullow published reports about USD 32 million has been paid in other fees and taxes last year, assuming the same payments by Total and CNOOC would mean Uganda has so far received USD 720 milloon and expects USD 286 Million. It is a fair assumption that Uganda is USD 1 Bn Rich todate or more bearing in mind Uganda presumably has earned some cash from the eight years of oil exploration before 2012.

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[1] With improved and enhance recovery methods, Norway managed to increase recovery rate from 25% to 45% offshore. Recovery rate can even increase to 60% with the use of modern and efficient technologies.

[2] Without clear fiscal rules on how the government will share revenue between the budget and investment, Fiscal sustainability analysis has not been calculated due to missing information. An assumption can however be made and calculations made for different types of fiscal rules i.e. Bird in hand or Permanent income hypothesis rule. To the done at later stage

Chinalisation of Uganda is a boomerang ( published in observer) link attached

Increased Chinalisation of Uganda could be a boomerang
http://observer.ug/index.php?option=com_content&view=article&id=27543%3Aincreased-chinalisation-of-uganda-could-boomerang&catid=38%3Abusiness&Itemid=68

Economic ties between China and Africa have grown steadily as reflected in the growing/ increasing aid to Africa in recent years. In the latest official disclosure of China’s aid indicated that it had provided over 6 Billion USD to Africa; however the most official aid considered a state secret.

China and Uganda diplomatic relations date as far back as to when Uganda attained its independence in 1962 and according data released by the American research group AidData, in the decade between 2000 and 2011 China’s aid to Uganda was an enormous $4.67b, slightly more than Uganda’s budget for this financial year.It is envisaged that as much as the subsequent years are not documented, the dialogue between the two countries is an indicator that there is continued aid increase. The aid china provides is mainly in the form of technical assistance, with an emphasis on training in Chinese institutions; grants; interest-free loans; preferential loans that have an interest subsidy; and debt relief. In 2007, a debt cancellation protocol for all debts before 2005 was signed by the two heads of state, which amounted to USD 30 million.  However, since China is not a member of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD), which reports on members' international aid, it does not provide details about the level and terms of its own aid to other countries—so data and information with regard to types, purposes, conditions, including the extent to which is assistance is tied are rather sketchy.

 

The sectors which have greatly benefited are transport; business related services, manufacturing, health and agriculture whereas telecommunications, mineral exploration has not realized the benefits from the eternal assistance extended by China to Uganda. Government officials reported that some of the aid to Uganda is mostly provided in kind, by Chinese companies, and tends to be on a turnkey basis, mostly with Chinese inputs, including labour. Part of Chinese Aid to the country has taken the form of technical assistance and investment technical assistance in projects of economic and social infrastructure nature such as roads and hospitals; the productive sector, notably agriculture (Kibimba (now Tilda) and Doha rice schemes);construction of the wakawaka Fish landing site now in use and other construction projects, such as government buildings (the Ministry of Foreign Affairs, the $36.3m  construction of the President’s Office), Naguru Hospital and sports national  stadium (Mandela National Stadium).  China has been offering 12 scholarships per year in higher education to Ugandans in mainly five fields engineering, computer science, Medicine, Business administration and food science. China has contributed medical equipment, and medicine to national referral hospital – the anti malaria medicine worth USD 500,000 per annum through Ministry of health.

 

President Museveni has been singing China’s praises his optimism a beam of light when he discusses the long term impact of Chinese investment in Ugandan infrastructure. Chinese continue to be beneficiaries of big infrastructural projects including the contentiously awarded Karuma dam (600MW) and the 51.4km Kampala- Entebbe high way. In president’s speech at the ground breaking for Karuma dam- he intimated that two other Chinese companies, Gezhouba and CWE (China International Water and Electric Corporation) will similarly take on Ayago and Isimba, according to the understanding Uganda reached with the Chinese side.   CNOOC is one of the 3 firms involved in oil exploration in Uganda. Chinese investment in the country is currently worth $596m creating employment opportunities for more than 30,000 Ugandans. In fact, there is fundamentally no sector in Uganda that the Chinese have not invested in or have future plans to invest in. The Chinese are planning to construct a multi-million dollar school that would teach Chinese to local students, in order to broaden trade and cultural ties between the two countries.

 

 China and Uganda trade relations date as far back in the 1960s. China is one of Uganda’s main trading partners. In 2012, 11% of the total imports were from China. In same year, the trade volume between the two countries came to US$575.5 million, among which China's export was US$546.01 million, and import US$29.49 million. This implies Uganda exports 5% of what it imports from China. China's main exports to Uganda are mechanical and electrical appliances, textiles, garments, pharmaceuticals, porcelain and enamel products, and footwear. China's imports from Uganda are coffee and plastics. China strategy is to phase in zero-tariff treatment to 95 percent of the products from the least developed African countries( Uganda inclusive) having diplomatic relations with China, starting with 60 percent of the products in 2010.

 

The president’s eulogy’s of the Chinese withstanding “Chinese lending is also completely free of the usual meddling and high-handedness of some of the friends from outside”, it is also important to note that despite the huge funds sunk in the Uganda sectors and written off debts by china, there still concerns over the huge trade imbalances between Uganda and China. Uganda exports 5% volume of what it imports from China. Also in 2008, china provided USD 120 million concessionary loan to Government’s e government project however the dominant workforce is Chinese. This leaves little room for capacity building, skills training and technology transfer.  Most of china’s Aid is project mode, whose sustainability depends heavily on continuous support from the Chinese Government. Limitation of the technology and skills transfer by Chinese Government leads to questions of sustainability of some of its development assistance. Aid flows from China are not laid out transparently to other donors and development partners, including those that are locally present. This will help not only the affect harmonization of activities but also the integration with economic policies to underpin macroeconomic stability.

 

On the outlook, it seems that the Chinese infrastructure projects in Uganda attract higher unit costs than similar projects in other countries.  The Renaissance dam on the River Nile, which Addis Ababa projects will cost $4.7 billion, will produce 6,000 Megawatts of power(10 times Karuma dam) when fully developed while karuma is projected to cost $2.2billion. Also the cost per kilometre of the  $ 476m four lane Kampala- Entebbe expressway is  $ 1.5m, a kilometre of the six lane  $ 612m Addis Ababa toll motor way will cost 1.3m. All factors constant, on both projects- Uganda will be paying higher than Ethiopia

 

Most of Chinese aid is tied – with at times necessitating Uganda to import from China. Notably significant share of Chinese export to Uganda are substandard. the Ugandan government allows the Chinese Aliens to undercut local Ugandans out of business and allows Chinese capital repatriation to be almost 100%  and at times given tax waivers or exemptions. Issa Sekito, a spokesman for the Kampala City Traders Association has been on record calling for government to place limits on Chinese trading activities in the small and medium enterprise area.

 

There are allegedly also elements of rent-seeking activities between Ugandan and Chinese officials as was the case in Karuma dam procurement. The hydro power dam procurement process was dogged by allegations of impropriety and whistle-blowers’ complaints that culminated in court petitions and the Inspectorate Government (IGG) halting the process citing bribery and corruption in the process. A court injunction halted the process ordering the government to repeat the technical evaluation which led to award of the to a China’s Sinohydro Corporation. The procurement flaws delayed the project for two and half years. Also Chinese companies are able to underbid local contractors for construction work since Chinese construction companies that are subsidized by their government. And it is difficult to get a government subsidy in Uganda. “They not only underbid local companies, but they also import cheap Chinese equipment. So construction companies in Uganda have gone out of business.

 

Although the Chinese have made significant investments in Uganda and continue to make inroads in major infrastructure projects involving roads, railway electrical power and communications, the Ugandan government has not benefited greatly from increased trade with China. The Chinese engagements could be a boomerang and this however,  leaves a hypothetical question on who the beneficiary from the  increased china-lisation of Uganda and needs a closer assessment of the ultimate outcomebearing in mind  the Chinese have historically been xenophobic.  How does China stand to gain from this collaboration? Is it through market creation? Global leadership? Imperialist rivalry? etc especially when many Chinese, in rural China, still live under difficult circumstances.