Author: Wandera E. Jonathan
The national content law on ring fenced services in the Oil and Gas sector does not favour the Ugandan Investor.
The law as it is, enables a foreigner or foreign company to incorporate as a Ugandan company and subsequently compete with Ugandan investors in the provision of ring-fenced goods and services.
Since Uganda announced the existence of commercially viable petroleum deposits, a lot of effort has gone into making laws and policies to ensure that the country maximizes the benefits of exploiting its oil and gas reserves. One of the ways through which this has been done is through encouraging local content, mainly through requirements and setting targets written in national laws and individual contracts. The achievement for positive local content is as a direct result of the type of frameworks in place. In the wake of the need to promote a conducive environment for Ugandans to participate in the Oil and Gas sector, Uganda has put in place the following policies, legislation and regulations:
The National Oil and Gas Policy, 2008 aims at ensuring optimum national participation in oil and gas activities through strategies such as, promoting State participation in production sharing agreements (PSAs), promoting the use of the country’s materials, goods and services in the oil and gas sector and promoting the employment of Ugandans in the sector.
The Policy further seeks to support development and maintenance of national expertise through strategies, such as the provision of goods and services to the sector by national enterprises and entrepreneurs and broadening the national education curricular to prepare a necessary workforce for engagement with the sector.
The Oil and Gas laws make it a requirement for companies to specifically provide for training and employment of Ugandans during their application for licenses within the sector. Furthermore, the law emphasize that all licensees, contractors or any other entity involved in petroleum activities shall incorporate and implement national content as an important element of their petroleum activities. National content means the level of use of Ugandan local expertise, goods and services, Ugandan companies, Ugandan citizens, registered entities, businesses and financing in petroleum activities.
Additionally, in promoting national content the law sets out a list of goods and services ring-fenced for Ugandans, Ugandan companies and entities. These include: transportation, security, food and beverages, hotel and catering, human resource management, office supplies, fuel supply, land surveying, clearing and forwarding, crane hire, local available construction materials, civil works, supply of locally available drilling and production materials, environmental studies and impact assessment, communication and information technology services, waste management where possible.
Generally, the Uganda oil and petroleum laws specifically require contractors or subcontractors to give preference to goods and services produced or available in Uganda and services which are rendered by Ugandan citizens and companies.
The law provides that where the goods and services are not available in Uganda, a joint venture shall be entered into as long as the Ugandan company has 48% shares in the joint venture.
In light of the above, the law in its current state does not protect Ugandans who wish to participate in the provision of ring-fenced goods and services in the Oil and Gas sector as herein below:
First and foremost, the Petroleum (Exploration, Development and production) Act 2013 is supreme to all existing laws save for the 1995 Constitution, the National Environment Act and the Access to information Act.
The national content regulations preserve the contracts for certain goods and services for Ugandan companies, citizens and registered entities. These have come to be known as ring fenced services.
The said regulations further define a Ugandan company as one to mean:
The Companies Act however does not define what a “Ugandan company” is but rather states that A company is one formed and registered under the Companies Act or an existing company or a re-registered company under the Companies Act.
The Oil and Gas laws create a loophole by allowing a foreigner or foreign entity incorporate a Ugandan Company to participate in the provision of ring-fenced goods and services.
The said law does not restrict shareholding by foreigners in a Ugandan company. This creates an opportunity for a foreigner or a foreign company to sneak into the oil and gas sector and register itself as a Ugandan company to participate in the ring-fenced goods and services.
As long as that company provides value addition to Uganda, uses available local raw materials, employs at least 70% Ugandans and is approved by the Authority under regulation 9(4), they qualify as a Ugandan company under the oil and gas law even though the majority shareholders are foreigners.
In company law, the prime beneficiaries of a company’s profits are the shareholders. The law as is, allows a foreigner to become a majority shareholder in a local company meaning that he would be the ultimate beneficiary of the profits made by the company and he would still have the powers to repatriate the profits out of the county. The current law therefore pits a foreigner who has more technical capacity or financial competence against a Ugandan investor in competing for the provision of ring-fenced services.
Further, the lack of shareholding restriction in the definition of a Ugandan company under the Oil and Gas laws negates the relevance of the joint venture mechanism which purports to restrict participating interests therein to 48% Ugandan owned. This in effect provides no protection to Ugandan investors as a “Ugandan company” can be partly or wholly owned by foreigners.
In consideration of other jurisdictions, countries like Angola have amended their national content law in a bid to protect and promote their local citizens in their oil and gas sector. They have introduced a restrictive concept where Angolan companies are required to be fully owned by Angolan citizens (100%) as opposed to the previous framework that deemed Angolan companies as entities where at least 51% was owned by an Angolan citizen. The Angolan national content law further draws a distinction between an Angolan company, a company incorporated under the Angolan law and a foreign company.
In a nut shell a foreign individual or company by virtual of the Act can legally incorporate and compete with locally owned Ugandan companies in the provision of ring-fenced goods and services.
In my opinion, the Oil & Gas laws on national content in Uganda do not provide protection to local companies and Ugandan investors against unfair competition from foreign investors that have access to adequate capital, technical and financial capabilities given their vast experience in the Oil and Gas sector.
In light of the above, the definition of a Ugandan company under the national content regulations should be amended to include “a company where a Ugandan owns 51% shares or more”
Disclaimer: No information contained this Article should be construed as legal advice from A.L Advocates or the individual authors, nor is it intended in any way to be used as a substitute for legal counsel on any subject matter.