Local SMEs n Uganda warned on oil fortunes

12-March-2012

An official of the Uganda Investment Authority told a story of a local poultry company that was contracted to supply 200 chicken a week to feed the growing population connected to the oil activities in the Lake Albert region.

The company delivered orders for two months, then stopped. It had run out of chicken.

“I was surprised to hear that it had failed to service the order consistently because it lacked chicken,” said the UIA official who participated in a recent study titled, Constraints and opportunities for SMEs investment in Uganda’s oil and gas sector,’ conducted by UIA and the ICBE Africa Trust Fund.

What the company should have done, according to Rebecca Nalumu Wamomo, the UIA officer who spearheaded the study, is merge with others to ensure adequate supply, instead of abandoning the order.

The study, conducted in January among 220 SMEs in Hoima, Masindi, Buliisa, Gulu and Kampala, found that their capacity to take advantage of the emerging opportunities in the oil industry –Uganda’s most lucrative sector for the foreseeable future – was curtailed by limited capital, assets, technical skills and information.

“It is very important for SMEs to merge to be able to meet the demand from oil companies,” Nalumu told The Independent. “The benefits of merging may not be obvious in the short run but can be seen in the long run.”

The study found that in the petroleum value chain, SMEs mainly provide indirect services such as catering, logistics, agricultural produce supply and unskilled casual labour – quite often unreliable as seen with the chicken supplier. Core activities like appraisals, surveys, exploration, drilling, and others, belong to government, trans-national corporations and large scale direct service providers, leading of which are international companies like Tullow, CNOOC and Total.

Due to low capacity, the international oil companies are less willing to formalise business with SMEs. Nalumu said of the 220 SMEs interviewed, only 10% had signed memoranda of understanding to supply services. Unfortunately, many of them also failed to meet the demand, which generally points to lack of or low capacity among local SMEs. This has to be addressed urgently if the high expectations of reaping from the lucrative sector are to be realised or if not completely lost to foreign companies.

UIA is reported to be making arrangements to register, train and equip the SMEs with skills.

“It is not too late. We haven’t started oil exploration yet. What we are doing now is preparing our SMEs to benefit in the next 25 or more years,” Nalumu told The Independent.

Training SMEs

Other key players support the need to training.

“If we don’t train them there will be a gap and everything will be done by foreign companies,” Private Sector Foundation Uganda (PSFU)’s Director of Policy and Advocacy, Moses Ogwal, told The Independent

He noted that with Kenya, Uganda and Rwanda all prospecting for oil and gas, Ugandan SMEs could easily lose lucrative contracts to better prepared regional companies.

Enterprise Uganda Executive Director Charles Ocici sees the training as an “investment” in which the government a big role to play. He says the government should use at least 1% of the Shs 4 trillion the private sector pays in taxes every year to finance this training.

“Investing in SMEs should not be seen as a cost but an investment that will in the future pay back to government in increased revenue,” Ocici said.

“Without government’s support SMEs will not benefit from the oil and gas,” Ocici said.

Protect us

However, a private sector player who already provides services to oil companies; says what local entrepreneurs need most is not training, but protection from unfair competition from international players.

“Many companies are starting to establish themselves in this region to exploit the opportunities in the oil industry,” Capt. Tony Rubombora, the managing director of the domestic airline Eagle Air, told The Independent.

Rubombora said Uganda could borrow a leaf from countries like Algeria and Angola that have protected local companies by making it mandatory for international firms serving the oil industry – especially in subsidiary services – to do so through joint ventures with local ones. This, he said, ensures that benefits are not monopolised and valuable business skills are passed on to locals.

“If we don’t put in place such policies, we might lose everything to foreign companies,” he warned.

Without such protection, Rubombora said foreign companies tend to deal directly with their subsidiary companies or to engage firms from their countries of origin only thus cutting out locals.

Chris Kyerere, the chairman of Uganda Allied Chamber of Commerce, Industry and Agriculture, urged East African governments to speed up the removal of barriers to the movement of persons and goods, to enable the SMEs in East Africa to consolidate capacities in the region.

Capacity first

But a senior policy analyst disagrees with the report’s focus on oil, saying UIA should concentrate on developing SMEs’ capacity, regardless of the oil resource that is described both as a blessing and a curse.

“Can’t Ugandans now talk about anything without talking about oil?” the analyst asked. “What will they do when we run out of oil?”

He argued that with the poor practices prevalent in SMEs in Uganda – poor or no records, financial mismanagement, small scale, inefficient production, etc – there is no way such SMEs can win contracts in the oil or any other internationally managed sector.

“Visitors from, say, America will not eat food prepared by a local person in Buliisa. They will look for standard food prepared by internationally recognised hotels like Serena or Sheraton,” he said.

“Our SMEs need to go step-by-step before we think about benefiting them in the oil sector. That will come later.”

With or without oil, however, all analysts agree that improving the capacity of local SMEs - mostly sole proprietorships employing up to 50 people, with assets or turnover worth up to Shs 360 million - is critical to Ugandan’s economic development.

According to the National Micro, Small and Medium Enterprises (MSME) Policy and Strategy of Uganda, 2007, the SME sector contributes 20% of national GDP and provides employment to approximately 1.5 million Ugandans at a growth rate of 20% per annum.

Oil production is expected to start next year in the Lake Albert region, where an estimated 2.5billion barrels of oil is to be extracted and a refinery built. Much of Uganda’s growth over the next 20 or so years is pegged on this resource and many Ugandan businesses are refocusing their activities to benefit from the resource across the value chain.

By Julius Busingye: The Independent Newspaper