Oil will enrich or ruin Uganda; and this is how

By The Independent Team

On October 16th 2009, University of Oxford’s Prof. Paul Collier gave a talk at Serena Conference Centre in Kampala on the prospects of an oil windfall for Uganda. Below we produce a slightly edited version of his speech.

Prof. Paul CollierA country’s competitiveness rest on two pillars: macroeconomics and microeconomics. Uganda has had one of the most outstanding macroeconomic performances on earth. That rested on a good Ministry of Finance and a good Central Bank; that is why it has been able to get good ratings of economic performance. It’s thanks to this, that Uganda has been able to go through the world’s economic crisis so successfully. Now Uganda needs to focus on microeconomic performance. To turn the macro around you need few key decisions by few good people; to turn the micro around you need systems that work from top to bottom.

The macro crisis: The longer term legacy of the macro is going to be bad news. This is because the appetite of risk among international investors has collapsed and will take long to recover since Uganda is rated a riskier place to invest. There will be a general retreat by international investors away from high risk environments. Uganda has to counter this by bringing its risk levels down. This has to be done from the micro level.

There is going to be less money out there as risk capital; also there will be less aid. Uganda’s donors have not yet gotten the guts to tell you this but it will happen. You will have to relay more on domestic resources like oil. Oil is the biggest thing that has ever happened to this economy and Uganda is not taking it seriously. The money that is going to come from oil will dwarf the money Uganda has ever gotten aid.

Think how much effort and attention you have devoted to donors and their priorities and concerns. Uganda should be devoting a lot of attention, in the next three or four years, to oil more than it has ever devoted on donors. Most of the decisions in this government taken about oil are taken by mining engineers. They don’t have the training about harnessing oil for development. They are the wrong people to have the power of decision about oil.

Decision making has to be moved from the mining engineers to economic teams. This is the biggest opportunity this economy has ever had and will ever have and it is letting a handful of mining engineers take the decisions! Uganda needs a top level task force to make these decisions; ministry of finance, central bank, Uganda Investment Authority.

Potentially oil can drive you from poverty to prosperity; it can also bring a country down. Diamonds in Sierra Leone caused it problems, now it has discovered oil.

Uganda in recent years has been seen in the same breath as Ghana. A year before Ghana discovered oil; its fiscal deficit was 1.9% of GDP; currently it stands at 19%. When oil arrives it will produce another 4.5% of GDP. Oil is about to arrive in Ghana, and yet they have spent it four times over. What Ghana faces is not opportunity but an economic crisis. Don’t be Ghana! A former president of Mexico once said: €œOil destroyed Mexico, don’t let it destroy you€

There are four things you need to do.

First, discover your natural assets. Uganda has already discovered oil but there is a lot more to discover. The average square kilometre of an OECD country has about US$125,000 worth of resource wealth underneath its soil; in Sub-Saharan Africa it’s about US$20,000. The reason is not that Africa is less endowed; Africa’s natural resources are yet to be discovered. Something has gone drastically wrong in the discovery process. A lot of attention has to be put into getting the discovery process in motion; there is no substitute to significant public investment in geological information.Tullow has sunk 27 wells in Uganda, 26 of them have struck oil. This sounds great but actually in a way it is bad news because it means they are only drilling where they are sure to get it.
Second, build a good tax system that brings the revenues in. Those of you who have been following the Financial Times realise that there has been a major story everyday about a resource contract in Africa that has been torn up. The current feel, according to the Financial Times, is that investment in resource extraction in Africa is now risky. This is terrible news; investors must have confidence in contracts. For this to happen, the contracts must have mutual advantages. The most obvious contingent plan is that world prices of whatever commodity change. In the last 13 or 18 months oil prices have fluctuated between US$147 to US$37 a barrel. You need a tax regime that is robust in the sense that when the prices are high, the government does not begin thinking of cancelling the contract and when the prices are low the company does not walk away.

Third, avoid the Niger Delta; where oil has been discovered in Uganda is not the safest place on earth. Nigeria never thought it would get into the nightmare it is in now. They thought they knew how to handle it. They had gone through civil war in the late 1960s; they thought they knew how to handle it militarily. Their army is much bigger than Uganda’s yet now they have a catastrophe on their hands. Oil output in Nigeria today is the lowest it has ever been in 30 years. They can’t get the stuff out of the ground. How do you avoid a Nigeria?

There are two essential things; avoid uncompensated environmental damage to the local people. The local community must be reassured from the start by actions that the unavoidable environmental damage will be compensated for and rectified. If you treat the local communities as enemies, when the resources are in their ground, you have lost it, and they will win. All they have to do is disrupt extraction. The power of local communities to disrupt is very considerable if they put their minds into it.

Secondly you have to build a discourse which makes locals’ demand for money look greedy. The locals have to be told that the money for natural resources is building the future of our nation’s children and if few individuals grab it, it will undermine that future of the nation’s children. How do you do this in a credible fashion especially given that there will be a lot of suspicions about government intentions? Suspicion has to be scaled down with a chain of transparency so that the use of the oil is manifested into the future of the nation.

To achieve transparency, avoid awarding oil contracts through secret negotiations because this increases the wall of suspicion. Uganda must award future contracts through transparent processes like public auctioning. Since the availability of oil in Uganda is now international news, this country must award contracts transparently. Auctions reveal true prices. The next step is to publish the revenues. Over 30 governments in the world have signed transparent oil extraction agreements; Uganda should follow suit.

Fourth, what does a government do with oil revenues? Don’t spend the money on public consumption. Oil revenues is money coming from depleting an asset which is exhaustible. As you deplete an asset like oil, you need to build up an offsetting asset. To do this right is the process of development; the asset you build up must be able to generate even more than the revenue that has been put into it. If you do not build up the offsetting asset it means that you are just plundering the wealth that should belong to the future.

That is why Nigeria is in problems, plundering instead of investing revenue from depleting resources. Same is happening in Zambia with copper. You need to also save from oil revenue. This requires two practical things; the revenues from oil need to be clearly identified separately from other revenues. Ghana failed to do this; it spent what it was hoping to make.

Another clear message regarding your savings from oil is do not do a ‘Norway’. The Norwegians saved by acquiring financial assets abroad. They had good reasons for this; the average Norwegian worker works with more investment capital than any other in the world. If the Norwegians had used the oil money and added it on to the already existing capital, they would have suffered diminishing returns to capital. Uganda has less capital per worker than anywhere in the world; so oil savings must go into direct investments.

How do you build that domestic investment? Uganda has been investing only 20% of its GDP. Now it needs to move to over 30%. That means a 50% increase in investment. However, if you pump more money into a weak system, the value of returns will be very small. Before you get to the stage of scaling up investment you need to go through a process of building the capacity of the public sector to choose and implement good investment projects.

There are lots of countries that were once poor and made rapid transformation. Look at them. Kampala in the next 25 years will probably triple in population. Do not be reactive to the expansion and growth of Kampala; plan the investment for the growth of Kampala. It’s much cheaper to get public infrastructure one step ahead.

Encouraging private investment is important. Public investment without private investment has very low returns. A good example is roads; without trucks it will bring no returns and vise versa. The government controls investment in roads but it does not control investment in trucks. It needs to encourage private individuals to buy vehicles then there will be returns on roads. You know that Uganda’s incentive environment is very poor. Next door in Rwanda, they have shot up; they are now higher than many countries in Europe. If they can do it, my goodness you can do it. In the 1990s Rwanda was falling apart. You should be ahead of them; anything they can do you can do better.

Think regional wherever possible. Uganda is a small land locked economy thus the region really matters. The East African Community is important. There is need for a common currency; bring back the East African shilling, an integrated transport system is needed. The best governance systems will be in the land locked countries.

Think urban; donors love to talk about the rural people. The rural is your past and present, not your future. Your future is in the urban. The function of agriculture in the future will be to produce food and other things, not employment. In modern economies like Europe and America, agriculture produces a lot of output but does not employ many people; in America it employs less than 2% of the total labour force.

Most importantly is the micro agenda, which involves lots of people taking decisions again and again. If you get it right, you can lift this society to prosperity over generations. This means that you have to get decisions right again and again across a wide chain.