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Why Oil, Gas and Mining Sector Governance Expanding Uganda’s Economy Amid COVID-19 Pandemic?

As Africa’s economy declining to a negative for the first time in years, concerns about the continent have shifted from how it will survive the outbreak to how stakeholders can revive and sustain the economy. Countries such has Uganda is experiencing a vicious second wave of infections, with high community infections and a number of new variants of which Delta is dominant. Economic experts have however warned that as the country paves ways of combating the pandemic, lockdown restrictions re-imposed are likely to hurt the economy more.

Natural resources can bring considerable wealth to a country, contributing to livelihoods, food security and the green economy, as well as generating trade and enterprise at local, national and international levels. Nations with non-renewable resource prosperity face both an opportunity and a challenge. When used well, these resources can create greater prosperity for current and future generations. Squandered, they can cause economic instability, social conflict, and lasting environmental damage. In order to profit from resource prosperity, citizens, private companies, and governments must make a broad range of decisions. Each call for leaders to examine aggregate options and trade-offs, and devise strategies to execute these policy choices.

Agriculture Remain the Backbone of Uganda’s Economy

Ugandan economy is basically agricultural, and it occupies some four-fifths of the working population. The vast majority of Ugandans are farmers on small plots of land which are used for subsistence agriculture or for the cultivation of cash crops such as coffee and tea. The country’s moderate climate is especially congenial to the production of both livestock and crops. Meanwhile, companies that are involved in oil exploration have identified at least 20 economically significant oil fields in western Uganda estimated to hold between 1.5 and 2.5 billion barrels of oil. If fully developed, this could place the landlocked country among the foremost African oil producers. The Ugandan government has also accelerated licensing of mining operations in recent years. Huge deposits of gold, uranium, copper, and rare earth minerals have been uncovered in areas with some of the highest rates of poverty in the country like Karamoja.

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The country’s economic freedom score is 58.6, making its economy the 106th freest in the 2021 Index. Its overall score has decreased by 0.9 point, primarily because of a decline in trade freedom. Uganda is ranked 14th among 47 countries in the Sub-Saharan Africa region, and its overall score is above the regional average but below the world average. The 2021 Resource Governance Index (RGI) released on September 2 has indicated that despite improvements in the governance of Uganda’s natural resources, its nascent oil and gas sector as well as that of mining are still classified as weak, with widening gaps between the laws and practice, that could impact the country’s push for transparency. The World Bank noted that Uganda’s oil has potential to diversify its economy for the long-term if revenues are invested well in developing key productive infrastructure, commercialization of agriculture, providing skills training and adding value to ensure high-quality exports to regional and international markets.

Since the first announcement of East Africa country’s oil discovery in 2006, the public’s perception of the sector has fluctuated from excitement, to expectation, impatience, cynicism and finally resigned acceptance that expected gains from oil will not be realised soon. Yet, recent progress indicates that a decision on the production and extraction of Uganda’s oil may be drawing closer. The Constitution of Uganda provides in its objectives that the State shall protect important natural resources, including land, water, wetlands, minerals, oil, fauna and flora on behalf of the people of Uganda. The Constitution further prescribes that Parliament shall make laws regulating the exploitation of minerals, the sharing of royalties arising from mineral exploitation, and the conditions for payment of indemnities arising out of exploitation of minerals. The natural resources and mining sectors are therefore subject to the taxes levied by government.

It is no secret that since the early years of the millennium as early as 2000/2001 the mining sector has been accorded a high priority status in the national development plans of Uganda. To this extent Uganda had in place a mineral policy (old policy) whose institutional framework was structured under the Ministry of Energy and Mineral Development with a specific directorate on energy and mineral development with three technical departments namely; energy resources, petroleum exploration and production and mineral resources. The old policy had as one of its objectives, the commitment to ensure that mineral wealth supports national economic and social development. This objective was to be attained
through the principle that government shall ensure equitable sharing of revenue from mineral resources by a strategy of levying and collecting royalties and fees for services rendered with a stipulation that those royalties should be shared between the central government and local governments from where minerals are produced.

In recent times, the Energy and Mineral Development Sector has made significant progress towards the achievement of the National Development Objectives as spelt out in the National Development Plan and in the NRM Manifesto 2016–2021, although several delays have been registered due to the COVID-19 global pandemic that has greatly restricted operations and implementation of projects within the sector. A number of electricity generation projects spearheaded by both the public and the private sector have been completed and commissioned while others are under implementation in the Power Subsector. Government is expanding the Power Transmission and Distribution Infrastructure through the construction of the transmission lines and the substation projects. The potential of generating power from solar, wind and geothermal energy resources is also being promoted to diversify the energy mix and increase the proportion of renewables. While in the oil and gas subsector, the process of commercialization of oil and gas resources is being undertaken with the issuance of production licenses and the rollout of the second licensing round which closes on 30th September 2020.

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The COVID–19 pandemic and subsequent lockdowns to prevent the spread of the virus damaged Uganda’s economy. The World Bank states that Uganda’s real gross domestic product (GDP) grew at 2.9% in FY20, less than half the 6.8% recorded in FY19, due to the effects of the COVID-19 (coronavirus) pandemic. GDP is expected to grow at a similar level in FY21. Economic activity stalled during the latter part of FY20 due to a domestic lockdown that lasted more than four months, border closures for all but essential cargo, and the spillover effects of disruptions to global demand and supply chains. This resulted in a sharp contraction in public investment and deceleration in private consumption, which hit the industrial and service sectors hard, particularly the informal service sector.

Moreover, the economy of Uganda is on a recovery trend after facing the negative impacts of the ongoing COVID-19 pandemic.
Government, through Petroleum Authority of Uganda, had launch key tenders for the first development phase of the construction of oil-related facilities in December 2021.
The first phase will include building of a refinery, oil pipeline from Uganda to Tanzania and completion of the oil road network in the Albertan region. After fifteen years discovering commercially-viable crude oil deposits, Uganda begins its final journey to production with the signing on April, 2021 of a landmark deal with Tanzania and French oil company Total.The deal, which is expected to unlock upwards of $15 billion in investments. The pipeline will transport crude oil from Hoima district in western Uganda to Chongoleani in Tanga, the northeastern port city in Tanzania.

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The long-awaited agreement allows country to move ahead with a project that has been plagued by delays for more than a decade since the confirmation of commercial deposits. According to a UK-based research firm, Climate Policy Initiative, the Uganda’s oil deposits are estimated to have reduced in value from $61 billion in 2013 to $18 billion in 2018 due to a fall of crude oil prices on the world market. In order to drive economic development, the Government of Uganda (GOU) has identified key focus areas in the Energy Sector in the National Development Plan (NDP) II. This includes increasing power generation, expanding the electricity transmission and distribution grid networks, increasing energy efficiency, promoting the use of alternative sources of energy, and strengthening the policy, legal and institutional framework.

The country’s second oil and gas licensing round for the exploration of five blocks in the Albertine Graben – Uganda – aims to increase international investment into Uganda’s oil rich energy sector. To boost oil production and tourism, the government has invested $309 million to construct Hoima International Airport, expected to be complete and start welcoming passengers by 2023. When Uganda created 10 new cities in July 2020, Hoima rose from a municipality to assume the moniker Oil City. This had been long in coming. About two decades ago, Hoima was a small, humble and almost lifeless town with a population of less than 30,000 residents. The second licensing round is driven by factors including the establishment of additional petroleum resources and reserves, the current high price of crude oil, interest in investing in the country’s oil and gas sector, a conducive investment climate and minimal geological and commercial risk.

Ugandan government with support from the World Bank, is preparing the Uganda Energy Access Scale-up Project (EASP). The proposed EASP will support government’s efforts to scale-up access to electricity for households, refugee and host communities, industrial parks, commercial enterprises and public institutions, so as to spur socio-economic transformation, in line with Uganda’s Vision 2040 and other Government policies. EASP activities will build on earlier Government initiatives, in the energy sector, to support the expansion and strengthening of the electricity distribution network, scale-up service connections within the network, and increase access to off-grid electricity in refugee settlements and their host communities, and to clean cooking services outside the electricity distribution network.

A total of 318 million tonnes of iron ore has been discovered in Rutenga, Kabale and Muko in southwestern Uganda. New discoveries have also been made in Kanungu, Buhara (Kabale district) and Mayuge districts an estimated total reserve of 200 million tonnes. Iron ore is a crucial in making iron and steel products – which are majorly used in construction, electrical appliances and cars among others – and the back borne of industrialization. This perhaps explains why government is placing a lot of emphasis on iron ore value addition among others.

Ugandan government is strengthening domestic resource mobilization and continue improvement of the business environment in order to make the country attractive to foreign and local investors. In an attempt to steer economic recovery through additional investments in ongoing infrastructure projects, defence, energy and transport sectors ate big while allocations to fiscal stimulus programmes and settlement of domestic arrears received “humble pie” in Uganda’s budget blueprint for financial year 2021/2022.

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The works and transport sector was allocated Ush5.1 trillion ($1.4 billion) for integrated transport infrastructure investments with a provision of Ush400 billion ($113 million) meant for road maintenance works in an arrangement intended to benefit current road construction projects in the Albertine region as the country ramps up preparations for commercial oil production anticipated to commence in 2023. The energy sector was allocated Ush1.1 trillion ($310.9 million) for infrastructure development, with Ush622 billion ($175.8 million) provided for expansion of rural electrification programmes. This budget allocation seemingly promises sweet opportunities for energy industry contractors and modest financial relief for Umeme Ltd, which is owed more than Ush200 billion ($56.5 million) in unpaid bills incurred on subsidised power connections done in rural areas since 2018.

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