You are here
Find us on:
Facebook Twitter Google Plus Youtube

Ugandan firms struggle to cash in on oil

Bemuga

Many local firms aspire to follow in the footsteps of Ben Mugasha’s (center) Bemuga Forwarders company, a well-known logistics service provider in Uganda’s oil industry, but are hamstrung by lack of credit, poor accounting standards and a history of corruption. Here, he is pictured receiving an award for his company emerging sixth in last year’s  survey of the top 100 mid-sized companies in the country. (Photo courtesy of Ben Mugasha)

Over the next few years, trillions of shillings will be spent bringing Uganda’s oil on-stream.  Oil companies have said it will take around US$ 10 billion to develop the oilfields.

Most of that money will bring in highly specialised equipment and services that no Ugandan company has the experience or expertise to offer.

Yet opportunities appear to abound for local businesses in areas such as construction of roads and buildings, transport of equipment, machinery hire, legal services and a range of other consultancy services.

Allan Katwere, a policy research officer with the Uganda National Chamber of Commerce and Industry, points out that some of the specialised equipment needed by the oil industry will have to be assembled in Uganda from imported components.  He believes that some of this work could be done by Ugandans and would count as “national content.”

As well as sub-contracting jobs for the oil industry, Ugandan companies stand to gain from a general building boom in the oil-bearing regions, as once-sleepy towns and trading centres become oil business hubs.

This ought to be good news for Uganda’s private sector.

Yet some local firms are pessimistic about the chances of landing oil company contracts.

 “If these guys require something they set high standards and by the time we try and meet what they need, you find that they have already out-sourced for the same services from other countries and no longer need what we can provide,” says an engineering contractor who prefers to remain anonymous.

“We need trainings on the standards required by the oil companies,” he suggests.

Credit supply

Cash flow is one of the ‘high standards’ required, and a serious challenge for many local players.

For many contracts, bidders have to show that they have a certain percentage of the total contract value already at their disposal in the bank.  This is generally required to prove that the company has the means to start the job.

But in practice this can prevent medium sized firms from growing big enough to bid for bigger and more lucrative contracts.   One construction company boss described this as a “no-win situation” for his company.

This problem could, at first sight, be remedied by ‘policy lending’ to strengthen Ugandan companies’ financial position and enable them to compete for larger contracts.

The African Development Bank (ADB) has funding earmarked for private sector loans in Uganda. However, Juliet Byaruhanga, an ADB private sector development specialist, explains that these loans are for US$ 10 million projects and have to be accessed indirectly through commercial banks (Stanbic, Barclays, Standard Chartered etc.)

But these banks themselves have strict borrowing requirements that relatively few Ugandan firms can meet.

Corporate governance

Sources at Barclays Bank Uganda confirm that, to be eligible for business loans, companies must have been properly registered with the Registrar of Companies for at least three years.  They must be able to present externally audited accounts for the previous three years.

A senior financial expert who prefers not to be named describes these as routine requirements of “corporate governance” but adds that many Ugandan businesses fall short.

“To borrow from a bank, you have to show how you manage your cash flows and observe the set international auditing standards,” he says. This includes “proof of management meetings” by a board of directors, because serious investors “do not encourage the one-man kind of business.”

It is not just banks that require this kind of discipline.  Bids for large contracts will not be considered, the same expert says, if the company cannot show that it is meeting these international governance standards.

Jonathan Namugowa Wanzira, Chair of the Uganda National Association of Building & Civil Engineering Contractors  notes that the association members frequently complain of “bureaucratic procurement processes.”

There has also been a tendency, he says, for Ugandan firms to bid too low in an effort to win contracts.  “If we had professional contractors, then we would not have under quoting of values,” he concludes.

Corruption

A history of corruption helps explain weaknesses in corporate governance, analysts say.

In a relatively small, developing economy like Uganda’s, the government is the main buyer of goods and services, and many private companies depend heavily on winning government contracts.

In Uganda, public procurement processes have in the past been notoriously weak.  As a result, some firms that bid for public contracts have developed bad habits.

Working with international companies could be a learning experience that brings Ugandan firms more in line with international corporate governance and accounting standards.

Report by Beatrice Ongode and Nick Young

editorial@oilinuganda.org