ISSUE 3 | March - May, 2018
Ugandans Leading, Authoritative bankers magazine
Banking in the mining, oil & gas sector INTERVIEW
Lots of opportunities in the oil sector - Mugira
PERSPECTIVE
ANALYSIS
INFRASTRUCTURE
Re-imagining Banking in 2018 and Beyond
UDB launches new business plan
Postponing projects hikes costs by 80% every year – Mweheire
ISSUE 3 | March - May, 2018
Contents Banking in the mining, oil & gas sector oil & gas sector
8 | Oil to more than double economy size in 2025
BANKING
20 | Block chain technology will save correspondent banking links - Dr Mugume The five Central Bank governors of the East African Community (EAC) recently highlighted risks to economic growth of the region such as the rise of crypto currency and the breakdown in correspondent banking.
Ugandans are set to reap bountifully from the impending windfall in the oil and gas sector, analysis by Stanbic bank indicates.
10 | Summary of major oil sector projects As the country moves into the production and development phase of oil, thousands of people in the oil frontline districts are facing involuntary Development Induced Displacements to pave way for the construction of critical oil and gas infrastructures.
INTERVIEW NEWS BRIEFS
4 | E. African Crude Oil Pipeline launch East-Africa-Crude-Oil-Pipeline-launch New details have emerged in the East African Crude Oil Pipeline (EACOP) regarding how it will be financed, run and managed.
5 | UDB launches new strategic plan The Uganda Development Bank has launched an ambitious 5 year Strategic Plan that is expected to see the institution shore up its Balance Sheet from the current sh325billion to a record sh1 trillion.
PERSPECTIVE
6 | Re-imagining Banking in 2018 Looking at the East African region in the past 12 months, economic conditions deteriorated largely in Kenya and South Sudan, with the rest of the countries closing the year with a not so favourable story to tell.
MIINING
22 | A lot of potential in mining sector The Government is shaking every tree in search of tax revenue, except the one that matters most, civil society has said.
17 | Lots of Oil and gas opportunities for anyone prepared Nick Mugira is the Managing Director of Inspector Africa, a local player in the oil and gas sector, he spoke with the Bankers Journal about the sector, below are excerpts of the conversation.
24 | Health, safety takes back seat in Busoga gold rush With red dust all over his body, a short well-built man, probably in his 40s steps out of a 50-foot pit, to speak to Oil in Uganda on his mining journey.
March - May, 2018 | 1
Contents Corporate news
OPINION
29 | Stanbic bank, URA launch online and mobile money tax payment solution
33 | Bank loans – a forward looking approach has arrived
URA and Stanbic Bank have launched a secure, convenient and affordable online payment solution that will enable taxpayers comply with their tax obligations by making payments using VISA, MasterCard and MTN Mobile money.
A number of banks in Uganda have already started preparations towards full compliance with data analysis and stress testing in 2017.
31 | Mortgage rates end year highest Ugandans must dig deeper for new homes after mortgage and land purchase rates hit the roof in the last quarter of the year, a Bank of Uganda monetary policy report indicates.
FEATURE 39 | Village saving groups bridging the gap in financial inclusion Sarah Mutanda never thought she would ever have a bank account, just like many fellow residents of Buwologoma village in the poverty stricken areas of Busoga sub-region in Eastern Uganda.
Editorial Welcome to the third edition of the Bankers Journal. This time we focus on the oil and gas sector, as well as a bit of mining; the most promising aspects of the Ugandan economy. In addition to this, we still delve into contemporary banking matters. Some $20b is set to be invested in the petroleum industry by different players; we discuss the opportunities and challenges of the sector. We also spoke to a local player in the sector, Nicolas Mugira about the sector and how Ugandan firms can navigate through it. We also discuss how block chain technology could be the solution to a recent break down in correspondent banking. Also included in this issue is the disruption that the Basel III framework has brought to Uganda’s banking industry. I hope you find this issue as informative as it is engaging. Enjoy!
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2 | March - May, 2018
Letters Government should not ignore public opinion on oil
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read with dismay a story in the Daily Monitor about the manner in which the oil debate was handled in Parliament. Several concerns have been raised before on matters concerning our oil. I least agree with the section of people who have asserted that oil is indeed a ‘curse’. In my opinion, oil only becomes a curse when stakeholders are isolated from contributing to its management, a case in point being failure to formulate all inclusive policies on its management.
loss of attaining the common good of society. As the saying goes, “When two elephants fight it is the grass that suffers”- in this case the public! Fellow countrymen, let’s consider oil as a national asset. Party and ethnic differences must be put aside for the good of the country. Remember any person who may be fronting selfish interests will be judged by history. And
remember history judges harshly! Ugandans can remain united and working towards the common good of all, irrespective of the oil excitement. But it is our sole responsibility to support this cause. For God My Country. John Vianney Ahumuza, Uganda Christian University, Mukono
We must note that Uganda is not the first country to discover oil in the world. Many countries have drilled oil over centuries and have maintained political stability. The hook has been simple, notably properly legislated oil policies. In this context, Uganda can effectively manage its oil resources and be a ray of hope in the Great Lakes region as far as oil management is concerned if inputs of the public is taken into account. It would similarly be unwise in case sections of the opposition may be using the oil debate as a way of paralysing the government in power. This would mean the public would be at a
A technician at an oil well.
Why the secrecy in oil and gas matters
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il has always been treated as a sacred thing by the current regime. We have witnessed deliberate denial of information relating to oil dealings with the Executive attempting to be the alpha and omega in all oil related issues. We know that secrecy breeds corruption. Recently, Parliamentary debate on oil was a classic example of how public interest is be-
ing sacrificed to the “minister”. We all know who wields power behind our so-called ministers. They do not have the capacity to make their own decisions without being influenced from “above”.
suspicion. With the rampant theft of public money, the Executive can no longer be trusted. It is a pity that some Members of Parliament are willing to hand over this resource to a few people, well knowing the implications.
Oil is a national resource and therefore, Members of Parliament should play their oversight role and any decision to sideline them should be resisted and looked at with
Cissy Kagaba, Executive Director, Anti Corruption Coalition Derived from Anti Corruption Coalition March - May, 2018 | 3
News Briefs East African Crude Oil Pipeline launch
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ast-Africa-Crude-Oil-Pipeline-launch New details have emerged in the East African Crude Oil Pipeline (EACOP) regarding how it will be financed, run and managed. For starters, Uganda plans to construct a pipeline that will transport its crude oil to the international market through the Tanzanian coastal port of Tanga.
The pipeline, is expected to be completed by the year 2020, when the country is scheduled to start oil production. In fact, Uganda’s President, Yoweri Museveni and his Tanzanian counterpart recently commissioned the construction of the East African Crude Oil Pipeline. The two leaders laid mark stones for the crude oil pipeline in Mutukula, Kyotera district and Kabaale in Hoima district. Total E&P Uganda, a subsidiary of French oil giant, Total S.A, is spearheading the construction of the crude oil pipeline on behalf of the joint venture partners. Adewale Fayemi, the general manager, Total E&P Uganda says discussions are ongoing to discuss on the formalities of how the pipeline will be run.
Tullow Uganda, CNOOC Uganda Ltd and Total E&P Uganda, and the governments of Uganda and Tanzania as shareholders in the company.
Already, an agreement has been reached that the East African Crude Oil Pipeline (EACOP) will be run and managed by a Special Purpose Vehicle (SPV) – private pipeline company. This means that a private company will be incorporated with joint venture partners –
Uganda’s minister of Energy and Mineral Development, Irene Muloni, says that the National Pipeline Company (U) Ltd – a subsidiary of the Uganda National Oil Company (UNOC) will own shares in the pipeline company (Special Purpose Vehicle), on behalf of
Presidents Yoweri Museveni and John Magufuli lay the foundation stone for the construction of a crude oil pipeline from Hoima in Uganda to Tanga in Tanzania on August 5th, 2017.
Barclays rebrands to Absa
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arclays Africa Group Limited, one of the largest banks in Africa, has officially announced that it will be rebranding all its operations across Africa to ABSA Group Limited. A statement attributed to the Barclays Africa CEO Maria Ramos says that the Bank’s overriding goal in all this is to double its market share in Africa to 12%. “Our overriding goal is to become a banking group
of which Africa can be proud, a forward-looking African business that recognises our African heritage, rooted in Africa, with global reach. We have a clear and undiluted ambition to double our market share of African banking revenues to 12%.” Ramos is quoted as saying. The rebrand is one of the conditions of the diverstature by UK based Baclays Plc.
the government of Uganda. As of now, the pipeline company (Special Purpose Vehicle) is yet to be incorporated. “Negotiations are underway for the setup and corporate structure of the proposed company, that will run EACOP”, Samantha Muhwezi, the Legal Advisor EACOP at Total E&P Uganda explains. The pipeline company, will build, own and operate the crude oil pipeline project.
DFCU Bank starts nationwide clinics to support women in business
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FCU bank is now imparting hands-on business skills to women, in a nationwide campaign that should help such women grow their businesses.
Source: East African Business Week. 4 | March - May, 2018
Mining Sector
Corporate News
A lot of potential in mining sector
Stanbic bank, URA launch online and mobile money tax payment solution
More firms than farms needed – Prof. Collier
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nterprise and not agriculture is the silver bullet that will deliver Uganda into middle income status and prosperity, Paul Collier (pictured), a University of Oxford professor of economics and public policy has said. Prof. Emmanuel Tumusiime-Mutebile, the governor Bank of Uganda noted in his remarks that despite successful liberalization of the country, the economy has not been restructured in recent years and is still greatly reliant toward agricultural production.
UDB launches strategic plan, to support SMEs
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he Uganda Development Bank (UDB) has launched an ambitious 5 year Strategic Plan that is expected to see the institution shore up its Balance Sheet from the current sh325billion to a record sh1 trillion. With a capitalization problem, UDB has eyes set om multilateral lenders like ADB, KFW and the Islamic bank to raise more capital for onward lending. Dr Samuel Sejjaaka the Board Chairman says that the Development Bank wants to use part of its available credit alongside its
expertise in ventures with formidable local SMEs over the mid-term. In an attempt to cool off the challenges of affordable credit to otherwise profitable Small and Medium Enterprises, a new Equity and Venture fund worth sh6billion is set to be piloted by the Uganda Development Bank. Dr Samuel Sejjaaka the Board Chairman says that the Development Bank wants to use part of its available credit alongside its expertise in ventures with formidable local SMEs over the mid-term.
Collier pointed out at the Bank of Uganda and International Growth Centre Governors Public Lecture series that at a population growth rate of 3.3% every year, land is quickly running out for agricultural activity. He delivered a lecture on the theme: “The Role of the State in Structural Transformation and Development” at the Serena Hotel. Instead of focusing on farms, Collier noted that government should create conditions for firms of at least four employees each for the economy to thrive. “Uganda is desperately short of proper firms. Modern firms perform the miracle of productivity. Uganda must look beyond agriculture because with 3.3% population growth annually, land is becoming scarcer. By specializing, firms produce more than farms,” Collier said.
Uganda Development Bank chairman Samuel Sejjaaka (L) and chief executive officer Patricia Ojangole address the press.
Equity bank outs new technology for refugee financial access
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quity Bank Uganda in Partnership United Nations Capital Development Fund (UNCDF) launched the innovative Biometric Card Solutions that enables refugees access formal financial services securely. Equity Bank Uganda and UNCDF partnered to drive financial inclusion in Uganda under a program called
Mobile Money for the Poor (MM4P). Equity Bank Uganda showcased the technology, process and applicability of the solution in Uganda in an event held at the Kampala Serena hotel. The biometric card solution will enable secure electronic cash transfer to refugees. March - May, 2018 | 5
Perspective
BY JOSHUA OIGARA Group CEO and MD, KCB
Re-imagining Banking in 2018 and Beyond Justifiably, 2017 was a year that can be summarised in three words: uncertain, changing and challenging. Looking at the East African region in the past 12 months, economic conditions deteriorated largely in Kenya and South Sudan, with the rest of the countries closing the year with a not so favourable story to tell.
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eopolitical instability remained a major threat to the region’s near-term economic growth. A prolonged electioneering period in Kenya brought a slowdown in expansion across the East African region. We however see some recovery coming through during the first half of 2018. The full effect of the law capping interest rate in Kenya marked by a slow business environment on account of the general election negatively hit businesses and the economy at large. The rate cap subdued private investment owing to the drop in lending rates. As such, overall credit growth to the private sector reached its lowest levels in mid-2017.
re-evaluating the entire system itself. Undoubtedly, the current circumstances are all quite challenging to work effectively in. The New Year will unleash its own set of challenges, with a series of expected regulatory changes beckoning.
Economic Outlook The general outlook for 2018 is favorable with an expected improvement in economic conditions and a pickup in investments across the East African region. We are op-
In South Sudan, hyper-inflation impacted on business but we remain optimistic that the political situation will take a turn for the better, creating a conducive operating environment. It is worth noting that the Rwanda elections passed uneventfully, which was a positive indicator for business and investment in the region. Unsurprisingly then, most business executives would report that conditions for the financial services industry have worsened over the past 12 months, a fact that is clearly borne out in the industry’s financial performance this year. But the shockwaves have not solely been external. Financial institutions have also been looking inward, implementing changes to their core operations — from shortening transaction times to integrating sustainable innovation into their product offerings— 6 | March - May, 2018
Customers in a banking hall.
timistic and looking forward to a more dynamic year in 2018 across East Africa. 2017 was a relatively tough year with a prolonged election period in Kenya and with that behind us now, we expect an uptick in economic activity in the next 12 months.
Financial Industry Outlook Two things will define the financial services sector this year—a new regulatory environment and increased investments in the financial technology (Fintech) space. The global financial system has gotten into
Perspective
a new regime—the International Financial Reporting Standards 9 (IFRS9)—which took effect on January 1, 2018. Under the IFRS 9, the most fundamental change is recognition of credit risk losses. Previously, financial institutions recognize a loan’s risk at the point of default but now they will be expected to recognise this risk at the beginning and during the entire loan’s life cycle and make the necessary provisions. This could have an impact on profitability and capital provisions. We do not anticipate a shrinkage in credit or any major shock to our business as this is something we have over the years been preparing for and making the necessary adjustments. KCB is adequately capitalized to fit in under the new guidelines.
Since the introduction of the caps, credit to the government has increased significantly with growth in credit to the government averaging about 15 per cent compared to the 2.3 per cent to the private sector.
We also expect to see the industry move deeper into the financial technology space. The future lies in leveraging technology to drive efficiencies in our operations in order to serve our customers better with relevant products that meet their expectations. Since the introduction of the caps, credit to the government has increased significantly with growth in credit to the government averaging about 15 per cent compared to the 2.3 per cent to the private sector. We are glad that the regulator has indicated a willingness to reassess the interest cap position. We are optimistic that all actors will reconsider the caps in the best interest of our customers when the time comes to relook at the regulatory environment. Indeed, it has been a difficult year financially, with headwinds in all of our markets. However, it was also a year when we decided to substantially transform for the future. Our take is that banking is much more than a current now business; banks transform short-term actions into long-term value for stakeholders. Banks need to manage for the long term game, through the cycles, even as they adapt in the short term through testand-learn experimentation. Given the technological and market chang-
to an explicit set of investments that prepare their organizations to seize the opportunities that unfold.
KCB Business Outlook As a business, our growth prospects are strong. Rating agency Standard & Poor’s (S&P) last month affirmed KCB Group B+ stable rating. This was driven by resilient and balanced portfolio of businesses, strong capabilities and a good position in most of the markets the bank operates in. Our business fundamentals remain strong. We remain optimistic and true to our strategy, even in the face of challenges. As the business environment evolves, it is important for us to expand its revenue streams to remain competitive. This aggressive focus on digital channels leveraged on our Fintech strategy is paying off. We will continually manage our capital and risks to keep the business growing while delivering on our targets. The future lies in leveraging technology to drive efficiencies in our operations in order to serve our customers better with relevant products that meet their expectations.
es roiling the industry, the coming 2-3 years may well bring even greater disruption to banking. To play the long-term game, each organisation needs to determine which developments to prepare for and how, based on its particular assets, prot pool, business model and operating model. Anxiety about these massive shifts in the financial services sector may lead many bank management teams and boards to focus overwhelmingly on the short game, especially the next quarter’s performance. Yet in many ways, I am convinced that the underlying business remains a long-term game. With IFRS 9, opportunities are stemming for financial institutions in terms of improved governance in accounting. It is key that as a sector, we ensure a smooth transition for customers during this period. Waiting indefinitely to see how these themes unfold is not a viable option. Instead, banking will benefit by committing
We are also focused on funding innovation which gives banks an opening to devise new forms of financing for long-term corporate projects, or new forms of financial structuring that benefit SME’s. Customers should feel that they are completely taken care of at a high service level and with simple, accessible services. We develop and invest in even better customised solutions based on our firm belief that high customer loyalty is the foundation for longterm profitability. We are keen to strengthen confidence in the banking system and ensure long-term financial and economic stability. 2018 success stories are most likely to come from those that are already planning for the years ahead and this is a sign that the New Year holds vast opportunities to break new ground in business and especially in the financial sector. March - May, 2018 | 7
Oil & Gas Sector
Oil to more than double economy size in 2025 Ugandans are set to reap bountifully from the impending windfall in the oil and gas sector, analysis by Stanbic bank indicates. Not only is Uganda’s gross domestic product (value of economic output) expected to hit $70b in 2025 (sh254.72 trillion), Ugandans will enter middle income status by 2022, thereby fulfilling a key part of governments Vision 2040 ambitions. Industries with potential for Local Development Power & Infrastructure
30% of total investment to be spent in Uganda
USD 20 BN
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n an interview, Patrick Mweheire, the Stanbic bank Chief Executive Officer (CEO) noted that the analysis is based on government’s target of achieving first oil by 2020. He also noted that the analysis incorporates the possibility of discovering new oil in 2019. Stanbic’s analysis also shows that Uganda’s GDP will move from about $30b in 2017 to about $70b in 2025 with oil. Additionally, Per Capita GDP will hit $1,286 (about sh4.7m) by 2022, placing Uganda safely within lower middle-income status. Mweheire noted that if there was no oil, Uganda’s economy would only hit $41b (about sh149.2b) by 2025, a level the country is likely to reach by 2020 should oil production start as has government has planned. Furthermore, out of the estimated $20b that will be invested in various levels of the oil sector, about $6b (about sh21.8 trillion) will be remain within Uganda’s economy and directly benefit Ugandans with firms in the power and
Power & Infrastructure Production Operation Services
Cement
Transort& logistics
Bulk Material
Aieline industry
Steel
Real Estate
Facility Management
Civil & Road Construction
Transportation (people)
Pipeline
USD 6 BN
Year investment
8 | March - May, 2018
InDustrIes
Fuel Wholesale Industry
Power Generation & Distribution
Refinery
Water supply
Waste management
infrastructure sector, transport and logistics, aviation, real estate, waste management, fuel wholesale, catering and food supply. Uganda revised its oil reserves upwards to 6.5 billion barrels in 2014 after an appraisal that also showed commercial deposits of natural gas; however, only about 1.4 billion barrels are recoverable using available technology. Although oil production licenses have been issued to Total E&P, CNOOC and Tullow, exploration is still ongoing and licenses have been issued to new outfits; Oranto Petroleum Limited from Nigeria and Armour Energy Limited from Australia. Allen Ayebare, Centenary Banks Chief Manager, Corporate Affairs and Communications noted that the oil and gas sector will increase the level of export earnings, and ease pressure on the local currency since the Country will be earning Foreign Currency. “We believe this will keep inflation down and help stabilize the economy. With a stable econ-
InDustrIes
Food supply Catering
omy, economic activities shall be boosted and businesses will enjoy domestic, regional and international growth opportunities,” Ayebare said. “This shall give the banking sector an opportunity to provide financial solutions to the businesses in the Value chain,” she added.
AfDB hails oil and gas sectors effect on economy In its recent economic performance and outlook report, the African Development Bank (AfDB) the recent issuance of oil exploration licenses; and the expected decision by the government to invest in oil infrastructure development in early 2018, given the projected increase in oil prices to an average of $55 a barrel in 2017–18 from $43 a barrel in 2016 will boost Uganda’s economy. AfDB also anticipated agricultural production due to better weather conditions; higher foreign direct investment (FDI) flows following the issuance of production licenses.
Oil & Gas Sector
DRC Interested in Uganda’s Crude Oil Pipeline Uganda and Tanzania plans to construct a 1,445 km long, 24-inch diameter, heated pipeline to provide access for Uganda’s crude oil to the international market.
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ganda’s Minister of Energy and Mineral Development, Hon. Irene Muloni, has revealed that Democratic Republic of Congo government is considering EACOP as an alternative route to access the international market for its crude from newly discovered oil resources in the eastern part of the country. “The DRC government has formally expressed interest to join crude pipeline project. They see it [EACOP] as an alternative route for their crude to the market,” she said, while launching the Front End Engineering Designing (FEED) for the crude oil pipeline project recently. An American Company Gulf Interstate is conducting the FEED study that is expected to provide the actual designs, costs and route for the crude oil pipeline. The study that was launched early January 2017 is expected to be completed within 8 months. Hon. Muloni explained that when they (Uganda and Tanzania team) was inspecting the Tanga port last year (2016), they were joined by an official delegation from the Democratic Republic of Congo’s Ministry of Hydrocarbons, and the delegation expressed interest to participate in the crude oil pipeline project. “This is potential route for them to access the international market,” Irene explained. This means DRC government, if admitted will be expected to acquire a stake in the EACOP and pay a tariff of $12 dollars per barrel of crude oil transported through the pipeline. The Democratic Republic of Congo (DRC) has so far discovered 3 billion barrels of oil around Lake Albert Eastern and part of the country, which neighbors Uganda. However, it is yet to be confirmed how much of the 3 billion barrels is recoverable It is cheaper for DRC to transport its crude
The proposed pipeline.
through EACOP, because the Alternative would involve constructing a 6,500 kilometer long pipeline though the vast jungles to the country’s western coastline.
ern DRC, said access to the least cost option to get crude to the international market is vital to the next round of investment the company is supposed to make.
Last year (2016), Mr. Giuseppe Cicarelli, the Chief Executive Officer of Oil of DR Congo, one of the companies exploring for oil in East-
“Oil of DR Congo is actively working to find viable solutions for the future evacuation of the crude oil from the two blocks it operates block I and II around Lake Albert - having already completed an extensive seismic campaign,” Giuseppe said.
DRC’s expression of interest follows, President Museveni‘s recent appeal to his Congolese counterpart, President Joseph Kabila, to consider joining the northern corridor projects, in particular the East African crude oil pipeline.
DRC’s expression of interest follows, President Museveni‘s recent appeal to his Congolese counterpart, President Joseph Kabila, to consider joining the northern corridor projects, in particular the East African crude oil pipeline. French Oil giant, Total S.A, is one of the companies exploring oil in northeastern DRC. Total S.A holds 66 percent stake in Block 3 located along Lake Albert alongside with South Africa’s Sac Oil. Derived with changes from Oil in Uganda. March - May, 2018 | 9
Oil & Gas Sector
Summary of major oil sector projects As the country moves into the production and development phase of oil, thousands of people in the oil frontline districts of Hoima, Nwoya and Buliisa are facing involuntary Development Induced Displacements (DIDs) to pave way for the construction of critical oil and gas infrastructures.
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ccording to the Land Acquisition and Resettlement Framework (LARF), critical oil infrastructures require huge chunks of land, which inevitably will lead to massive displacements of people, which could negatively affect peoples’ livelihoods, if not properly handled. The 161 pages LARF report released in January 2017, explains in detail the infrastructure network expected in the Albertine Graben, mainly the districts of Hoima, Nwoya and Buliisa. The critical infrastructures include; the Central Processing Facilities (CPFs); oil flow-lines; feeder-pipelines; water-intake stations; well-pads and permanent as well as temporary camps, among others.
‘First refinery’ One of the critical oil infrastructures is Central Processing Facilities (CPFs). Originally, the Ministry of Energy and Joint Venture Partners (JVP) had planned to construct three CPFs two in Hoima (i.eat the Kingfisher Discovery Area (KFDA) & at the Kaiso- Tonya area) and one in Buliisa. However, in a bid to minimize the project footprint, the Kaiso-Tonya CFP was abandoned. Mr. Adewale Fayemi, the General Manager, Total E&P Uganda BV, explains that the current plan is to have only two CPFs – one in Kingfisher Discovery Area in Kyangwali, Hoima district and another in Buliisa district. Oil from the ground is usually mixed with debris, water and other impurities. Therefore, the main purpose of CPF is to stabilize the crude, separate 10 | March - May, 2018
The Minister of Energy and Mineral Development Hon. Irene Muloni, while launching the Front End Engineering Design (FEED) for Nwoya and Buliisa oilfields recently, said in order to minimize the project footprint in a fragile ecosystem, all pipelines will be buried.
the different fluids, and remain with pure crude oil.
CPFs alone, will require at least 300 hectares of land.
The Buliisa CPF will be the largest with capacity to stabilize 200,000 barrels of crude oil per day, while the Kingfisher CFP will have capacity to stabilize 30,000 barrels of crude oil per day. In total, the country expects to produce 230,000 barrels of crude oil per day, out of which 30,000 will be supplied to the refinery for refining while the rest will be exported.
“Each CPF area will be fenced-off with controlled security access. The area will include camps for staff and contractors. Outside the restricted area, there will be a buffer zonewhere certain land-use limitations will be placed as a safety measure. For instance, settlements might be prohibited within the buffer zone to protect people from noise, radiation and other health concerns.
Mr. Adewali says that the Buliisa CPF is expected to occupy at least a length of 1.5 kilometers and a width of 2 kilometers piece of land. However, the LARF report reveals that the Buliisa CPF and its associated facilities will be built on an estimated 260 hectares of land, while the Kingfisher CPF will be built on a 40 hectares piece of land. This means, the
“The size of the buffer area will be determined through the Environmental and Social Impact Assessments (ESIA), detailed engineering and Resettlement Action Plan (RAP) studies,” the report reads. The buffer is a safety and security area along the perimeter fence to avoid the construction of buildings in the immediate vicinity of the well-pad or CPFs and to prevent
Oil & Gas Sector the risk of fire-propagation in case of vegetation burning,” the report reads. The report adds that the physical and economic displacement within the enclosed area will be permanent, and land acquired within the area will be transferred to Government,”. Displacement may be caused by the development of permanent infrastructure, as well as temporary construction activities. However, physical displacement will be avoided as much as possible,” The Buliisa CPF is expected to stabilize crude oil from Buliisa and Nwoya districts in Exploration Areas EAI and EA2 while the Kingfisher one will stabilize crude from Kingfisher discovery area and Kaiso-Tonya.
Network of pipelines In addition to CPFs, the Albertine Graben will also be punctuated by overlapping network of pipelines. According to the plan,there will be network pipelines (also referred to as flow-lines), which will connect the well-pads or production-wells to the CPFs.
Crude oil flaring in the Albertine Region. Below: President Museveni and his Tanzanian counterpart, John Pombe Magufuli signing the agreement for the construct the 1,400 Km Hoima-Tanga oil pipeline.
Then, feeder-pipelines will transport crude oil from the CPFs to the delivery point near the government refinery in Kabaale village, Hoima district, where some crude will be channeled to the refinery and the rest to the East African Crude Oil Pipeline for export. “The length of pipeline from Buliisa CFP to the delivery point at Kabaale is estimated at approximately 100 kilometers and the length of pipeline from the Kingfisher CPF to the refinery is estimated to be 50 kilometers,” the report reads in parts. The Minister of Energy and Mineral Development Hon. Irene Muloni, while launching the Front End Engineering Design (FEED) for Nwoya and Buliisa oilfields recently, said in order to minimize the project footprint in a fragile ecosystem, all pipelines will be buried. “All pipelines are expected to be buried with registered conditional surface right of ways restricting land-use to varying degrees,”. In the two main projects, that Kingfisher Discovery Area and Exploration Areas I and 2, an approximated 400 kilometers of flow-lines will be laid together with fibre-optic cables within a Right-of-Way of 30 meters wide. Hon. Muloni explained that due to the deMarch - May, 2018 | 11
Oil & Gas Sector mands of routine inspection, maintenance and repairs, the pipelines corridors will have restricted land-use. For instance, no buildings or cultivation will be allowed within this corridor, but the land may be used for grazing.
Production wells Other critical infrastructure likely to displace hundreds of people are production-wells. According to the LARF report, the Kingfisher Discovery Area is planned to have four wellpads each with multiple wells that will be operational throughout the existence of the project. The purpose of having multiple production-wells and injection-wells on one well/ production-pad is to reduce the infrastructural foot-print and to consolidate the land impacts to larger, but fewer sites. In the EA1-EA2 north project, more than 40 well-pads will be developed and approximately 30 of these will be located within communities.“Each well-pad will occupy between an estimated 2 and 3 hectares of land, depending on well-pad design, and will be fenced-off. Land within the perimeter will be permanently acquired by the project and ownership will be transferred to Government.
There are also plans to construct a gas processing facility for the already discovered gas and associated facilities, though these will be developed later. planned at Kabaale, Hoima District to facilitate the movement of people, goods, machinery and other equipment for the oil industry. Three airstrips, namely, Kyabasambu in the Kingfisher Discovery Area, Pakuba in Nwoya, and Bugungu in Buliisa District will be upgraded. These too will require permanent land-take by government thereby calling for compensation and displacement of the landowners. In order to amicably manage the displacement impacts, tripartite agreement between landowners on one hand, and JV partners and government, on the other hand, have been planned.
camps, JV partners or operators will enter into tenancy agreements with the people affected by the project,and it will be handed back to owners after the agreed period. Some land, on which certain restrictions will be placed, for instance within the infrastructure corridor or within the safety buffer zones around sensitive infrastructure, easement agreements will be signed with landowners to compensate for the restricted land-use. There are also plans to construct a gas processing facility for the already discovered gas and associated facilities, though these will be developed later. While it is not exactly clear how many people will be displaced by the entire oil infrastructure, the numbers are expected to be in the thousands. Already more than 1700 households have been displaced in Kabaale area by the refinery. Some people might not be displaced, but will have their economic activities such as fishing and agriculture restricted, which may negatively affect their livelihoods.
In Buliisa and Nwoya areas, this means a total of 120 hectares of land will be required for well-pads alone.
“Our commitment is that petroleum activities will only commence on the land after full compensation has been made and the land has been vacated by the landowner,” the report reads.
The displaced persons are advised to form themselves into associations that can engage with government and Oil Companies to address their rights and plight.
Water-Intake Stations
For temporary land-take, for instance mobile
Derived with changes from Oil in Uganda.
Oil production will require a lot of water. Water will be injected into the ground to push oil out of the ground. In order to make use of Lake Albert water in a sustainable way, JV partners will construct two water-intake stations on the shores of the lake: one in Buliisa and another at Kingfisher Discovery Area in Hoima. A water-intake station will be constructed on an estimated one hectare piece of land. Water will be pumped from the lake into the water-intake or abstraction system that will be linked by pipes to the CPF and production-wells. “The water-intake facility will also be fencedoff with a small additional safety buffer. Due to the locations of the water-intake facilities, they could obstruct peoples’ access to fishing sites on the Lake, which could have social challenges affecting the fishing communities.
Aerodrome A medium sized “airport” or aerodrome is 12 | March - May, 2018
Masterplan for the proposed Kabaale International Airport, for Oil & Gas development in Uganda
Oil & Gas Sector
First oil likely for 2022 not 2020 Commercial bank lending rates could be at their lowest point now. Samantha Singh, a Barclays Africa Strategist has pointed out that the Bank of Uganda (BoU) is likely nearing the end of its easing cycle due to a stable shilling, and low inflation.
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peaking at the at the Barclays Africa Group Economic Outlook Forum at the Serena hotel, Singh said that there is risk that as the effects of monetary policy easing become entrenched, albeit after a lag, domestic demand is likely to pick up putting some upside pressure on the exchange rate which would feed into inflation. “The Bank of Uganda (BoU) is likely nearing the end of its easing cycle. The inflation outlook looks relatively benign in the immediate term given the prospects of improved weather conditions and a relatively stable shilling,” Singh said. “The BoU has been concerned with boosting private sector credit growth, which has been subdued to date despite its aggressive easing of monetary policy,” she added. The Central Bank Rate (CBR) was held at 9.5% for December 2017 and January 2018, its lowest level since highs of 23% nearly six
Singh noted that the economy is likely to grow at above 5%. However, she noted that an increase in capital imports associated with development spending will outweigh an improvement in exports.
years ago. Louis Kasekende, the Bank of Uganda deputy governor noted that earlier policy easing actions had improved economic conditions. He said inflation, which had slowed to 4% year-on-year in November remained subdued
and domestic economic activity continues to strengthen with as financial conditions ease and agricultural output returns to normal. Singh noted that the economy is likely to grow at above 5%. However, she noted that an increase in capital imports associated with development spending will outweigh an improvement in exports. Additionally, she said that private sector imports should increase due to aggressive easing in the monetary policy stance by the BoU. She pointed out that the oil production timeline could shift to between 2020 and 2022 due to the urgency of expensive infrastructure requirements. In the meantime, she said new exploration opportunities from ongoing licensing round, expansionary fiscal policy and energy and transport infrastructure projects will propel economic growth in the lead up to oil production. March - May, 2018 | 13
Oil & Gas Sector
Government Ring-Fences selected Goods and Services for Oil Sector In order to enhance the participation of Ugandan citizens in the Petroleum Industry, government has finally ring-fenced 15 categories of goods and services to be provided exclusively by Ugandan citizens, companies and entities.
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he goods and services will include; transportation, security, foods and beverages, hotel accommodation and catering services, human resource management, office supply, fuel supply, land surveying, clearing and forwarding, crane hire, locally available construction materials, civil works, Environmental studies and Environmental Impact Assessments (EIAs), Communications and Information Technology (ICT) services and waste management. The ring-fencing is contained in a set of new regulations issued in 2016 by the Energy Minister, Irene Muloni to operationalize the 2013, Petroleum Acts. The regulations have already been gazetted and therefore in force. The Petroleum (Exploration, Development and Production) (National Content) Regulations 2016 and the Petroleum (Refining, Conversion, Transmission and Midstream Storage) (National Content) Regulations 2016, makes it mandatory for the goods and services cited above to be provided exclusively by Ugandans. Regulation 11(1) of the Regulations states that, “Every licensee, contractor or sub-contractors shall reserve contracts for goods and services specified in the schedule to these regulations to be provided by Ugandan companies, registered entities and Ugandan citizens.” However, in respect to waste management the regulations have a qualifier stating that “where possible”, meaning it can still be offered by non- Ugandan companies. By ring-fencing certain good and services, government is creating more opportunities for local companies, entities and individuals and ensuring that the country maximizes benefits from the sector. The move by government to ring-fence the
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Workes in one of Tulllow Oil’s exploration site in Bulisa district.
goods and services follows numerous complaints and concerns by local players in the industry who argue that Ugandans were not benefiting from the industry.
Unbundle contracts In addition, the 2016 National Content Regulations further require International Oil Companies (IOCs), and other international companies in the sector; to unbundle huge and expensive contracts; to make them affordable to local companies and citizens. Regulation 12(3) of the Regulations states that, “Where a Ugandan company, registered entity or citizen fail to win bids, every licensee, contractor or sub-contractor, shall give feedback to unsuccessful bidders, indicating reasons why the bid was unsuccessful”. Where an IOC has significant operation, it is required to establish a Tender Office, to enable people acquire the necessary information on business opportunities and tender offerings in the company. The regulations, confers powers on the Petroleum Authority of Uganda (PAU), in consultation with industry stake-
holders, to develop a national supplier data base. The data base should contain a list of prequalified Ugandan companies citing; their qualifications, experience, skills for the provision of specific goods, services and/or works and this data base shall be published by the authority by December, 31st, each year and make it available to oil companies and the public in a digital format. This is the first step in promoting transparency and accountability in the contracting process in the oil sector. “A company shall not provide goods, works or services in petroleum operations in Uganda, unless it is in the national supplier data base. It is only where, goods, services or works are not available in Uganda national supplier data base,” states the regulations. However, the definition of a Ugandan company has remained a key concern. Some stakeholders had earlier argued that a Ugandan company should be one where Ugandan citizens have a majority shareholding. However, the regulations instead use value addition and
Oil & Gas Sector employment to define a Ugandan company. A Ugandan company is defined in the regulations are one registered under the Companies Act, 2012 which provides value-addition to Uganda; uses available local raw materials and/or employs at least 70 percent of Ugandans.
Oil jobs On jobs, the regulations ban IOCs from employing expatriates, where there is Ugandan with similar qualifications, skills and competences. Therefore, before any expatriate can be granted a work permit, the authority must be satisfied that there is not Ugandan with similar qualifications.If, for example, oil companies hire expatriates without approval for the authority, the regulations provide for general sanctions for non-compliance with the regulations. The regulations mandate the Petroleum Authority of Uganda, to establish, maintain and operate a national human resource capacity
register that will documents Ugandans, their qualifications, experiences, skills and capacities. The regulations also provide benchmarks on employment of Ugandans. For instance, 20 percent of management staff in IOCs and other International companies should be Ugandans at the start of operations, which should increase to 60 percent after five years and 80 percent within 10 years. For technical staff, 30 percent of all technical staff in international companies in the petroleum industry should be Ugandans at the start of operations, which should increase to 60 percent in five years and 80 percent in 10 years, while 95 percent of support staff and middle level staff, must be Ugandans. A contractor or sub-contractor who fails to comply with the requirements with the regulations commits an offence and is liable on conviction to a fine not exceeding 100 currency points (Shs 2 million) and an additional fine
not exceeding Shs 1m for each day the offence continues. Repeated non- compliance attracts a fine of Shs 10million fine. However, some Civil Society Activists argue that the sanctions are not deterrent enough. Regulation 32 (3) of the regulations states, “Where a licensee repeatedly fails to comply with the national content requirements under these regulations, the licensee commits an offence and is to be liable upon conviction to a fine not exceeding five thousand five current points [5,500] [ approximately Shs 110 million shillings],�
Fabrication, welding The regulation, restrict the importation of fabricated or welded materials. It provides that the authority, where possible shall determine, fabrication and welding activities that can be undertaken in Uganda, and what can be done out of the country. Derived with changes from Oil in Uganda.
Oil Firms Redesign Food Supply Chain to Benefit Locals Three Oil companies operating in Uganda have redesigned their strategy through which they purchase food stuffs from farmers in the oil-rich Bunyoro region.
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ullowOil Uganda, CNOOC Uganda and Total E&P Uganda operating under the Joint Venture Partnership (JVC) have partnered with Government to support the Agriculture Development Programme(ADP), which is aimed at increasing food production, upgrade the health of the livestock population, increase the fish catch; provide a basis for the long term development of agriculture; strengthening and improving institutions; and improve the incomes and food security of poor households in Uganda.
During the Traidlinks tenure, over 1000 farmers from Hoima, Buliisa and parts of Masindi started supplying agricultural products including eggs, tomatoes, cabbages, rice, potatoes, among other food stuffs to Tullow’s workers stationed at Kisingya and Buliisa camps. Farmers were able to earn premium prices during the peak exploration phase. On average, 120 farmers in Bunyoro used to supply food to Tullow per week. However, when Oil Company Operations slowed down, food demand declined and the number of farmers that remained supplying food to the Oil Company dropped to 200.
The Oil Companies and Government partnership programme will replace a food supply model that was being run by Traidlinks, an Irish not-for-profit NGO, whose project closed at the end of March 2017. Traidlinks organized farmers into food supply groups that could tap into the oil market during the oil exploration stage. The Traidlinks arrangement which com-
menced in 2012 was designed to link local suppliers to oil markets and improve their technical capacities to match the set international standards of supplying the oil industry.
According to John-Bosco Kalule, the Traidlinks Agriculture Supply Chain Manager, the farmer groups were able to supply to Tullow 12,966kgs in 2012; 19,668.5kgs in 2013; 73,286kgs in 2014; and only 2490kgs of food stuffs in 2015. Derived with changes from Oil in Uganda. March - May, 2018 | 15
Oil & Gas Sector
Civil society petitions government to protect local Oil and gas suppliers In an extra-ordinary move to force government’s hand to do more for local companies, particularly those in the energy sector, the Africa Institute for Energy Governance (AFIEGO), a public policy research and advocacy registered non-governmental organization (NGO) has petitioned the energy minister.
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he petition, a copy of which the Bankers Journal has seen, seeks Irene Muloni, the energy minister’s intervention to address gaps in the 2016 petroleum regulations which according to AFIEGO defeat the purpose of the local content policy. In the petition, Dickens Kamugisha the CEO of AFIEGO notes that regulation 182 of the 2016 Upstream General Regulations which lays out the procedure for handling complaints does not promote the values of equity and fairness that are necessary for fair competition and effective national content. Kamugisha says the regulation creates unfair ground, especially for local firms seeking to supply energy companies. He points out that this is because the licensee against whom a complaint is being brought is given the right and responsibility of addressing the same complaint without the oversight of an independent arbiter. “In effect, the regulation does not give sub-contractors or bidders an option of independent redress in cases of injustice. Instead, it gives licensees powers to accept or dismiss the complaints without fear of consequences,” he says. “This neither benefits the bidder nor Uganda’s national content aspirations,” Kamugisha explains. Furthermore, he points out that the regulations do not provide for a right of appeal against a decision of a licensee. Kamugisha says that this is unfortunate and a danger to genuine investors who desire fair play. He says that the regulations also undermine
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Hon Eng. Irene Muloni, Minister of Energy and Mineral Development
Singh noted that the economy is likely to grow at above 5%. However, she noted that an increase in capital imports associated with development spending will outweigh an improvement in exports.
the powers of the Petroleum Authority of Uganda (PAU) to regulate the industry as well as protect the interests of citizens. Kamugisha also noted that the period of five days within which a bidder is mandat-
Dickens Kamugisha, Chief Executive Officer -AFIEGO
ed to submit a complaint from the date of notification that their bid was unsuccessful is also too small. “An unsuccessful bidder may be constrained to study the reasons for the failure of their bid and lodge a complaint in five days. It is perhaps for this reason that licensees were given 15 days to respond to complaints,” Kamugisha said. “If licensees need 15 days, unsuccessful bidders need ample time too. The regulations also do not state whether the five days include weekends and public holidays. This needs to be remedied,” he added. Furthermore, Kamugisha noted that the petroleum laws and regulations should be reviewed to provide for establishment of a Petroleum Disputes Tribunal (PDT) that is independent and has skills to handle all oil disputes in a timely manner.
INTERVIEW
Oil & Gas Sector
Lots of Oil and gas opportunities for anyone prepared – Mugira Nick Mugira is the Managing Director of Inspector Africa, a local player in the oil and gas sector, he spoke with the Bankers Journal about the sector, below are excerpts of the conversation. Tell us about your company.
Inspector Africa is an energy services company providing a range of engineering, production support and maintenance management services to the oil &Â gas sector. We have been around since 2012, we started with Tullow, but the real big projects came when Total E&P gave us a project to supply and install its well heads, and we also serviced and overhauled the equipment that Total had acquired from Tullow, during exploration.
Are local companies being sufficiently helped by government to compete in the sector?
Well, there is a local content policy in place, but I think that there is still a bit more that government needs to do to ensure that more local companies can bid for these big jobs. For example in the current bid process, we are the only local company that has participated, the rest are multinationals that have registered here for the same service of supplying Christmas trees, well heads and oil rigs. It is a very specialized area and not many Ugandan firms may have the backbone/knowledge/ experience and capacity to participate.
How lucrative is the oil and gas sector right now?
Right now is a lot better time for the industry due to simultaneous exploration and production activities going on. The licensed companies are going to spend over $20b (about sh73.3 trillion) in the next 2 to 3 years which was not spent during exploration so there will be more opportunities even for local companies. During exploration, about $4b (about sh15 trillion) was expensed. There are lots of opportunities out there for everyone. There will be something for someone that prepares themselves. If you can position yourself in whatever sector you are in, you will get an opportunity. There is no reason to compete with anybody because few people are prepared. Once you prepare, there will be an opportunity for you. The spillover will be so great that every Ugandan will get a piece of the money somehow.
Which are the easiest activities in the sectors for Ugandans to get into?
There are area such as logistics, cater-
ing, accommodation, stationery, plumbing, supplying pipes and water valves. There is room for professional services like accounting, auditing, insurance, legal, medical services and hotels among others. Even now, support services like audit and lawyers must be feeling the boom since for one to get onto the National Suppliers Data Base, you must have audited accounts and Uganda Revenue Authority (URA) tax clearance certificate.
How can Ugandan enterprises prepare to interface globally in this sector ?
This being a new sector, there will be a need for Ugandan companies to enter into joint ventures with the more experienced multinationals to enhance their capacity to meet the stringent standards and financial requirements of the sector. Partnerships will also bring skill transfer and training to the local population. Overall oil will trigger development in Uganda. Other industries such as agriculture and tourism also will develop as a result of the oil and gas sector. March - May, 2018 | 17
logistics
Massive opportunities for logistics companies Local players in transport and logistics sector could reap big as Uganda prepares to import and transport millions of tons of equipment and materials for the construction of the Crude Oil Pipeline and Refinery. The planned importation of equipment and materials into the country presents an life time opportunity for the local players in the logistics industry.
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reliminary studies by the Joint Venture partners – Tullow Oil, CNOOC (U) Ltd and Total E&P Uganda BV have estimated that Uganda will import a total of 11.2 million tons of materials worth billions of dollars. Out of these, 6.2 million
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tons of materials will be sourced from within the region, while the rest of the materials will be imported from beyond. Mr. Moses Kirumira from Total E&P Uganda BV noted that Uganda is about 1,500 kilometers away from the coastline and therefore has to import the materials and equipment through the coastal ports of Mombasa in Kenya or Dar-es-Salaam or Tanga in Tanzania. “We envisage to import an estimated 11.2 million tons of materials and equipments within a period of three years,� The bulk of the cargo, he added will be transported by road.
logistics Mr. Kurumira was making a presentation [titled, “Transport and logistics needs for the oil and gas sector as seen by Joint Venture Partners,”] at the Joint Oil and Gas Convention and Logistics Expo 2017 at Serena Hotel in Kampala on April 25, 2017. This year’s convention was meant to make a case for the opportunities the oil and gas sector present to the logistics business in the country. The oil refinery project will be divided into two: i.e. the Buliisa project that will evacuate the crude from the oil fields in Buliisa and Nwoya; and the Kingfisher Discovery Area Integrated Project that will evacuate crude from Kingfisher and the Kaiso- Tonya oil fields in Hoima district. The Buliisa project will have a Central Processing Facility (CPF) in Buliisa district, while the Kingfisher Integrated Project will also have its own CPF at Kingfisher. “In terms of equipment and material volumes, the Buliisa project will receive approximately 1 million tons, while the Kingfisher Discovery Area and Kaiso- Tonya will receive 200,000 tons. The Crude Oil Pipeline will receive 500,000 tons of equipments and materials, 30 percent of which will come to Uganda and the remaining 70 percent will be in Tanzania,” Moses explained. The country plans to transport about 6.2 million tons of materials sourced from within Uganda and the EAC region.
In respect to personnel, at least 5,000 people are expected to be working in the field at the Buliisa project; 1,000 at Kingfisher and about 4000 during construction of the crude oil pipeline. Government has, in collaboration with the oil Joint Venture Partners (JVP), mappedout specific roads that will be needed to transport the materials and equipments. “For equipment and materials that will pass through the port of Mombasa, the JVP intend to use the northern route and avoid the busy towns, because of the already existing heavy traffic” Moses explained. He added that equipment and materials destined to Buliisa and Nwoya districts will be routed from Mombasa and pass through Nyeri – Nakuru – Busia – Mbale – Soroti – Lira and have a temporary stop at Masindi where they will be checked and sorted according to their final destination” Materials and equipment destined for the Kingfisher area will be transported from Mombasa via Nakuru – Malaba – Kampala – Hoima and finally to Buhuka in Kyangwali sub county, Hoima district.
Materials and equipment imported through Tanzania will go through Mutukula –Masaka – Ssembabule – Mubende – Hoima – Masindi and finally to their respective final destinations.
Trucks The equipment and materials will be transported by regular trucks and other specialized vehicles. “We estimate at least 350 trucks will be needed per day,” Mr. Kirumira said. According to Industrial Baseline Survey (IBS) released by the Joint Venture partners in 2014, the country has a shortage of trucks. Most of the trucks cannot meet the international standards the sector requires. Local transport and logistics entities will have to improve their capacities (i.e. human, financial & technological) to meet the standards, if they are to benefit from the opportunities presented by the sector. Hon. Irene Muloni, the Minister of Energy and Mineral Development, in 2016 issued regulations to operationalize the Upstream and Midstream Petroleum Acts in which she ring-fenced certain categories of goods and services in the sector to be provided exclusively by Ugandan citizens, companies or entities. Transport and logistics was one of the services ring-fenced. “We [Uganda] will have vehicle vetting that will involve checking the condition of vehicles in terms of age, mileage, mechanical conditions and suitability for service”, the Minister reported. “We shall be very strict on the age and safety conditions of vehicles”, Moses said. Moses added that “the oil sector will be interested in the certification and defensive driving abilities of drivers”. In addition, drivers will all be required to undertake routine medical checks to make sure that they are fit to do the work,” he said. In respect to personnel, at least 5,000 people are expected to be working in the field at the Buliisa project; 1,000 at Kingfisher and about 4000 during construction of the crude oil pipeline. Derived with changes from Oil in Uganda.
March - May, 2018 | 19
banking
INTERVIEW
Block chain technology will save correspondent banking links - Dr Mugume The five Central Bank governors of the East African Community (EAC) recently highlighted risks to economic growth of the region such as the rise of crypto currency and the breakdown in correspondent banking. Dr Adam Mugume, the executive director for research at the Bank of Uganda, had a chat with the Bankers Journal about the sector and the economy. Below are excerpts; How serious is the breakdown in correspondent banking?
international banks have decided not to deal with small countries such as Uganda.
The breakdown of correspondent banking has a lot to do with the fight against financing of terrorism and money laundering. Banks must know their customers.
There are several countries that have lost correspondent banking connections. We have not yet had serious impact in Uganda.
The challenge is that there are several international banks that have been penalized severally for not knowing their customers well. Due to the fear of being penalised, some
There are two layers of correspondent banking; the first one is between commercial banks. If you are making a payment in dollars to China, there should be a clearing
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house, say in Europe or the US, but if the correspondent bank in Europe or the US does not want your business, they can give any reason. They can say your business is so small. It also happens at the Central Bank level, because we make payments on behalf of the Government. We have lost some corresponding banking connections and so has Kenya and Tanzania, but there is a western Africa country that has
INTERVIEW lost most of its links, which means they cannot make any international payment.
have a few banks that can serve an entire population. In that case, banks should be less and there shouldn’t be worry of mergers and acquisitions if they happen.
Is the worst behind us regarding the breakdown in correspondent banking?
How will the development of the oil roads affect the economy and banking?
It is a major problem right now, but it can grow. Even though you can switch from one correspondent bank to another, as the Central Bank, we normally use banks with a AAA rating and such banks are few. We could end up dealing with a bank which has a lower credit rating if the problem grows.
It will not have an immediate effect. Only when the roads are constructed and are used will there be an impact on the economy. Most of these roads are done by machines — few people are employed and that is why the effect on the economy is minimal.
So what are the solutions to the problem?
The issue surrounding correspondent banking is that some international banks fear our business because they do not know us. One of the suggested solutions is using block chain technology — the technology behind crypto currency and bit coin. That technology enables one to trace where money is coming from; there is no way of changing where the money is coming from. Block chain technology will enable international banks to know the history and transactions of local banks. However, this is still far from being internationally accepted.
Banking around the world is moving toward a tighter Basel III framework by January 2022. However, sections of this are already being implemented. Is Uganda ready for Basel III?
In Uganda, we will be implementing some elements of the Basel III such as the capital buffer by December. If you are a systematically important bank, you will need a buffer of say 2.5% above the minimum requirement – we are already implementing this.
How will the new Basel III requirements affect the banking sector?
Most banks in Uganda already have capital in excess of what the Central Bank requires, so there is really no impact. When we did a stress test on capital adequacy, only one or two banks were on the margin. If a bank is required to increase its capital, shareholders will be required to put in the money. If they cannot raise it, they will be required to sell the bank.
banking
The question right now is how do we regulate crypto currency in case we do not control it? Someone sits in his house and mines bit coin — it is hard to regulate. Some of these people who create these crypto currencies use advanced computers. There has been a drop in the number of banks in Africa, from 300 to under 100. Will higher capital requirements accelerate this trend?
It can happen. But we have not reached that stage because all banks are well-capitalised. However, this is true for Nigeria, where the bank number dropped from hundreds to under 20 because they were not well capitalized. This also happened in Kenya. Nonetheless, with developments in technology now, why should you have too many banks? Many people do not use them anymore. With mobile money, there is not much reason to go to the bank. You can move your money to a mobile phone and transact. Even if you get a cheque book, you never use it. Many banks are no longer fashionable due to modern innovations. You can
If construction of the roads creates positive sentiment, then it can drive investment. We have roads being constructed around the country, but they are not used productively. It is only when farmers, say in Arua, use the better road network to sell their potatoes as far away as Kisoro that the road project has an impact on the economy. But if the road is used for goats to run on, the impact becomes minimal.
How much has crypto currency affected monetary policy in Uganda?
Not so much. However, there is something called financial technology (FinTech). These financial innovations are something you want, but not crypto currency or bit coin, which are private money. If these were to be accepted in Uganda, they would be competing with the shilling. FinTech is the way to go. The only puzzle is how to create regulation that will hinder the creation of private money but at the same time promote financial technology and innovation.
Do you have regulations for crypto currency in the pipeline?
The question right now is how do we regulate crypto currency in case we do not control it? Someone sits in his house and mines bit coin — it is hard to regulate. Some of these people who create these crypto currencies use advanced computers. I do not think there is any person in Uganda who can create crypto currency, but you can trade it from Uganda. It is difficult to regulate against it as a store of value. That is why we can only regulate against its use in the economy. We can stop it from being used to pay taxes and to buy products in the supermarket. March - May, 2018 | 21
Mining Sector
A lot of potential in mining sector The Government is shaking every tree in search of tax revenue, except the one that matters most, civil society has said. According to the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI), the potential of Uganda’s extractive sector to contribute to economic growth, job creation and poverty alleviation is being stifled by weak oversight.
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he civil society organisation says that a disproportionate share of the benefits in the extractives sector is being eaten up by multinational companies at the expense of local outfits which is feeding into unemployment and low tax revenue collection. Uganda Revenue Authority (URA) registered a sh132b deficit in collections for the first quarter of the financial year 2017/18 for the period July to September 2017. The observations were made during a stakeholders dialogue organized by SEATINI Uganda and Oxfam, under the theme Taxation in the Extractive Sector: Opportunities and Challenges at the Golf Course Hotel in Kampala recently. During the dialogue, Bwesigye Don Binyina, the executive director of the Africa Centre for Energy and Mineral Policy (ACEMP) pointed out that royalties on some industrial minerals, such as coal, peat, limestone, phosphates and salt have ridiculously low rates. He said that royalty rates vary from sh500 per metric tonnes to sh3,000 per metric tonnes as listed in schedule 3 of the mining regulations, 2004. In addition to low royalty rates, Binyina noted that mining companies are given unfair leeway to deduct from their taxable income both royalties and capital expenditures related to searching for, discovering, testing and gaining access to mineral deposits.
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He said that this implies that there is nearly nothing left to tax. “Unfortunately like most resource rich economies, Uganda lacks independent means of verifying the precise amount of natural resources extracted and exported,” he said. “Instead, they depend on reports filed by the operators, who have an incentive to underreport, especially since requirements in legislation such as the Dodd-Frank Act cannot cover undeclared quantities,” Binyina said. He urged the Government to empower the Uganda Revenue Authority or the Financial Intelligence Authority (FIA) to verify declarations with actual production no site. Binyina noted that due to weaknesses in oversight over the extractive sector, the African Gold Refinery, which was recently commissioned by President Yoweri Museveni with a call for waiver of taxes on such investors, is at cross roads. He noted that the gold refinery is facing a $1b (about sh3.6 trillion) investigation for tax evasion and money laundering by the Financial Intelligence Authority and the Inspector General of Government (IGG). He said that while the Directorate of Geological Survey and Mines (DGSM) DGSM reported the production and export of only 93 kilogrammes in the financial year
Top: Works in Namekara Vermiculite Mine. Above: The executive director of the Africa Centre for Energy and Mineral Policy speaks the stakeholders dialogue organized by SEATINI Uganda and Oxfam.
2015/16, the URA recorded 5,316 kilogrammes of gold exports worth $195m – causing an unexplained discrepancy. Binyina pointed out that another gap in Uganda’s law is in the tax incentives under the Free Zones Act. He noted that the Free Zones Act enables unrestricted remittance of profit after tax, tax holidays of 10 years,
Mining Sector
Akunobera said that bilateral negotiations should establish an appropriately drafted provision to allow Uganda, the source state to tax income earned from short term assignments of expats.
Minerals revenue could finance oil projects Julius Kapwepwe Mishambi, the Uganda Debt Network, the director of programmes, noted that Uganda should first fix its house before it borrows to finance major oil projects. The Government is still hunting for $3.55b for the 1,445km East African Crude Oil pipeline (EACOP), $708m for the Kabaale Airport and $4.27b for the oil refinery. Cumulatively, the government needs $8.53b (about sh31 trillion) for the three projects. “The minerals sector still has a lot of room and potential for domestic revenue mobilisation,” Kapwepwe said.
Bwesigye Don Binyina, the ED of ACEMP noted that the Free Zones Act enables unrestricted remittance of profit after tax, tax holidays of 10 years, and exemption of capital gains tax on machinery for up to five years.
and exemption of capital gains tax on machinery for up to five years. Although Binyina welcomed the Uganda’s ratification of the protocol against the illegal exploitation of minerals in the great lakes region, he warned contracts under a programme code named ITSCI had given a raw deal for the governments of Congo, Burundi and Rwanda.
Double Tax agreements Festus Akunobera, the CEO of the East African School of Taxation noted that
where Uganda has a double tax agreement with another country, a technical (service) fees and operatorship fees article should be included to mitigate tax losses. “Lessors of rigs and other industrial equipment are likely to escape Ugandan tax on the income earned from leasing rigs and other industrial equipment to drilling contractors and other service providers, on the basis that the leasing is not carried out through a fixed base or Private Equity (PE) in Uganda,” he noted.
“The extent to which we empower the URA and other institutions to be able to come to scrutinise the books of these multinationals to get this revenue onto national coffers is certainly the way to go,” he added. Henry Bazira, the executive director at Water Governance Institute (WGI) noted that secrecy is keeping the extractive sector from delivering better tax returns. “There is a lot that is not known to the public about benefits of the extractive sector,” he said. “There is also a mindset by the Government that there are no capacities locally to invest in the sector. However, we will never have a successful extractives sector using foreign investors’ money since they come to take away what we have,” he said. “The Uganda Development Bank should be empowered to encourage local investors to develop the extractive sector,” Bazira added. Fredrick Kawooya, the manager policy advocacy and campaigns at ActionAid Uganda urged the Government to adopt the African Mineral Governance Framework (AMGF) which he said is a robust and holistic extractives sector oversight. March - May, 2018 | 23
Mining Sector
Health, safety takes back seat in Busoga gold rush With red dust all over his body, a short well-built man, probably in his 40s steps out of a 50-foot pit, to speak to Oil in Uganda on his mining journey.
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is name is Majidu Musisi, Chairman of Nabwala Gold Mining site in Budde, Bugiri district which has over 500 small scale gold miners. Musisi works with his wife, Nekesa Beatrice and together, they brave the pits and tunnels below the ground in search of the ever elusive gold rocks. ‘’I have been mining gold in this area since 2006, and even though other people have left with the belief that gold is done, I still think we can find more if we dig further into the ground ‘’ Musisi says.
In his search for gold, Musisi uses rudimentary tools like a hand-held pick axe, shovels, and hoes. Quickly, he rather adds that he knows that he needs protective gear like a helmet for his head and gloves, nosemasks and gumboots for his hands, nose and legs to protect him from getting into contact with mercury during washing and amalgamation process. “These protective gears are expensive to buy,” he says, adding that they prefer to use bare hands and purchasing gloves, gumboots and nose-masks will ‘economically’ take him back. “If we were using excavators, it would be different.” It is a common sight to find men, women, and children searching for gold from a mixture of soil, water, and mercury. However, while the local miners crave mercury to help them get gold, they are also inviting ill health that could cause death with the same measure. According to the World health Organization (WHO) exposure to mercury is the biggest cause of health hazards facing Small scale or artisanal gold miners. The UN organization says in a report on the Health effects of Mercury that due to Mercury’s effects, children and women of 24 | March - May, 2018
According to the World health Organization (WHO) exposure to mercury is the biggest cause of health hazards facing Small scale or artisanal gold miners
child-bearing age are considered vulnerable populations because it says mercury can be passed from a mother to her unborn child. And yet at gold mines in Namayingo district, eastern Uganda, mercury is one of
the vital possessions every miner must have. The liquid chemical is highly sought after as they apply it during the process to extract gold from dust dug ground from the Gold rocks in the mines. Dr. Joseph Gyagenda of Nsambya hospital last year told Oil in Uganda that mercury was a heavy metal that could not easily be absorbed by living organisms, including humans and could cause permanent mental disability and a range of other conditions. A walk around Nabwaala mining site, deep open-abandoned pits are littered all over the place; often with no kind of forewarning of probable accidents and some pits obscured by thickets.
Mining Sector Because of the rudimentary methodology, mounds of tailings stand at several meters high overlying on the edges of the pits that are sometimes more than 50 feet deep.
According to the Acting Community development officer Bugiri District Shafic Butanda, the district has not taken interest in gold mining in the district.
On a rainy day, accidents are imminent as the loose earth simply collapses into the pit, nostalgic Lubanga Ronald states.
‘’Gold mining is a new thing, so politicians in the district have not shown interest in it and we are forced to reach out to the central government to take up the issue of regulating small scale miners’’ he told Oil in Uganda.
When digging tunnels into the ground, there are no re-enforcements on the walls of the tunnels. This, according to Batambuze Methuselah, the Community Development officer of Budhaya Sub-county can make the walls collapse during the rainy season. According to Musisi, four people have lost their lives after pits collapsed on them. In Nsango B gold mining site in Namayingo district, two people lost their lives in the same way in 2015. “People here just mine and if they find no gold, they abandon the pit and start digging another one without filling the hole created,” Musisi narrates, adding that even
A youth miner entering a pit in Nabwal Mining Camp.
stoarge of tailings has become a challenge in the area. In Uganda, artisanal and small-scale mining has for years been recognized as illegal and there is no regulatory framework that governs them. This has also created loopholes on the checks and balances since the safety measures cannot be enforced.
The visit to Busoga revealed that artisanal mining, just like other areas around the country is a source of livelihood for many Ugandans. A recent study estimates that over 400,000 people in Uganda who are directly engaged in the activity and additional 1.5 million benefitting indirectly. This is a part one series of the gold story in Uganda. In the subsequent part, we visit the Mubende mines whose operations are comparatively at a more sophisticated level. Derived with changes from Oil in Uganda.
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March - May, 2018 | 25
Relations
Standard Chartered Bank celebrates Chinese New Year of the Dog Standard Chartered hosted the Chinese Business community in Uganda to a dinner to celebrate the Chinese Year of the Dog. The Bank, which has a rich heritage of over 100 years in Uganda, reinforced its commitment, expertise and leadership in facilitating trade between China and Uganda.
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018 marks the 160th anniversary of Standard Chartered’s uninterrupted operations in China since its first branch was set up in Shanghai in 1858. This demonstrates the Bank’s commitment to the China market, and its leading position as a foreign bank in the banking industry. Standard Chartered has one of
26 | March - May, 2018
the largest foreign bank networks in China – with more than 100 outlets across about 30 cities. This has the Bank well positioned to play a central role in facilitating the Belt & Road (B & R) initiative. The Belt & Road initiative is a development strategy initi-
ated by the Chinese government in 2013 to boost trade and investment growth through better infrastructure connectivity across Asia, extending to the Middle East, Africa and Europe. It involves construction of railways, highways, pipelines and ports along the routes, as well as local infrastructure improvement and building
Relations clients seize the opportunities resulting from this important initiative. The Bank’s involvement in the Chinese New Year celebrations reaffirms its commitment to the Chinese community in Uganda and positioning as the main trade bank. This further demonstrated by the Bank establishing a Chinese Desk which is manned by Mandarin speaking Relationship Managers. While speaking at the event, the Chief Executive Officer, Albert Saltson said: “We are one of the very few truly global banks that can facilitate trade, capital and investment flows across Belt & Road markets. With our unique network, more than two thirds of our global footprint overlap with the Belt & Road destination countries and we have a long history of supporting clients across these trade and investment corridors. We are present in 45 of the Belt &Road countries, particularly in the regions with the most dynamic activities, including South East Asia, South Asia and Africa” The event was graced by the Chinese Ambassador to Uganda, His Excellency Ambassador Zheng ZhuQiang, who thanked Standard Chartered Bank for hosting its Chinese customers to the dinner and affirmed China commitment to doing business with Uganda
of industrial parks. The enhanced connectivity between China and Africa not only boosts trade and investment growth, but also facilitates capital flows, create jobs, bring about new technologies and promote innovations. Last year, to mark the 9th UK - China Economic and Financial Dialogue, Standard Chartered committed to further support the Belt & Road initiative by facilitating financing to the value of at least USD20billion by 2020. Standard Chartered has committed to further support the Belt & Road initiative by facilitating financing to the value of at least USD20billion by 2020. This new commitment will support ourChinese clients along the Belt & Road routes and help our destination market
The event was graced by the Chinese Ambassador to Uganda, His Excellency Ambassador Zheng ZhuQiang, who thanked Standard Chartered Bank for hosting its Chinese customers to the dinner and affirmed China commitment to doing business with Uganda
“We are very grateful for this gesture of celebrating the New Year with the Chinese business community. Because of the long history of Standard Chartered both in China and Uganda, the Bank is best poised to offer the best solutions to customers in both countries. China continues to invest heavily in Uganda mainly in the areas of infrastructure and hydroelectric power generation. Relations between China and Uganda will continue to grow from strength to strength both at political and economic levels,” H.E. ZhuQuiang said. The event was attended by 150 of the Bank’s Chinese Clients and the Board, Management and Staff of Standard Chartered Bank.
March - May, 2018 | 27
Relations
28 | March - May, 2018
OPINION
Bank loans – a forward looking approach has arrived
Corporate news Stanbic bank, URA launch online and mobile money tax payment solution Uganda Revenue Authority (URA) and Stanbic Bank have launched a secure, convenient and affordable online payment solution that will enable taxpayers comply with their tax obligations by making payments using VISA, MasterCard and MTN Mobile money. The platform on the URA website, www.ura.go.ug can be accessed on your laptop, tablets, phones and other mobile devices and is available to both Stanbic and non Stanbic clients.
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o make a payment, a taxpayer logs onto www.ura.go.ug and request for a Payment Registration Number (PRN). Thereafter, complete payment using the Stanbic payment tab by simply entering the relevant Visa /Master card details or MTN mobile money account. The bank debits the card or mobile money wallet, processes and posts the payments into URA account. URA is notified about the payment and an electronic receipt is sent to the taxpayer. The receipt confirming payment of the tax is presented to URA. Amidst the testing phase from December 1st 2017 to January 31st 2018, over UGX74m was collected. Since the launch of similar e-payment tax solutions in March 2017, over UGX4.5 billion has been collected through these e-payment platforms. Stanbic Bank’s Chief Executive, Patrick Mweheire stated, “The Mobile money and digital solutions are a fantastic innovation that will simplify the payment and collection of taxes by offering greater convenience”. Over the years, Stanbic Uganda has upgraded its services including the Stanbic App, which gives customers a single-view platform for interaction with the services offered by the bank.
Stanbic Uganda Chief Executive, Patrick Muheirwe, shakes hands with URA Ag Commissioner General, Patrick Mukiibi at launch
Ag. Commissioner General Patrick Mukiibi stated, “URA continuously strives for process improvements by putting in place mechanisms that will stimulate compliance by leveraging the appropriate technology to reduce time and cost of doing business”. The solution, he added, would reduce
time and unnecessary costs in payment activities, eliminating obstacles to compliance. This new solution is in addition to already existing tax payment solutions namely Cash, Cheque, POS (Pay Way), Mobile money (MTN), Real Time Gross Settlement (RTGS) and Electronic Funds Transfer (EFT). March - May, 2018 | 29
Corporate news
KCB sponsors 30 SMEs for Germany and Turkey trip KCB Bank Uganda has sponsored 30 of its business club members for a 10-day business trip that will see the SMEs network with a wider international market as well as provide business linkages to suppliers of goods and services in Gemrany and Turkey.
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peaking during the flag off, Joram Kiarie, the Managing Director KCB Bank Uganda noted “at KCB Bank Uganda, we are aware that one of the biggest challenges that our local SMEs face is creating valuable linkages to enhance their businesses, this trip is a step towards facilitating our customers to make these linkages.” The business trip will include visits to construction factories with modern cost saving technology in Germany, firms that sell heavy construction machinery in Ulm, modern health facility installations and medical equipment manufacturing companies, the BMW museum as well as have business to business meeting with the Turkish business community to create linkages. The Germany Ambassador Dr. Albrecht Conze noted that the trip provides an opportunity will help the new generation of entrepreneurs in Uganda to grow their busi-
nesses. “The backbone of German industry is the family businesses, which is the same for Uganda, this is an opportunity for KCB
SMEs to learn how to go further, as well as make contacts for opportunities to resell machinery.”
Nina interiors, Marasa, Prudential, Serena partner for Ecobank Premier Segment
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cobank has partnered with various entities, such as TPS Uganda (Serena Kampala, and Serena Golf Resort), Nine interiors, Marasafa Africa Lodges (Paraa, Chobe, Mweya and Silverback Safari Lodges) and Prudential Insurance to increase its offering form its premier banking customers. Under the deal, Ecobank Premier Customers will get a 5% to 10% discount on Nina Interiors furniture, Serena accommodation and restaurants, and Marasa Africa Lodges; they will also get Prudential insurance cover for total permanent disability or death.
30 | March - May, 2018
talk about the unbanked population, we are not just referring to only those who cannot afford money. We are actually talking to the business people who keep their money in sacks and under the bed,” he said. “This category tends to move with cash hence increasing the risk of attacks and rampant murders.” Clement Dodoo, the Ecobank CEO noted that the partnerships are aimed at encouraging more Ugandans into the banking sector. Recent Bank of Uganda data shows that there are only about 5million accounts for close to 40 million accounts. “When we
Alice Karugaba, the Nina Interiors CEO noted that the partnership is a step into the world of cashless transactions which are less risky and are the current standard in the global world of business.
Corporate news
Mortgage rates end year highest Ugandans must dig deeper for new homes after mortgage and land purchase rates hit the roof in the last quarter of the year, a Bank of Uganda monetary policy report indicates. The Monetary Policy Report for December 2017 shows that mortgage and land purchase interest rates have defied reductions in the benchmark Central Bank Rate (CBR), declining in the middle of the year before peaking in October.
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he rates moved from 24% per annum on average in April 2017, and then declined to about 20% in the months of May and June before surging to 22% in July and back up to 24% in October 2017. The surge in mortgage and land purchase rates was contrary to a reduction in the CBR to 9.5% from 16% in April 2016. This reduction affected rates in other sectors such as Transport & Communication, Agriculture, Business Services and Mining & Quarrying sectors whose rates declined in October 2017. Generally, the Weighted Average Interest (WAI) lending rate averaged 20.7% in the quarter to October 2017, compared to 21% in the quarter to July. Although the Bank of Uganda report did not explain the rise in mortgage and land purchase rates, Isaac Mujenga, the National Housing and Construction Company manager for marketing and sales, noted that at the inaugural housing development forum at the Golf Course Hotel that only partnerships between banks and property developers can bring down rates due to high demand for housing as Uganda’s population grows exponentially. Mujenga pointed out that Uganda’s population will exceed 50 million people by 2020, which will increase pressure for low cost housing. In addition, he said about 50% of Uganda’s population is below 18 years, adding that Ugandans within this age bracket are bound to increase the current housing shortage to within 2.4 million units. “There is need for durable accommodation that can last over 20 years, which is the nor-
mal duration of a mortgage. The global average interest on mortgage is 11%, but our rates in Uganda are higher. We need these rates to reduce through synergies between developers and banks,” Mujenga said.
A latest report by property company Knight Frank for the first half of 2017 notes that there has been a marked increase in the supply of prime residential stock for rent on the market over the past 12 months.
Shem Kakembo, Stanbic Bank’s head of personal markets, noted at the same conference that Uganda currently has a housing deficit of close to 1.2 million units, with a deficit of over 200,000 units in Kampala alone.
This supply is in the prime suburbs of Kololo, Nakasero Bugolobi, and Naguru. Kololo and Nakasero is seeing increasing redevelopment of old residential plots of between 0.50 – 1.00 acres, in line with the zoning regulations of these locations.
He noted that studies also indicate that by 2040, almost 60% of Uganda’s population will be living in urban areas.
Most of these residential developments are 2, 3 and 4 bedroom apartments, all rooms en-suite, and some with a house help’s room. Additonally, swimming pools, gyms, and children’s play areas have become standard facilities provided at the new residential developments.
“The rapid urbanisation is bound to put pressure on housing delivery systems which are often informal or reliant on the state. The goal of providing affordable housing can only be achieved by bridging the gap that has existed between access to capital and execution capability,” Kakembo said.
The report notes that the major drivers of this demand is coming from private organisatons, corporate companies, and oil and gas consultancies and other related services. March - May, 2018 | 31
Corporate news
Stanbic creates new holding company “HoldCo” Stanbic Bank Uganda’s board of directors has resolved to create a Holding Company (‘HoldCo’) that will house the bank and other non-bank subsidiaries. In an interview, Patrick Mweheire, Stanbic Chief Executive noted that the move is aimed at attaining sustainable business growth and merely a knee jerk reaction to sticky market conditions.
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arlier, during a briefing on the banks half year performance, Mweheire warned that the reduction in lending rates due to a drop in the benchmark Central Bank Rate, currently at 9%, will eat into banking sector profits for 2017. The state of the economy report at the end of December 2017 indicates that the weighted average lending rate on shilling denominated loans declined to 20.4% in the quarter ended November 2017, from 23.2% a year before. However, growth in Private Sector Credit (PSC) continued to decelerate as government seeks funds locally. The ministry of finance is currently seeking approvals to borrow about sh736b locally to finance statutory payments including salaries and wages. Despite that, Bank of Uganda projects that the economy will expand robustly by between 5 to 5.5% in the 2017/18 financial year due to a revival in private sector investment flows if government does not crowd out the private sector. During the recent Bank of Uganda monetary policy meeting, Louis Kasekende, the deputy governor acknowledged that the Central Bank has been mopping up money from the banks but said that there is enough money left in their coffers to sustain private sector lending.
Stanbic’s “HoldCo” subject to May annual general meeting Mweheire says that the creation of HoldCo will enable the organisation to provide both banking and non-banking services and ensure a sustainable long term business model to secure future success. 32 | March - May, 2018
Stanbic Uganda Chief Executive, Patrick Muheirwe.
He said: “The reorganisation would comprise of a non-operating holding company (the current listed company) and several non-banking subsidiaries. The Board anticipates that the proposed structure will enhance SBU’s customer value proposition while increasing the returns to its shareholders. The proposed re-organisation will have no adverse impact on Stanbic Uganda’s shareholders, customers and employees.” He noted that the details of the proposed re-organisation will be provided in a circular to be issued to SBU’s shareholders together with the notice of the annual gen-
eral meeting in due course. The re-organisation will be subject to Stanbic Bank Uganda receiving all requisite regulatory and corporate approvals, including the approval of SBU’s shareholders and Bank of Uganda and SBU’s shareholders following the Annual General Meeting in May 2018. “Until further announcements regarding the proposed reorganization are made, Stanbic Bank Uganda’s shareholders and other investors are advised to exercise caution when dealing in Stanbic Bank Uganda shares,” a statement from the bank says.
Opinion
By CPA Albert Richards Otete Research Partner, J. Samuel Richards & Associates (www.jsamuelrichards.com)
Bank loans – a forward looking approach has arrived The International Financial Reporting Standard (IFRS 9) – Financial Instruments is mandatory from 1 January 2018. The Standard was deemed necessary following the global financial crisis that brought a lot of tears to the banking industry. A number of banks in Uganda have already started preparations towards full compliance with data analysis and stress testing in 2017. Bank of Uganda is equally monitoring the reports submitted by the banks to assess the likely impact on industry-wide credit impairments and how different it will be from the International Accounting Standard (IAS 39) which will be replaced by IFRS 9.
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here will be a fundamental paradigm shift in the way financial institutions evaluate credit applications and classify/measure their credit facilities. Likewise, bank customers and their accountants/consultants must think differently. Banks are expected to recognize a 12-months’ expected credit loss (ECL) immediately the credit facility is booked even though no significant credit risk has arisen. ECL is a terminology that is a pervasive in IFRS 9 and it is important to first understand what it means. ECL is the weighted average credit losses on a given credit facility over a period of time, with the probability of default (PD) acting as the weight. Another parameter used in calculating the ECL is the loss given default (LGD) which is the portion of a credit facility that would be lost should a default occur. Finally, there is the credit exposure itself which the actual outstanding on the credit facility; this is called the exposure at default (EAD). Mathematically, the equation for ECL is as follows with T = the date of impairment assessment and R = Effective interest rate for discounting future cash flows:
*R We have read from above that 12-months’ ECL is required immediately the credit facility is booked even though no significant credit risk has arisen. This is Stage 1. However,
where there is a significant increase in credit risk (SICR), the credit facility is pushed to Stage 2. At this stage, the bank is expected to recognize lifetime ECL, meaning that credit losses up to the term of the loan. Where a loss
event has occurred, the loan is pushed to Stage 3 and again lifetime ECL is to be recognised in the books but interest income must be accrued on net carrying amount. IFRS 7: Financial Instruments – Disclosures will also require detailed roll-forward reconciliations. In the past, banks have relied on audited fianncial statements as one of the inputs into the credit evaluation process of a new loan. Consequently, some of the customers undertook audits of their financial statements specifically to meet that requirement. Unfortunately, this tactic will become obsolete. Secondly, banks have asked their customers to provide unaudited management accounts for the current period. This is also likely to become a redundant variable. Thirdly, the banks ask for profit and loss, and balance sheet forecasts.
Banks are expected to recognize a 12-months’ expected credit loss (ECL) immediately the credit facility is booked even though no significant credit risk has arisen.
These are relevant but will need to take into account a full understanding of future macroeconomic factors; global, regional and local. Forward-looking macroeconomic factors include demographics of consumers, exchange rates, interest rates, political direction, market forces and so on. Most Certified Public Accountants (CPAs) can help regulators, banks and customers with IFRS 9 models and capacity building. March - May, 2018 | 33
Project management
INTERVIEW
Postponing projects hikes costs by 80% every year – Mweheire Over the past five financial years, government has allocated the largest provisions to the infrastructure sector. Patrick Mweheire, the Stanbic bank CEO spoke to the Bankers Journal about how investment in the sector will transform the economy. Below are excerpts; As Uganda’s leading bank what role does Stanbic Bank play in supporting national infrastructural development?
It’s important to note that we participate on balance sheet and off balance sheet. Off balance sheet right now we have about sh1.2 trillion exposure. About 90% of that is in infrastructure exposure, guarantees, and letters of credit that we provide on behalf of our clients to UNRA which is largely the contracting agency for delivery of these projects. We have written some guarantees to Sino hydro who is doing Karuma power dam and China International Water and Electric Corporation which is doing Isimba power dam. As you can imagine, there is execution risk that comes with these infrastructure projects. Uganda, rightly so and under the UNRA mandate, cannot take a foreign bank guarantee or performance bond. Even when Sino hydro shows up with an ICBC guarantee from their home country, we have to write a counter guarantee because UNRA wants to protect itself and be able to call on the guarantee in its jurisdiction. Stanbic has the single largest obligor limit (the amount of exposure to a single party) which is a percentage of capital, of $50m. It is important to have a bank with the ability to take large exposure. That sh1.2 trillion off balance sheet should soon start to wind off as these projects ease off and we write more. On balance sheet, we have exposure to most of the names in infrastructure such as Umeme, government agencies that enable infrastructure and in the power sector.
Stanbic bank was the lead bank in the Karuma dam - Exim bank debt restructuring two years ago, what 34 | March - May, 2018
benefits will the Ugandan government and taxpayer derive from this transaction?
There is massive benefit. When Uganda borrowed money from the China Exim bank, government had a floating debt at LIBEL plus a margin of 450 basis points. In theory, they were borrowing at 5% per annum. The interest swapped eliminated the risk of LIBEL then moved upwards. Every economist expects that LIBEL will be raised four times this year and will go up by about 2.5%.
So we were able to fix this interest rate at 6%. So for the next 15 years, Uganda knows they will always pay 6% not a single dollar more. This is one of the smartest things that government has done; they are already in the money (gaining the benefit of the interest swap as market rates reach and later rise above the fixed 6% rate). If the ministry of finance is paying 6% and not 12%, their relief on the national budget, the overall projections for payment of debt
INTERVIEW are lower. Now, there is certainty. Out of the total debt of about $645m, we estimate that we will save government about $100m in the first five years based on historical trends; every percentage point is $6.45m.
Donors argue that the Ugandan Government is overextending itself by borrowing excessively in order to execute multiple infrastructure projects. They say while these projects are important they should be sequenced over time otherwise the country’s debt will go above the 50% threshold which is considered to be unsafe. What is your opinion of their views?
I have two thoughts on that. Firstly, there is an opportunity cost of not doing the projects. That opportunity cost manifests itself in the two ways; one is in the lost opportunity of the country generating revenue, and creating jobs. The other opportunity cost is that it becomes more expensive to do these projects later.
My own estimate is that the cost of doing these projects goes up by 70% to 80% a year. There is revenue that comes in if you do these projects quicker rather than delaying them; these revenue offsets the costs while delaying increases inflation costs and the project gets much more expensive. Fifteen years ago, Karuma hydro power project was just $300m; now it is being done at a cost of $2.2b! If it was done then, tariff would have come down and it would have paid for itself.
Very few of the large scale infrastructure projects are being handled by local companies. How does this impact the economy and what interventions would you suggest to get more local content involved in these projects?
There are bits that can be done by policy and some bits that can be done by the private sector. Government policy is not everything. Beyond policy, there are other initiatives that can help. We will soon be launching an SME incubator. We have realized that 70% of Ugandan SMEs do not make it to their third anniversary due to a multitude of issues such as governance, quality control and issues around access to markets. We are coming up with a cur-
I have two thoughts on that. Firstly, there is an opportunity cost of not doing the projects. That opportunity cost manifests itself in the two ways; one is in the lost opportunity of the country generating revenue, and creating jobs. The other opportunity cost is that it becomes more expensive to do these projects later. riculum around the impediments to SME survival especially in the oil and gas sector first, to help them excel. The idea is to train 1,000 SMEs every year. In certain sectors such as oil and gas and infrastructure; standards will never be lowered for the benefit of Ugandan firms, the only way out is to uplift Ugandans to meet those standards and stay there for longer. We spend about $5b on infrastructure every year, it is the right thing to do, but how this expenditure does not trickle back into the economy is the challenge for us. About $4.5b of this infrastructure expenditure every year stays in China. China is not a charitable organization, when they lend to you, they have already calculated the risk of default and what they get; that is why they are fast but that does not give us an excuse not to do our homework. We need to diversify funding sources; there is a lot of money out there in pension funds that is looking for a home. If we can package these products well, there is no shortage of capital in the western world such as the calPERS which has assets worth about $500b. There are also green funds such as SIDA (Swedish International Development Cooperation Agency) with 20 year money which can support projects in our energy sector. They can offer money at 1% and 2%.
Project management
What unique difficulties does the banking sector face in financing large infrastructure projects in Uganda? Are there specific policies, measures that can be introduced to change this situation?
The banks can package the infrastructure projects to attract investment. If all local banks magically decided to support a single project, the highest we can do is $150m – it’s a small number compared to the $5b that Uganda needs annually. So we need foreign investment, and package these deals to be transparent. If there is one sector that works in Uganda it is energy. People may have some issues with Umeme, but the sector has not got a single shilling of subsidy in the last ten years. If we can bring that level of transparency to other sectors, we can go a long way in tapping these other sources of financing.
Lastly, the Oil sector is expected to have a major transformative effect on the Ugandan economy starting with infrastructure. What role will Ugandan banks play in the development of the sector and what advantages do Ugandan based banks have over foreign ones who must also be looking at the same opportunities..
The pie is big enough for both local and foreign banks. The oil sector will attract about $15b over a three year period; I would consider it a success if $5b can be kept in the Ugandan ecosystem. We do not make rigs but we make world class cement and steel that can sit in that $5b. When oil sector revenue starts to come in 2020, Uganda’s double GDP to $70b in 2025. I think the oil money will create more successful local firms, and more jobs. I will we have about 10 companies that have about $500m of revenue by 2025. Just imagine having 10 MTNs or Stanbics - this is going to happen. This will create more depth in the economy; perhaps local firms will go regional. All this translates into demand for loans. All these companies will need loans for long term debt and working capital expenditure. March - May, 2018 | 35
Project management
What does successful digital transformation look like By Tom Pegrume, Vice President EMEA Emerging Markets at Hitachi Data Systems
The business world is changing. Historically, businesses were “analogue” in that they had a bricks-and-mortar store where customers would interact with real people and things were dealt with on a personal level. In today’s digital world, everything is automated and there is not as much personal interaction.
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ow, there’s a battle going on between analogue businesses that are trying to establish a digital footprint and all-digital businesses that are trying to set up a bricks and mortar presence. While best practice might be a combination of the two to optimise profitability, at the heart of both of these models is the customer. But there’s even more change happening in the customer space. We often speak about Millennials, but what about Generation Z, who start interacting with technology from birth? They are the future customers who will one day make up the bulk of the population, so businesses need to start thinking about how they will serve this generation of tech-savvy users, who are at the centre of the digital experience. This means businesses need a different model if they want to maintain relevance and increase profitability.
Digital battleground This has made digital THE competitive battleground. With digital transformation, the only constants in the future of business are change, agility and the ability to pivot in response to market shifts. In other words, digital transformation requires an entire rethink of the business, but many organisations fear change. Change, by its nature, brings risk and could be a reason why so many businesses have not yet taken the digital transformation plunge. But when we consider that, since 2000, 52% of Fortune 500 companies no 36 | March - May, 2018
longer exist as a result of digital business models creating disruption in the market, can businesses really risk not taking the risk? If they want to protect their businesses, it seems CEOs have little choice.
Aid solution on top of existing infrastructure - and while this may result in a quick win, they’ll almost certainly lose the war.
But with estimates of digital transformation failure ranging from 66% to 84%, it’s no wonder that businesses are cautious. One of the reasons for failure could be that businesses approach digital transformation as a single problem that needs to be addressed, rather than a reinvention of the business through the use of digital technology such as social, mobile, analytics and cloud. Too often, businesses adopt just one of these technologies - applying a Band-
When companies go all-in on digitisation, the number of point-to-point connections among systems rises by almost 50%, creating greater complexity in systems and processes. The enterprise architecture department therefore plays a key role in reducing the complexity associated with digital transformations.
The importance of enterprise architecture
Traditional companies approach this by trying to behave like a startup but they do
Project management
A successful project follows seven steps: 1
Assess whether or not your employees have the right skills sets to move forward with a digital transformation strategy
2
Have key employees attend formal digital transformation education - and then convert this into a continuous learning programme
3
Solicit input from customers, partners, advisors and employees at all levels
4
On an ongoing basis, conduct benchmarking and other market analysis with an emphasis on digital startups and direct competitors
5
Review and revise your organisation’s mission, vision and strategic goals
6
Review and revise business models and product/service offerings
7
Select technology to enhance operational practices, communication and collaboration. Take a holistic view of solutions. Consider a solution bundle
not have the technology infrastructures or operating models to keep up with companies that have been digital from the start. They end up with ever more complicat-
ed IT systems, deploying new features or patches to meet immediate needs without any clear roadmap or consideration of future IT needs.
Successful digital transformation projects have the right mix of people and skills, tools, collaboration, experimentation, risk, agility and commitment. They adopt a twoto five-year vision and strategy and look for long-term solutions rather than quick wins that can actually sabotage future success. More importantly, successful digital transformation projects must have a successful deployment of big data and analytics to uncover new insights. Data is everything in digitisation. How companies use their data will be critical to their survival. Forrester has predicted that, by 2020, every business will become a digital predator or digital prey. A key point to remember is that digital transformation is a marathon that will never end. Taking more risks is what defines successful digital transformation projects and will separate the winners from the losers. Distributed by African Media Agency (AMA) on behalf of Hitachi Data Systems.
Business activity improving, at a slower pace
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tanbic Bank’s Purchase Managers Index (PMI) posted 51.1 in February down from 52.0 in January, signaling a moderate improvement in business conditions in the private sector, marking the thirteenth consecutive month of strengthening operating conditions since the survey was launched in June 2017. Commenting on February’s survey findings, Jibran Qureshi (right), the Regional Economist for East Africa at Stanbic Bank said; “Business conditions in Uganda’s private sector continued to improve, albeit at a more moderate pace in February. The Bank of Uganda’s (BoU) MPC upgraded its GDP growth forecast for FY2017/18 to a range of 5.0% to 5.5% year on year from their previous forecast of 5.0%. On annual basis the BoU expects GDP growth in 2018 to expand by 5.0% to 6.0%, broadly in line with our own expectation of 5.6%.” This follows the cut in the Central Bank Rate down from 9.5% to 9% by which indicated
sub-sectors. Anecdotal evidence linked the expansion to a number of new projects amid stronger underlying demand. Indeed, new orders rose further mid-quarter, with businesses citing intensive marketing efforts as the driving force,” said Benoni.
improvement in economic growth and projected economic growth of 6% guided by a drop in non-performing loans to 5.6% per year from 10.5% and a revival in private investment activity. According to Stanbic Bank’s Fixed Income Manager Benoni Okwenje, the Central Bank’s projections are aligned with this month’s PMI survey which signals an improvement in business conditions. “Output growth was observed in the industry, services, construction and wholesale & retail
In regard to purchasing activity, Benoni noted “purchasing activity contracted for the first time in nine months due to delay in payments which prohibiting buying. Inventories reduced for the first time in the survey’s history and panelists blamed the use of inputs to support output growth and the fall in purchasing for the decline.” The Stanbic PMI is a composite index, calculated as a weighted average of five individual sub-components: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show deterioration.
March - May, 2018 | 37
Expected Credit Loss INTERVIEW
How Expected Credit Loss (ECL) provisioning will affect Banks, Customers During an informal dinner of the Uganda Bankers’ Association (UBA) at the Sheraton hotel, Bank of Uganda Governor Prof. Emmanuel Tumusiime–Mutebile noted that the Central Bank is preparing the banking industry for implementation of a new International Financial Reporting Standard (IFRS) 9. The New IFRS introduces the concept of Expected Credit Loss (ECL) provisioning, which replaces the incurred losses model under IAS 39. Sam Mwogeza, Chief Financial Officer Stanbic Bank Uganda spoke to the Bankers Journal about the effect of this change on banks and the geneal public, below are excerpts; How is the replacement of the IAS 39 with IFRS 9 going to affect clients?
International Financial Reporting Standard 9 or IFRS 9 is a new financial reporting standard that defines how financial institutions including banks should determine the value of the financial assets they own such as loans and the financial liabilities owed, in a forward looking basis. IFRS 9 was introduced to replace IAS (International Accounting Standard) 39 because the latter was considered too complex in its application, inconsistent with the way most banks manage risk and because it delayed the recognition of credit losses until far too late in the credit cycle. This situation was deemed to be potentially toxic in a highly sensitive sector such as banking, evidenced by the 2008 financial crisis which was brought about mainly by undetected overexposure to credit risk by interconnected banks across the globe. The fundamental impact of the IFRS 9 on the customer who has a loan and pays it in a timely manner consistent with the terms of the loan will be negligible. Bank customers however who access credit facilities then delay to settle their loan obligations risk facing higher interest rates and penalty charges. In extreme circumstances they could face greater scrutiny and limited alternatives when accessing further credit from financial institutions. This is because banks are going to be required to carry significantly higher provisions for loans where delayed repayments are generally taken into consideration. 38 | March - May, 2018
The fundamental impact of the IFRS 9 on the customer who has a loan and pays it in a timely manner consistent with the terms of the loan will be negligible. Will the change in credit loss provisioning affect Bank profitability?
This really depends on the individual bank, how well they prepared for the proposed changes over time and how effectively the respective bank manages their credit risk appetite and loan portfolios. As Stanbic for example, we have been preparing for the introduction of IFRS9 for a while and have made required enhancements to our loan management processes to the level where we have consistently maintained a credit loss ratio of less than 2.0% over the past few years which is well below the industry average. In addition we have incrementally increased our core capital over the past few years to cater for the new provisions. In General however, the higher credit provisioning will have an impact on the profitability of most banks across the industry, and given that these provisions are not in respect of specifically impaired or non-performing loans, they are currently not defined as tax deductible which implies banks will potentially face a more severe impact on their
Feature
Village saving groups bridging the gap in financial inclusion Sarah Mutanda never thought she would ever have a bank account, just like many fellow residents of Buwologoma village in the poverty stricken areas of Busoga sub-region in Eastern Uganda.
M
any villagers around Uganda are uneducated and cannot speak the English language that most commercial banks use in their documents. In addition, there is a general fear among the villagers that the high bank charges would erode their meager earnings and push them into deeper poverty. “I believed the charges were unaffordable. The bank was also very far away. I thought banks are not for people like me. They are for rich
people and people with big businesses,” she said.
a create a new breed of financial institutions.
At 23 years, Mutanda already has four boys and one girl. She never imagined that her children would ever make it to school until she encountered a special programme code-named “banking on change.”
Through Village Savings and Loan Associations (VSLA), villagers at the lowest levels of society, those with very little and inconsistent incomes can save and invest their earnings until they have enough to access commercial banks.
Only 1% of all Ugandans have a bank account. This rather low statistic has forced commercial banks such as Barclays bank to partner with Care International and Plan International to
Often, the villagers get to access additional services such as low cost loans, entrepreneurial training and financial literacy classes from the commercial banks. March - May, 2018 | 39
Feature
Financial literacy is the knowledge of the available financial products and how to use them. The groups are financially literate and included. Mutanda is the treasurer of her local VSLA. She says it was unsafe keeping huge sums of money and that it now less dangerous using a commercial bank. The villagers have been trained in enterprise management. Individually, they own motorcycle businesses and cattle farms saving their proceeds with a commercial bank on a VSLA account. With the savings, they are then able to keep their children in school and pay for basic health care. Their children now have a brighter future. Village savings groups around the country hold atleast sh43b. Unlike most commercial bank customers, customers of village groups 6 times more likely to save with the group than borrow. Research shows that the villagers place highest emphasis on saving first, insurance and then credit. This increases the depth and stability of Uganda’s financial sector. 40 | March - May, 2018
Village savings groups around the country hold atleast sh43b. Unlike most commercial bank customers, customers of village groups 6 times more likely to save with the group than borrow.
Globally, over 1.2b people aged between 15 to 24 years, yet only 4.2m young people have access to financial services. Of these, young workers are paid $1.25 (sh3,250) a day. There are over 2.5b unbanked people that are sometimes referred to as unbankable due to their meager earnings. Many of these people reside in villages earning $58 annually, but, as a whole, such people are holding a substantial$145b (sh377trillion). Financial inclusion is now part of the new UN development framework in recognition of the ‘bottom billion’.
Henry Mbaguta, a finance ministry official noted that financial inclusion is very vital to the attainment of Uganda’s Vision 2040. When the plan is successful Ugandan households will each earn between sh10m and sh33m by 2032 effectively placing the country in the upper middle-income League of Nations. Mbaguta noted that the village groups will soon be catered for through a national microfinance regulatory body to regulate and encourage innovation at the village level. Sylvia Juuko, a Bank of Uganda official noted that new approaches are needed to extend financial literacy even to the urban illiterate. “People need to know that they have the right to negotiate terms on a bank loan,” she said. Fred Muhumuza, an economist pointed out that the village groups are bridging a gap in the financial sector and expanding the financial markets. “There is a lot of money held by the bottom billion. Commercial banks must learn that lending must be based on cash flow and not just collateral,” he said.