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“You have to go slow in order to go fast”

Image: Professor Jenik Radon

Professor Jenik Radon

Uganda should move carefully and without haste to develop its oil industry and wider economy.  Well crafted laws, with institutional checks and balances, are essential to govern the commercial aspects.  Revenues should be deposited overseas in hard currency accounts, with a portion saved for the future—because development cannot take place overnight, it needs to phased. Increased government spending should be tied to a comprehensive development plan.   Environmental, health and safety issues should be governed by regional laws that bind international oil companies to the same standards they would have to apply in their countries of incorporation—because otherwise they ‘won’t take it seriously.’

So says Columbia University professor, scholar-activist and renowned extractives industries expert, Jenik Radon, who has been delivering a series of lectures at Makerere University.  Oil in Uganda caught up with him as he packed his bags to return to storm-buffeted New York City.

Oil in Uganda: What is your current take on Uganda’s ongoing petroleum bills debate?  It seems there’s been some last-minute horse trading and efforts to compromise on some issues—for example, upgrading the status of the Petroleum Authority from an ‘Authority’ to a ‘Commission.’  Do you think that will make any real difference in practice?

Jenik Radon: There should be a series of checks and balances in established systems.  That means not having all authority vested in one place.  This includes, for example, having an Authority that only does policy, another group that only does enforcement, and you don’t mix the two.  So, depending on what the authority of the Commission is, or the rights of the Commission, it may not be any different from the Authority.  But the concept was originally that the Authority would effectively be reporting to the ministry—and that’s where there’s no checks and balance.  If the Commission is independent, and has independent authority, that would be a plus.

On the National Oil Company, there seems to be a strong feeling among MPs, including the Natural Resources Committee, that it should be a fully state-owned corporation, at least in the start-up years.

First, there’s a relatively minor yet actually quite sophisticated point.  There should be a national, state oil company for the simple reason that a ministry should never be signing production sharing agreements, because that puts the government at risk of something.  We can disagree on what the ‘something’ is, but by signing a production sharing agreement you by definition have rights and liabilities. So the way you counter that is by creating a corporate entity which signs agreements that have commercial impact and should have no more—they shouldn’t have environmental, health and other provisions which should be regulated by law.  But by having a national oil company sign it you limit your liability in the way that that you limit liability of any company that signs agreements: stockholders are not liable.

The way historically that they have done it here is that the ministry has signed, which effectively means the stockholder is potentially liable, there is a lingering liability.  So for that reason alone you should create a national oil company.

Secondly, a national oil company, if it’s created today or tomorrow, needs the time to mature, to develop the skills, to develop the expertise, to develop the institution. And that cannot happen overnight.  Therefore it should remain in state hands until it reaches a degree of maturation.  At that point it can be advisable—Brazil has done this—to register it on a recognised stock exchange because that gives a degree of discipline with the recording requirements, with the transparency, with the governance requirements, and that would be very good for a more mature company.  In the beginning that’s certainly not feasible.

Also, if you are creating a national oil company—which, as I’ve mentioned, from a liability viewpoint I do favour—what are the full assets of it?  Do they administer or do they own all the assets?  In this country, under the Constitution, all of the petroleum is owned by the state. So what are the rights of the state owned enterprise to that [petroleum] and what would its rights be if it becomes a semi-privatised one?  I would say that this requires going a little bit slow now.

I can imagine some people saying that if the company is entirely state owned there’s a certain moral hazard there because if they get involved in refining and in downstream stuff as well there are commercial risks and it could actually lose money—without the discipline of private shareholders it could just become a waste of state resources.

That is a risk but it is also a risk for private companies.  That’s a question of governance.  There have been good state owned companies, like the Malaysian one [Petronas]. Pemex in Mexico was run well except for one major problem.  The major problem was that in most places where you have state owned such as petroleum companies, [they are not encouraged to] invest in technology.  Pemex now has a technology challenge.  Over time as they go into advanced technologies they either have to buy them, or develop them.   People don’t like selling technology, not in this field.  It can be bought but it’s expensive.

But in the foreseeable future I don’t see how that would be a challenge [for Uganda] because it’s not even clear how big the company will get.  But a company should manage the state assets, which should not be managed just by a ministry, by administrators. From a legal point of view they should be managed by a state company.

Whether they become fully operational for, as you mentioned, a refinery, that is a different question.  That should be decided case by case.  But on a theoretical basis, it should make no difference. On a practical basis the verdict is still out.  There are some good ones—Statoil [Norway] is excellent, by any standard—as efficient as any company can be anywhere in the world. Total is solid.  So it is really a question of gaining the right expertise and management, and this is not going to happen overnight.

In terms of checks and balances, there is a natural demand for more parliamentary oversight. But many people would point out that Uganda’s parliament has a large number of MPs who are very well paid and many of whom seem to be, to a significant extent, mainly concerned with personal advancement and gain.  I know that’s true of many legislatures, but the situation in some African parliaments does seem to be of a different degree.  How do you see this?  Should more power be given to parliament?

Well, first of all, I think there has been confusion in the discussion so far. Parliaments, worldwide, have an obligation to represent the public. Whether they do it well or badly is a different issue, but that’s their obligation.  Accordingly, parliament’s main job should be enacting laws to the extent necessary.  So parliament can and should have a supervisory role in this, that’s part of the checks and balances.

I have never said parliament should have an approval role [for licensing and production sharing agreements].  Because if it has an approval role, then we come back to the liability question.  Parliament can only approve laws.  So if parliament approves something, does the PSA then become a law?

Good checks and balances, that is to say good governance structures, are built up over time: there’s a parliament, there’s an executive, there’s a judiciary, all performing their functions. If it doesn’t happen today, we should still be making a road map so that it can happen tomorrow.

Parliament should have a supervisory role, an advisory role, but it should not have an approval role.

Can we move on to talk about oil revenue management.  It seems to me that the oil industry, for the government and the commercial operators, is all about money.  A Public Finance Management Bill, Chapter VII of which creates a framework for revenue management, has been around for many months now. My perception is that in Uganda there’s been far less debate about this, far less interest in this, than in the petroleum bills.  Do you agree with that, and if so what would you think would be the reason for it?

I agree there has been less debate.  There’s one very natural reason—one step, then the next.  In my view they are parallel, but the revenue management bill is still slightly, in a timing sequence, secondary—although it is crucial.  Why?  Because the petroleum bills get the money, so to speak, get the operations.  Once you’ve got the operations it will still be several years before you see productivity.  So you do have an element of time for the revenue management bill.

Secondly, it’s more esoteric in nature. It’s not as tangible for people who do not deal with these issues on a daily basis to grasp what the implications are. I’ve seen, in most countries of the world that I’ve worked in, people do not understand the comment that you’ve just made.  At the end of the day, the extractive industry is a business.  But it is a business with a public purpose because it is state owned: the resources belong to the state, belong to the people.  So how do you manage that development you have to do irrespective of the form of the contract?

For example, as long as the resource is in the ground, it’s permanent, it’s there.  Let us assume that the price of the resource drops from a hundred dollars a barrel to ten dollars a barrel. Maybe Uganda wouldn’t want to develop it at the point, because it would rather save the asset until the prices go up again!  The management of this resource is quite a challenge.

How does this relate to the revenue bill?  From my point of view, it is not always understood that managing natural resources is different from collecting corporate taxes from an airline, collecting corporate taxes from a barber shop, collecting income taxes from a person.   It’s a unique business, a one-off business for the state, not the normal sort of collection of money.

Therefore, all funds collected from the natural resource should be in one Fund, kept in a jurisdiction (overseas) that is established such as the UK or New York.  Because you need to keep your earnings in a hard currency, not the local currency, or you will have the Nigeria effect.  Even Canada is now beginning to feel the effect of converting everything [from natural resource sales] into Canadian dollars, making the rest of their industry, including agriculture, more expensive, therefore less competitive.

That Fund should have great restrictions on how it operates, because it is not just anybody’s money but ultimately Uganda’s.   A sovereign entity having the power to determine how this money should be spent should be [a matter for] parliament.

They should develop a policy on how much goes into a permanent (investment) fund, how much goes into their budget.  Because if they put everything into their budget we will have the famous ‘Dutch disease.’  That is, converting everything locally, everything becomes too expensive, so you have even roads which are absurdly expensive.

Certain things you need to save for the future.  One reason is, this is an asset of the people, the state: you, your children and your grandchildren.  So it doesn’t just belong to you for your immediate needs, although the needs of Uganda are great—education, health, etc.

But let’s take a simple example: education.  Where do you find the teachers, qualified teachers, overnight?  Development sometimes has the irony that in order to develop you have to go slow in order to go fast.  Therefore, you need to save those funds in a Fund until they can be properly dedicated for productive investment.

As I always say to my students as well as to legislators and executives I talk to, the object is to take a permanent asset, which is in the ground, and make it into a productive asset once it leaves the ground.  That may actually mean saving it.  And if you put it all into one Fund, then you can see and track it so it also has the virtue that accounting becomes easier, tracking becomes easier.

So this is a very sophisticated issue that needs time, needs debate, but also I would say it needs input from real experts on how to create these sort of Funds.

At the moment the draft legislation has no floors or ceilings—there are no percentages as to the amount that can be put into the budget each year and how much should be saved.  So it makes it a year by year decision.  Do you think that’s wise?

I think it would be best to have parameters.  Let us say we have parameters of X to Y percent.  It could still be changed by parliament, because it’s parameters. But I think it’s a mistake not to at least think of it beforehand, because that forces thinking about development now.  You need to identify a development plan, an education plan as part of your development plan.

And you should at least have the concept that X percentage is saved for the future, for emergencies.  Botswana saved so much [from its diamond mining] that it could even take care of its citizens with HIV.  They had enough money to care for the needy people. So I am a believer that you give as much direction as you possibly can, show a roadmap.  Parliament is still sovereign and it could change the roadmap in the future.  But it forces concrete, specific thinking, and that has tremendous value in governance.

A slightly broader question.  More and more African oil and gas producers coming onstream, I think it’s something like 40 countries out of the continent that have some level of resources.

I think all but five, that’s what I’ve read.

Broadly speaking, do you think that improves the prospects of learning from each other, better examples?

No.  I see things, relatively often, differently from the way that others do.  Now, we’ve talked about the petroleum bills. Uganda has an absolutely, sovereign right to determine who’s coming in to develop it [the oil], what the tax rate should be, etc.  That’s its right—these are not the resources of any other country, they’re Uganda’s resources.

However, Uganda is trying to pass a legislation that also impacts environment, for example. Now, how many countries can you have with new environmental legislation?  Who can keep up to date with environmental legislation?  How many experts do they have on environment?  How many experts do they have on health?  Even the United States keeps learning. England keeps learning.

So, they [producer countries] should have the licensing. The licensing should be local, that’s their prerogative.  But I’m of the belief that there should be uniform laws on environment.

We have to look at the risk factors in oil and gas.  The risk factors are, one, you don’t earn any money.  Another risk factor is that you may have more cost than income.  And the costs are normally public costs: health and environment.  Now, I’ve heard [oil] companies around the world say ‘There was no law against flaring!’  Well, that may be true, there may be no local law against flaring.  But there was a law in the country you were incorporated in, you the parent company!  Why didn’t you apply that?

Companies misuse these lowest common denominator laws, which are not just lowest common denominator they are also to do with how many environmental experts you have when you have just discovered oil and gas.

So you need what I call a “common” law or a “reference” law.  Let’s say, for argument’s sake, that Norway or England has developed the most sophisticated laws for environment in the petroleum industry. Let’s use that as a reference point. If our [eg, Uganda’s] laws have gaps, let’s use that.

So, in other words, it’s not just the petroleum law of licensing.  That gets the money in, but it’s also the third party costs [that matter].

Here’s the good news for Uganda.  Petroleum is relatively clean compared to mining activities.  Because the [petroleum] technology has made tremendous advances.  I’m not saying that things don’t go wrong—look at the Gulf of Mexico! [Where, last year, there was a massive oil spill from BP-operated platforms.]  I’m not saying that companies don’t economise excessively by using the lowest laws in that way. But I am saying that, relatively speaking, it’s a better bet than mining, where even the particles flowing up into the air cause problems.

So, your question is not just a valid one, it’s a necessary one.  I am on record as saying that they should develop, together with other countries, one set of laws, one set of expertise.

I just read that they’re thinking of developing a common court for the East African Union.  So why don’t we develop common [environmental] laws that are not local?

Licensing laws need to be local, because that’s appropriate sovereignty. But we don’t need local environment law because there should be [in developing countries] the same standards that a developed country has.  People are people.  Give me the best environment that money can buy!  That’s my philosophy on it.

Companies too often lobby for ‘the race to the bottom.’  EIAs [Environmental Impact Assessments] are not taken sufficiently seriously anywhere in the world, because they should not just be done today but they should be updated and if you violate them you should be penalised.

Look at [the Gulf of] Mexico.  To me, I needed only one bit of evidence.  The EIA for the oil companies had a statement in there on how to protect the environment, including the seals in the Gulf of Mexico!  [There are no seals in the Gulf of Mexico.]  They copied the EIAs from Alaska! [where seals abound].  Now that, to me, proves just one thing.  They didn’t take it seriously. They put no thought into it.

Questions put by NY

Jenik Radon trained first as an economist and then as a lawyer.  He has advised numerous governments and civil societies in Africa, Asia and Latin America on foreign investment regulation, constitutional law and natural resource management, and has written and taught extensively on these subjects.