Feb 12, 2014

Government and Oil Companies signed an MOU, So what?

“A prenuptial agreement is a legally bind contract created by two people before they marry. In the prenuptial agreement the couple addresses such issues as the property bought into the marriage by each person and what the property rights of each will be should they divorce.”

Words. Sentences. Jargon. Phrases. Anecdotes. This is how we tell stories, sometimes. So last week you may have encountered phrases like: “...roadmap for the Commercialization of Petroleum Resources discovered in the country,” or “…framework for achieving a harmonized commercialization plan for the development of the discovered oil and gas resources in the country.” How did we get to all this jargon? 

Well, the oil companies operating in Uganda – at the moment – that is: Total, CNOOC and Tullow had been negotiating with government on how to develop our oil. In other words the oil companies and government had to agree on how much oil will be refined, where it will be refined, who will finance the refinery & pipeline, and other infrastructure needs. It took over a year to agree on this considering that the oil companies had been opposed to a refinery in Uganda. So finally, they agreed and signed. But so what if they signed? Does it mean oil will start flowing soon? Can companies begin production? Well, no.  

Here is what the MOU isn’t: The MOU doesn’t mean we know how much fuel – once the refinery is complete - will cost. It also has nothing to do with how much Uganda will earn in terms of oil revenues. It has nothing to do with revenue management. Obviously, it will not determine the price of oil.

It is only a roadmap. In other words, this just paves the way for Uganda to continue the process towards finally being an oil producing country. It is also an indicator that our oil is commercially viable right now. 

Remember the definition of a prenuptial agreement above? That is how I can describe the MOU between government and the oil companies.

Only one company – CNOOC – has been issued a production license. [Note that all the three oil companies are equal partners in all the licensed areas in the albertine region, but CNOOC is the main operator – the in-charge – of the area where a production license was issued - Kingfisher]. So yes, an MOU was signed, but no new production licenses were issued. Total and Tullow still have to wait. A production license is like a go ahead for companies to finally start “bringing oil out of the ground.” Notably, it takes about five years – in Uganda – from the time you’re issued a production license to finally start commercial production.

Secondly, the MOU points out the role of government and that of the oil companies. The government's priority right now is to find the majority stake investor – 60% - in the oil refinery. It is currently compensating people occupying the 29square kilometers of land in Kabale Parish, Buseruka Sub-county, Hoima District where the refinery will be located. It has also shortlisted six consortia to submit their proposals for the development of the refinery.The model and financing of the refinery will determine the cost and whether we’ll get more affordable fuel. One of the reasons government gives for its push for a refinery, is to the country of a petroleum import bill of US$1bn [2013]. 

For the oil companies, their role is to make sure oil produced goes the refinery first, before it makes to the export pipeline. The export pipeline is their business, not ours. Not quite. It is our business too but we have the option of having a stake or not in pipeline. In other-words, we do not have to sink tax-payers money in the pipeline, unlike the refinery.

A statement issued by government reads, 

“The MOU requires the oil companies to support Government in its efforts to develop the refinery including public endorsement of the project. It also requires Government to provide support to the oil companies in acquiring approvals for studies and surveys for an export pipeline and to initiate discussions with neighbouring countries in relation to cross border frameworks for the pipeline.”

Tullow’s Jimmy Mugerwa issued this “public endorsement” in a statement issued after the signing: 

“The parallel framework of a crude export pipeline and a right-sized refinery that has been agreed on in this MOU provides that market certainty.” 

Note the wording >> “right-sized refinery.” The size of the proposed refinery, 60,000 barrels per day. Expected completion year: 2018.

The third point is that the MOU signing gives the oil companies some sort of signal on whether to invest in this country or not. Again, here is another quote from Mugerwa: “…conclusion of this MOU between us and government is significant because the capital required to finance the development of the upstream production facilities, the pipeline and the refinery is in billions of dollars and the financial planning for the project requires that there is a clear market destination for Uganda’s oil production before a Final Investment Decision (FID) can be concluded.”

So, Total Uganda, CNOOC Uganda and Tullow Uganda subsidiaries can now confidently march to their parent companies and say, “hey, we’ve made progress, can we get some more money to invest in this country?” This also – silently – is some assurance to the oil companies that they will perhaps get production license considering that they’ve already signed an MOU. More investment in Uganda means, our local suppliers get to win [some] contracts. A possibility of some jobs – I’ll refrain from a particular figure – and then infrastructure development.

What I can say, the MOU was signed, and meaning government and oil companies are reading from the same script. I can also say a roadmap can take as long as possible. We still have several unanswered questions especially on project costs, whether we need both a refinery and pipeline? What have the oil companies exactly committed to? What we need to watch closely is the current Public Finance Management Bill in parliament that indicates how revenue from petroleum is going to managed. 

Feb 6, 2014

Finance Trust Bank: Local bank but will it hack it as a commercial bank?

26 – The number of licensed commercial banks in Uganda. Not a terrible statistic considering that only one commercial has been closed down in the last five years. The Commercial Bank of Africa (CBA) and Finance Trust Bank are the latest entrants in Uganda’s commercial banking scene. More recently, Guaranty Trust Bank (GTBank) acquired a 70percent stake in Fina Bank. (I’ll write about the prospects for GTBank in Uganda next time) 

Finance Trust Bank is not entirely new to Uganda’s banking scene. Founded in 1984, Finance Trust Bank started as a microfinance institution until December 2013. Its focus: providing affordable to mainly women. It is, rather was, not a small microfinance. It boasts of 35 branches. The transition into commercial banking means that Finance Trust Bank made the baby steps just like Centenary Bank – Uganda’s 5th largest bank by assets – did.

FTB with its current figures of Ushs43bn in customer deposits, Ushs58bn loan book and assets of Ushs91bn, will have its work cut out in the commercial banking segment. In customer deposits, it comes at number 20. On the size of the loan book it is ranked 18, just above United Bank of Africa (UBA). With its assets of Shs91bn, we can ideally say, FTB is now Uganda’s 19th largest bank out of 26. In 2012, the bank also recorded after tax profit of Shs1.5bn, which would have placed it in 17th position. These numbers considering that it already has 30 branches, means it has already spent on some start-up costs and will not have to go through the cycle again. 

Prof Mutebile, BoU Governor & Irene Muloni (Chairperson FTB)  Picture from New Vision 

The broader challenge however is managing to keep its customers happy, with attractive interest rates especially for micro-lenders who have grown with it over the years. Centenary Bank has managed to do this. When Equity Bank of Kenya acquired Uganda Microfinance Limited in 2008, some branches in rural areas were closed. They were not making money for the bank. It was hemorrhaging money on administration costs. Moral of the story: Commercial banking can be similar to microfinance but it is not the same thing.   

Commercial banking comes with more demands, expectations and survival. To begin with, FTB managers have to make sure the capital base of the bank remains above Shs25bn – the regulatory requirement – and also “innovative” [find ways of being more predatory] if they’re to sustainably grow. To shore up its capital base, the bank apparently had to seek some international funders to buy some stake in the bank, but to sustain this level of capital – or more – the bank will have to make money.

It is a whole new ball game for them. What advantage does FTB have over other banks? Irene Muluni the Board Chairperson, FTB says, “Most banks are in urban areas, which gives us the opportunity to go for rural women.”

FTB is a majority Ugandan owned bank. This we should be proud of as “locally owned banks” have been in short supply. Ugandan organizations – mostly women organizations – own 55.4percent of the bank. Only Centenary Bank and Crane Bank have above this local ownership threshold. Interestingly, Annet Nakawunde Mulindwa, the FTB CEO is only the second female CEO of a commercial bank in Uganda.

With all this bloom, will FTB making formal banking more attractive. A 2013 Finiscope study on Financial Inclusion [I have a hard copy of this report if you need it] indicates that between 2009 and 2013, the percentage of adult Ugandans with access to a formal bank had declined by 1percent to 20percent. This, even after the increasing number of commercial banks in the country. The same report indicates that the percentage of Ugandans saving with a commercial bank had fallen to 19percent in 2013 from 21percent in 2009. Additionally, the number of Ugandans accessing credit in a bank rose – marginally – from 5percent in 2009 to 6percent in 2013.

FTB will however be boosted by the fact that 73percent of borrowers – both formal and informal – take up small loans of Shs500,000 and 14percent taking up about Shs1,000,000. Since the FTB’s focus will be those Ugandans in rural areas, then they could succeed. Considering its focus to encouraging women entrepreneurship and financing, it could also help increase the percentage of women with access to formal banking services.

However, when FTB was a microfinance institution, it was also in the formal banking category and the numbers as we’ve seen have been stagnant. What will it do differently? We’ll wait and see.