The Public Finance Bill 2012

Presentation to

Members of Parliament

By

Shem Byakagaba

Managing Consultant

Lantern Consult International

+256-772-433440

shemb@lanternconsult.com

June 8th , 2013

Petroleum Revenue Management

Introduction

Oil is a unique, finite resource with a lot

of positive and negative impacts on the

socio-economic equilibrium of a country.

It needs special regulation.

The user cost is critical to the design of

both the resource extraction path and

the utilization of proceeds from oil

The Constitution, 1995

Article 244(1) states that;

“Subject to clause (2) of this article, Parliament

shall make laws regulating:

a. The exploitation of minerals,

b. The sharing of Royalties,

c. The conditions of payment of indemnities

arising out of exploitation of minerals and

d. The conditions regarding the restoration of

derelict lands.”

The Constitution contd…

Article 244(2) provides that:

“Minerals and mineral ores shall be

exploited taking into account the

interests of the individual land owners,

local governments and the

Government.”

Revenue Management

The objective of an appropriate

Revenue management law should be

to ensure that oil revenues are

fairly, equitably and progressively

shared between critical stakeholders

like the Government, the Companies,

and the private sector

Some Revenue

Management

Frameworks in Uganda

The Local Government Act, Cap 287

The management of some natural

resources is the responsibility of local

governments.

The Local Governments Act specifies the

relationship between the central

government and local governments,

including the sharing of government

revenue.

The LGA Contd…

However, the law predominantly focuses on the

sharing of tax revenue and the formula

government uses to allocate this revenue to

district governments in the form of conditional

and unconditional grants.

The Local Governments Act does not

recognize, in the fiscal sense, the region of

origin of natural resources. Hence, it is largely

silent on the issue of derivation funds.

The Mining Act, 2003

Section 98(2) provides for the sharing of royalties

between central government, local governments and owners or lawful occupiers of land subject to mineral rights in the manner specified in the Second Schedule to the Act.

Under the Second Schedule, the distribution of royalty is as follows: central government receives 80 percent; local governments receive 17 percent and the owners or lawful occupiers of land subject to mineral rights are entitled to 3 percent.

The Mining Act therefore, provides the strongest precedent to the proposed derivation formula for the oil and gas sector

Petroleum Revenue Management

Revenue management should ideally

focus on the following :

Saving for the future generation

Achieving economic stability

Responsible and beneficial spending and

investment

Why Does Oil Revenue

Management Matter

Oil revenues are:

Volatile

Can damage other industries

Are finite

Can lead to political instability

Best Practices

What Oil Can Do

Norway

Critical features

• Large scale production started:

1972

• Oil revenue collected in 2010:

$44 billion

• Proved barrels remaining: 6.7

billion

• GDP per capita: $97,255

• Education spending: 16% of

budget

• Rural population without access

to clean drinking water: 0%

What Oil Can Do

Azerbaijan

Critical features • Large scale production started:

1872

• Oil revenue collected in 2010:

$19 billion

• Proved barrels remaining: 7

billion

• GDP per capita: $6,832

• Education spending: 11% of

budget

• Rural population without access

to clean drinking water: 29%

Transformation

What was the magic that Norway,

Chile, Indonesia and Malaysia

applied to transform their

resources into wealth and

wellbeing?

The Winning formula

• Prudent macroeconomic management

• Public investment in human capital and

infrastructure (through ‘investing to invest’)

• Creation of good business environment,

including political and policy stability

• Access to financing and working with the

private sector to spur investment

• Relatively open trade and open investment

policies

• Political will and commitment

What the Winning Oil Formula

can do

Chile & Indonesia Malaysia

Cant we achieve it? Could this be Biiso municipality in Buliisa after oil?

Yes it is possible

Corner Kamdini after oil?

Avoidance of the

Dutch disease is

key

Policy Options for Mitigating

Dutch Disease

Investing in economic diversification Health Education Infrastructure (e.g. electricity; roads;

telecommunications) High-potential sectors (e.g. finance;

tourism; agriculture)

Uganda’s Current Oil

Policy and Legal

Framework

National Oil and Gas Policy

Section 5(1) lays down the guiding

principles in the development of the oil

and gas in Uganda to include:

a)Using finite resources to create lasting

benefits

b)Efficient resource management

c) Transparency and accountability

Policy, 2008 contd…

The NOP provides for the following

regulatory framework;

Parliament

Cabinet

Ministry responsible for oil and Gas

The Petroleum Authority of Uganda

(PAU)

National oil Company

MDAs

Civil society and Cultural institutions

Oil Revenue Policy

The Government passed the oil and gas revenue management policy in February 2012.

It focuses on: 1) Assessment and Collection of Government Oil and

Gas Revenues

2) Oil Revenue and Inter Governmental Fiscal Transfers

3) Macroeconomic Policy Management

4) Fiscal Rule for Managing Oil and Gas Revenues and

5) Oversight and Controls

The Petroleum (Exploration, development

and Production) Act 2013

The Act’s objectives are inter alia;

To give effect to Art 244

To regulate petroleum exploration,

development and production

To establish the Petroleum Authority of

Uganda

To establish the National oil company

To regulate the licensing and participation

of commercial entities, etc

The Petroleum (Refining, Gas Processing and

Conversion, Transportation and Storage) Act, 2013

This is the mid stream Law that is to deal with

refining, processing, transportation and storage.

This presents diverse environmental concerns

through the refinery, pipelines, and other forms

of transportation

The socio-economic impacts especially on land

spread all over the country need to be borne in

mind

The Public Finance Bill

The Bill provides in part VII, clauses

51 through 71, for management of

petroleum revenue in terms of

collection, deposit, management,

investment and expenditure.

Comments on Petroleum

Revenue management There is a persistent concern as to

why Petroleum Revenue management

law should not be separate from the

general Public Finance law in order to

address the uniqueness of petroleum

revenues.

Comments contd…

The Bill as amended provides in clauses 52 to 69 for a

petroleum Fund. The bill no longer provides for

segregated Funds. The justification given is that ‘it is not

advisable to split the petroleum Fund into a petroleum

Holding Account and a Petroleum Investment Reserve. That

the split effectively prohibits the government from ever

accessing the principal of the Petroleum Investment reserve

for budget financing….The government may be forced to

resort to expensive borrowing’ ( Pg 17 of amendments)

The question is: what are the rules for deposits, withdrawals

and investments? what safeguards are in place to avoid abuse if

government can access principal petroleum funds for budget

financing? What is the due process? How do we hedge these

funds against current political and socio-economic rigours?

Comments contd…

The provisions on safeguard on volatility are

weak especially in the absence of a stabilization

mechanism

Withdrawals according to the amendments will

not be quarterly (pg 16) as per cash flow plan

YET reporting will be quarterly.

Clause 60(3) in respect of BOU is contradicting

clause 61 which requires the Minister to direct

the BOU

Clause 63 as amended does not sufficiently make

the Investment Advisory committee

autonomous.

Comments contd…

Clause 71(1) provides that ‘Government shall

retain ninety three percent of the revenue from

petroleum production and the remaining seven

percent shall be shared among the districts located

within the petroleum exploration and production

areas’

Comments:

Why not share from all the revenue streams like

profit oil, income tax etc?

What is the rationale of the 7%? Cant it be 17% ?

Comments contd…

Clause 71(3) provides that “ 50% from

royalties due to the districts shall be shared

among the districts involved in petroleum

production based on the level of production

of each district”

Comments

There is ambiguity as to what

“producing districts” constitute. Can

this be defined?

Comments contd…

Clause 71(8) provides; “a district may, in consultation with

the Minister responsible for culture and local governments

grant a share of the royalties due to the district, to a cultural

or traditional institution”

There is passionate and justifiable arguments for the

cultural institutions to directly share from royalties. This

would be consistent with section 7(3) of the Oil Policy.

Moreover, it is not feasible to subject the cultural

institutions to the discretion of districts without a specific

and preset formula in the law. Why relegate this

contentious matter to the districts? In the alternative,

automatic and preset grants can be set while awaiting the

review of the laws to cultural institutions.

Comments contd…

Clause 71(11) states; “ the revenue from royalties

transferred to a district in a financial year, shall not

exceed the total of the non-oil oil revenue of that

district

Clause 71 (12) also states that “ where the

revenues from royalties derived under subsections 3

and 4 is in excess of the total of the non oil revenue

of a district, the excess money shall be held by the

minister in trust for the district”.

Comments contd… Firstly, what is the meaning of “non oil revenue”? Does

this refer to total receipts of a district or only internally

generated revenue?

Secondly, this is anti district development in the sense

that development is a function of investment. How will

the districts increase their revenue unless they first

invest especially in the supportive sectors like works,

Education and agriculture?

Whereas its important to manage the transfers, the

benchmark should be set at the doubled total of non oil

revenue.

What mechanisms are in place to manage the balance of

the remaining funds that the Minister holds in trust for the

District?

Comments contd…

The share of royalties is between the central

Government and the districts. Under the Local

Government Act, the Municipal Councils and

other urban councils do not receive money

from the districts. This means that the

municipalities and other urban councils will not

benefit from the royalties yet they are within

the oil producing areas!!

Comments contd…

Land owners are absent in the sharing formula

yet they are the frontline people and

communities that will be affected by oil. Cant

the precedents of the Mining Act and the

Uganda Wildlife Act that cater for land owners

be applied?

The requirement for the population size in

clause 71(4) seems un reasonable because it

disadvantages the host districts with a lot of oil

but with small populations

Conclusion

Petroleum revenues have a potential to turn around

this country either positively or negatively. It is

critical to have a legal framework that is fair,

equitable and progressive to guarantee maximal

benefits for the country today and in the future.

The few relatively successive African countries in

the management of extractives revenue have

benefited from two critical factors: Stakeholder

participation and good governance and respect for

the rule of law.

This law will not therefore work in a vacuum.

God Bless Uganda