Is Uganda a liability for Tullow Oil?

Neymar was the poster boy for Brazil in the World Cup. He was all over billboards and adverts during the World Cup. When he got injured, Brazil crumbled. They conceded a record seven goals. Tullow similarly has been the poster company for oil discoveries in Uganda. Tullow risked its dollars. The company, in a statement says they have spent close to US$2.8bn in Uganda in the last 10years.

Over the last one year, we cumulatively could be looking at confirmed unrecoverable liabilities of US$182m. The ruling by the Tax Appeals Tribunal ideally would place the liabilities of the company at between US$450m and US$500m.

Tullow abandoned drilling for oil on Lake Albert – the Ngassa discoveries. This area stretched almost close to the Democratic Republic of Congo on Lake Albert. Flashback to 2009, Angus McCoss, the Exploration Director at Tullow said Ngassahad the “potential to be the largest in the basin.”  He also described it as a “significant oilfield.” 

Fast-forward to 2014, in February, Tullow told its investors that they were abandoning the Ngassa discoveries. Investors were told that “Ngassa has been written off due to offshore appraisal and development being currently uneconomic.” Abandoning this discovery area cost Tullow about US$67m. This means that all the money Tullow spent on appraisal and exploration for these discoveries is a loss. It is not recoverable if oil production starts.

There was more to come: More bad news for the Irish company. In the half year operational update released in early July 2014, Tullow admitted it was forgoing US$115m duefrom CNOOC and Total. In 2012, Tullow sold 66.6% of its assets to the two companies at US$2.9bn. About US$300m of this was placed in a reserve account and would be paid to Tullow as soon as it had shown evidence of some promised "deliverables."

Tullow said this $115m loss was due to delayed project approvals and failure to secure license extensions. The delayed project approvals could not be revealed, as the company tows the confidentiality line. From my understanding though, “delayed project approvals” means the eight production licenses Tullow applied for as far back as 2012. 

Tullow applied for Production Licenses for Mputa, Nzizi, Kigogole, Nsoga, Ngara, Ngege, Kasamene and Wahrindi. A production license is like owning land with its title. Before you secure that land title, you cannot construct on the land or even use it as security for a bank loan. Similarly, a production license is what companies use to secure financing for eventual commercial production of oil. There is potential investment of about US$10bn to US$22bn ifproduction licenses are approved. Now, the three companies are equal partners in the licensed areas. Tullow was given the task to make some key deliverables, but it hasn’t. It has paid the price.

The final nail in the coffin or the cherry on the cake, depending on how you view this, was the ruling by the Tax Appeals Tribunal that Tullow pays US$407m to Uganda Revenue Authority (URA). This is the income tax [Capital Gains Tax] accrued from the 2012 sale of its assets to Total and CNOOC for US$2.9bn. Tullow disputes this valuation, noting that it is entitled to an exemption as per the highly guarded and confidential Production Sharing Agreements (PSAs) signed with government. Tullow paid US$143m as income tax before it went to the Tax Appeals Tribunal. 

 It insists this is actual tax to be incurred. The ruling and order by The Tribunal to pay the remaining US$264m will not be reflected on their accounts because the company is not going to pay that money. It will be challenging the ruling in both local and international courts.  This could drag on for years. 

Tullow with all these "challenges" though, has made money. Tullow said it has spent US$2.8bn in Uganda for the last 10years. But the company also sold a stake to CNOOC and Total at US$2.9bn. This is even before the first drop of oil. However such developments on delayed projects, tax obligations and write-offs bring back the same old question, Is Tullow here to stay? The best answer is, “it will be understandable if they exit.”

Tullow officials have sent mixed signals on their plans for Uganda. In February, Paul McDade the Chief Operating Officer Tullow, told the Wall Street Journal that Kenya was “more supportive” and that first oil was more of “national priority.” McDade’s comments were scathing.  He further said “Kenya will be easier to develop and the government is very enthusiastic for us to get underway with that development and get first oil as soon as possible.” 

These statements do contradict what David Onyango, the deputy spokesperson of Tullow Uganda told the Daily Monitor back in November 2013. He said, “No consideration has been given to any scenario or option other than a long term partnership with Uganda that delivers shared prosperity and benefits for the country and the company.”

The Ugandan government though remains unscathed. They have turned out to be tough negotiators. At the back of their minds the belief is that with the current oil finds, Tullow can leave and there will be other companies clamoring to takeover. They also consider Tullow's mixed signals on an exit is playing politics and trying to pile pressure on government to issue those licences. 

Interestingly, after the ruling by The Tribunal on taxation issues, Aiden Heavy the CEO Tullow Oil Plc hints at resolving this dispute by negotiating with government. 

"Tullow believes that the TAT has erred in law and Tullow will challenge the EA2 assessment through the Ugandan courts and international arbitration but hopes that further direct negotiation with the Government can resolve this matter." 

What you - may - need to know. Q & A on Actis selling its stake in Umeme

So there has been all this talk about “Umeme on sale,” if the Uganda’s leading newspaper is anything to go by. The headlines then changed to “20 firms interested in Umeme.” Kindly shrug that number. What matters is who eventually buys the shares in Umeme. So what’s the story? Here is my attempt to break down what this is all about.

Who is selling what?

Actis is the single largest shareholder in Umeme Holdings – domiciled in Mauritius. Umeme Holdings owns 60percent of Umeme Limited, which is Uganda’s largest power distributor with about 500,000 customers. Actis until November 2013, owned100percent shares in Umeme Holdings. On November 30th 2013, about 38percentshares of Umeme were floated on the Uganda Securities Exchange. Actis has now made the decision to sell part of the 60percent in Umeme to variousshareholders. So yes, Umeme is on sale, but not all of it. Still it is a sale.

Read: How Actis minted billions in Uganda, from just two companies

Who is selling what to whom? 

My guess is as good as yours. I do not know. NSSF perhaps? IFC? Who could it be? Norfund. I do not know. There are quite a number of potential investors that can buy up the shares ranging from pension funds, investment banks, sovereign wealth funds and "others." 

"Due to corporate governance restrictions, Umeme  cannot comment further until the transaction has been completed," a statement from Umeme reads. 

Why is Actis selling - part  of - its shares in Umeme Holdings?

Actis is aprivate equity firm. It invests, grows the business and sales to the highest bidder[s]. Then it will move on to the next country and do the same for any other business. In 2012, it divested its entire interest in Banque Commercialedu Rwanda. In 2013, it also sold a 45.05percent stake in Dfcu Bank, Uganda sixthlargest bank by assets. It previously held a 60percent stake in the bank. On this transaction, Actis sold the stake at 119billion Uganda Shillings to NORFUND and Rabobank. There seems to be a similar arrangement with Umeme, considering that Actis will still hold a minority stake in the company.

It also exited Xiabu Xiabu, a Chinese restaurant chain and XP Investimentos a brokerage firm in Brazil.

Actis has been busy since it sold a stake in Umeme, Dfcu and BCR. It acquired Compuscan,” the largest independent credit bureau in Africa.” Compuscan is headquartered in South Africa and in Uganda; it provides the famous financial card required by all commercial banks before you take-out. The takeover amount was not disclosed.

It also made a 36percent equity investment in the AutoXpress Group, a tyre company in East Africa that distributes Pirelli and Dunlop brands among others.

In 2013 it also invested perhaps the largest chunk of money in Cameroun. At $220m, it acquireda 56percent stake in Cameroun’s national grid company, inclusive of two independent power plants.  It also went into the pharmaceutical industry in India, when it bought a stake in Symbiotec Pharmalab Limited (“Symbiotec”) at US$48m. It also spent US$95m on one of South 

Africa’s largest payments company, Paycorp.

Other acquisitions include Upstream, a mobile marketing and e-commerce Company and Jiashili Food Group, a Chinese Biscuit manufacturer.

Has the sale got anything to do with parliament adopting the proposal to terminate the concession?

Tough question, huh? Well it depends on how you look at it. The first divestment came at a time the whole ad-hoc committee on the energy sector was debating the contract of Umeme and Eskom. The second divestment comes at a time when parliament has adopted the recommendation for the Umeme contract to be terminated. A decision by cabinet has not been made, but considering the submissions made by Irene Muloni, the energy minister at the time of the debate, the concession is going nowhere.

My understanding is even if Actis partially exits, the concession that would be cancelled is one made with Umeme Limited, so either way, government can still terminate - if it makes the decision. Government would still compensate Umeme Limited investors for the termination of the contract. Still a win for investors!! Whoever they will be!!

Does the Actis exit have any implication on the share price?

Well, trading of Umeme shares has been suspended for now as the transaction is concluded. The reason trading is suspended is one to avoid some “insiders” from hiking or downgrading the price. [You need to read the book: The Last Tycoons:The Secret History of Lazard Frères & Co. It provides some good insight on mergers and acquisitions of listed and non-listed companies.] If the price goes up, then it works in favor of Actis and if it falls, whoever is buying gets a juicy deal. This is not unprecedented. In 2013, trading of Dfcu shares was suspended to allow the completion of the Actis, Rabobank and NORFUND deal.

The Dfcu shares were trading at shs1,000 per share then. Currently they’re trading at Shs1,215 per share, a Shs215 rise since mid-2013. Umeme’s share price is currently Shs360, up from Shs275 at the time it went public. One cannot predict the share price of company, but what the USE has proven to us is that if the fundamentals of a company are right, the price will rise or remain stable. If the fundamentals are wrong, then investor confidence is dented, take for instance what is happening with Uganda Clays and NIC [It is currently recovering, although it is still trading below IPO price].  

It should be noted that institutional investors hold the largest chunk of shares of USE listed companies. If they sneeze, the price could dip or rise. For now, the political chatter on Umeme is not moving them just yet.

What is Umeme worth?

My conservative calculation of Umeme's value is Ugx584.5bn [No of Shares x Current share price]. The Actis ownership is 60 percent, which is about 975.6 million shares valued at Ugx351bn. If, Umeme were to remain with a minority shareholding, say 15.5 percent after selling 44.5 percent, it could make close to Ugx300bn tax-free money. [This is speculation. Just to point you to you the potential valuation of Umeme and the sale.]

Remember, Actis lent Umeme about Ugx47.6bn between 2005 and 2007. By the time the loan repayment was complete in 2012, Actis had received an estimated Ugx92.7bn. This added to the dividend of Ugx14.2bn in 2013, then you can see why Umeme was a fine investment for Actis. 

www.goldroof.net

What does this mean for the electricity user in the country?

Well, hard to say. That depends on the investors that are coming in and their vision for the company. Power supply is still somewhat erratic and what Ugandans need to know, is whether this will reduce. Will the tariff reduce? Does Umeme’s image change? Well, no to all of these. First of all, the change in investors could bring in some new faces on the Umeme board, which perhaps could change the strategy of Umeme – or not. Power supply to improve will depend on whether there is commitment to invest in improving infrastructure. 

Umeme recently took-out a loan of US$195m from the IFC, Stanbic and Standard Chartered for capital investment. It also requires close to $300m for investing in rolling out pre-paid meters to the whole country. If you’re experiencing poor power supply, it is likely that would remain the same.

How does Uganda benefit from this transaction?

Wait, before you say Capital Gains Tax will be paid. In 2011, there were amendments made to the Income Tax Act. One of them was that any sale of assets in a Private Limited Liability Company, the company that has sold will be subject to a Capital Gains Tax assessment by URA. This, if you remember is a subject of two major legal battles between URA and Heritage Oil over the sale of its assets to Tullow Oil. The other one is between URA and Zain, which arose out of Bharti Airtelacquiring Zain’s assets in 2010.

Umeme is a publicly traded company listed on the USE. The rules are different. Actis, which will be selling is not subjected to Capital Gains Tax. CGT was not applied when Actis sold Dfcu shares to Norfund and Rabobank. Government opting not to impose such a tax share transfer of listed companies was mainly to encourage the growth of the capital markets.

Notably, the benefit for Uganda is that it makes it a fertile ground for FDI. It is rather comfortable for a company to know that it can come invest in Uganda and then exit at will by selling to other investors. Some of our brokerage firms and law firms, will also have a share of the pie when the bill their clients.  

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. 

What you need to know about the firms interested in constructing your oil refinery

Many have said Uganda has been too slow in propelling itself into oil production after discovering oil in 2006. Others  - mainly oil companies – have insisted Kenya could be the first oil producer in East Africa. Pressure from the same oil companies – Elly Karuhanga, President Tullow Uganda – has been growing for government to issue production licenses. All that, understandable as it may be, is seemingly not going to let the government barge from it taking its time, including completing an oil refinery. Meanwhile, the expectations from Ugandans continue to grow. With all this, the government seeks to first get the refinery project off the ground. So as the compensation process goes on in the 29 square kilometer piece of land for the refinery, in Kabale, Hoima District, the final six firms and consortia bidding to build the refinery have been released. The diverse list is not dominated by Chinese companies as earlier speculated. So what? You may ask. Well, these firms want to be part of an infrastructure project, that if economical enough, could see a drop in fuel prices and propel Uganda to be self-sufficient, partly tilting the Balance of Payments. According to Bank of Uganda statistics, the value of oil imports in 2012 increased to USD1bn from USD800m in 2011. 

The China Petroleum and Pipeline Bureau (CPP) consortium was first on the list. Projections would indicate that this consortium at best, includes a host of Chinese companies involved in the petroleum production value chain. CPP, is also a subsidiary of the Chinese National Petroleum Corporation (CNPC) which is placing itself a global oil producer. CNPC has assets of over USD480bn more than twenty times the size of Uganda’s GDP. Chinese companies more often than not have the finances from their development banks to spend on big infrastructure projects. Cheap financing is understandable because it doesn’t weigh heavily on the refinery once completed. Notably however, refineries in Chad and Niger, all with a 40percent stake from Chinese companies, in 2012 were operating below capacity as government and the companies failed to agree on oil prices.

From Japan – Ugandans drive lots of Toyota’s from the country – is the Marubeni Corporation, which is the only firm listed on the six. In other-words, it is only the one single company that did not submit a bid as part of a consortium. Internet searches and the company website describe it as a major player in the construction, exportation and marketing of oil and gas projects. It is a conglomerate that has major investments in Health, transportation, industrial machinery, energy, mineral resources, ICT, Finance and Real Estate among others. It is currently part of refinery projects in Kazakhstan, Qatar and Kuwait. In 2012 however, the company was forced pay USD54m in fines after violating U.S. Foreign Corrupt Practices Act (“FCPA”) in a Nigerian LNG Plant construction project.

Ever heard of Petrofac? Well, Petrofac apparently spent $1.5m (£1m) on a private jet for the boss plus $189,000 on client entertainment according to a story written by UK’s Independent. That aside, Petrofac a UK company, registered in Jersey, USA, also submitted a bid with a consortium. Petrofac is involved in various infrastructure projects in the oil and gas sector in Algeria, Tunisia and Malaysia. Its strength is in the petrochemicals segment, which is usually an offshoot of refining. In September 2013, Petrofac led a consortium that won a deal to construct a petrochemicals plant in Kazakhstan.

Russia is a power house in the oil and gas sector. Its companies, like Roseneft and Gazpromm have proven to be major players in Europe. Well, it is rather not surprising that a consortium led RT – General Resources has also expressed interest in the Ugandan refinery. RT – General Resources is a subsidiary of the Russian state corporation – Rostec. Rostec, is also known to be involved in the businesses of firearms, and in October 2013, signed a USD1bn arms deal with the Angolan Government. They also service and supply Russian made helicopters. In Natural resources, they’ve mining activities in Zimbabwe. Interestingly of all the companies/consortia that placed bids for the refinery, RT – General Services is the only one that issued a statement eventually picked up by the news wires. Their consortium includes VTB Capital, the lending arm of the VTB Group a leading Russian financial services – including banking – provider. It is 60percent owned by the Russian Government. Tatneft, another Russian company, is involved in the entire value chain from exploration to marketing, is also part of the consortium. A point to ponder on though is a statement in the Russian media outlet RT, which reveals that Andrey Korobov, the General Director of RT – Global Resources said “The consortium aims to recoup the money spent on the project in a short time due to the high oil price.”

As South Korea ponders on the next move to be made the young North Korean leader, Kim Jong Un their companies have been making inroads in Africa. Samsung has pitted itself against Japanese Companies like Panasonic, Sony and Olympus on one hand and Apple on the other. This time, the largest oil refiner in South Korea SK Energy – a subsidiary of the SK Group - has also put in a bid with a consortium of companies for the Ugandan refinery. Korean media has been reporting declining fortune at home explaining why it has been looking for opportunities in countries like Australia. The SK Group has eight subsidiaries in just the petroleum value chain.

Know a country called Iran? Of course you do. Well, this has nothing to do with Nuclear Weapons but has everything to do with it. In September 2012, there was an EU embargo on Iranian oil imports; that limited any business performed by international companies with ties in the EU. In that month, Vitol a Swiss company, the largest and most aggressive energy and commodities trading company, admitted – well kinda – to have traded some Iranian oil. Okay, if that is complex, remember the famous Iraq UN oil-for-food-program? Vitol also in 2007 pleaded guilty to theft and paying kickbacks to Iraq under this program. It agreed to pay a fine of USD17.3m. So why are we talking about Vitol? It is also leading a consortium of companies that want to construct an oil refinery. Vitol [http://www.vitol.com/] is also vertically integrated – involved in the entire oil value chain.

As the Uganda government deals with compensation of Ugandans occupying the proposed refinery land, it now also has to go through a process of finding the best possible partners in the oil refinery. One of these consortia named above will have a 60percent in the refinery of about 60,000barrels per day. In an article I wrote for The CEO Magazine – Honorary mention in the 2012 ACME Oil and Gas reporting awards – a Norwegian expert told me:

 “Worldwide, there are more than 600 refineries with different solutions for state involvement based on history, economics and politics. Each situation must be evaluated  on its own merits, and I am confident that Uganda will find a solution which serves the  country well,” - Sverre Brydøy a consultant with IPAN [The International Petroleum Associates Norway (IPAN), a consulting firm with expertise in exploitation of oil and gas including refinery models.]

In the same article, Dr Keith Myers [previously worked for BP  and rose to the level of Senior Commercial Advisor until  2000, when he quit. He now offers advisory services through Richmond Energy Partners – which he founded – to investors and oil and gas companies.] also noted; 

“I assume that the GOU will wish to have its share of the capital costs paid by others. The providers of capital will want a considerable degree of control over how the refinery operates until their risk capital is repaid. The challenge comes in aligning purely commercial objectives with a political agenda that may compromise profits from the commercial partner's perspective. Refinery joint ventures between State Enterprises and commercial investors work best where objectives are aligned, but the relationships are never easy.”

On Umeme: let’s get back to the basics

It is the last day of November – 30^th to be exact – in 2012. The sun is finding its way through the clouds. We are at the Sheraton Kampala Hotel. The same Hotel where everything was "Kwisha" in 1981. Fast forward to 2013, I once got served milk that had gone bad. I abandoned the cornflakes. Well, on this November day, Umeme had treated us to breakfast and a host of speeches. It was on this day Umeme got listed on the Stock Exchange. And yes, the trading floor was temporarily moved to the Sheraton. “They have been bought off,” they said. “Why are they not telling us the issues? Umeme is cheating us?” they added. Oh well, I wonder how breakfast could be a form of buying us off? But the company got listed, the first since 2009. The price has since appreciated by 36percent and now a share is worth Shs365. Good for the company and good for the USE. Such days are rare for the USE. 

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The generators blare on. Downtown Kampala, traders along Nasser Road are listening to their Radios. Later in the evening they will watch NTV and on Newsnight, Andrew Mwenda will be talking about “daft MPs” trying to get the “Umeme contract cancelled.” We suffer from "lack of intellectuals" to analyse issues, he will say. The Umeme concession is in its 8^th year – of 21years. When MPs made recommendations after an adhoc committee report on the electricity sector, one of them: terminate the Umeme contract as they claimed it was signed in bad faith. We got a bad deal. Additionally, Umeme lied. In defense of Umeme – and partly, I agree – Mwenda notes that Umeme has not breached any of the concession terms and in fact continues to invest in Uganda, achieving the targets set for it. They recently added a Shs485bn loan deal from IFC, Stanbic and Standard Chartered for further investment between 2015 and 2018. 

Yes the concession agreement is complex. You'd have to breakdown the key issues, one by one, including taxation. So let’s deal with the basics. Umeme is inefficient – sometimes. Bills are still estimated and the generators are dominant. In Kampala, we lack a smart grid. Sometimes the slightest of winds – even before the rains – we are plunged into darkness. They’re “trying to fix” the grid. It is not that easy – they say. Western Uganda is now expected to experience more than four months of load-shedding as the grid is upgraded. But what do we want? Electricity! Efficient supply of electricity. Where did all this start? Uganda Electricity Board (UEB) used to be the power distributor and generator. We had daytime and nighttime load-shedding. It was inefficient. It had suffered from elite capture. The same “elite” still running some of electricity bodies like UETCL, UEDCL and UEGCL – all replaced UEB. All these companies have a role to play in the energy sector. It is complex. UETCL undertakes most of the high level projects on behalf of government. If the transmission lines are inefficient, we have the right to blame them. 

We delayed power projects yet more people were added on the grid. Bujagali delayed. We blamed butterfly activists and Ken Lukyamuzi. Then desperately to keep our lights on, we brought in thermal generators – at a premium. Government decided to subsidise the tariff. Bujagali “went live” in 2012. We had excess electricity, an "un-smart" grid and an ad-hoc committee report. The company went public, the investor, Actis got back about Shs92bn returns on loans for “upgrading” the systems since 2007. 

With Bujagali and ESKOM – running Kira and Nalubaale – they want a power distributor that can make collections for them to get paid. The lending arm of the World Bank, IFC, and Germany’s KFW etc… are all investors in Bujagali. IFC is also a lender to Umeme and holds a 3percent stake in the company. IFC wants a return on the money invested in Umeme, they also want to make money from Bujagali. One Bujagali official notes that they prefer Umeme as a distributor, that way they get paid on-time to avoid creditors knocking on their doors. The pressure is on Umeme and Ugandans. If we generate more power, where does it go if we lose 24percent of it? Well, the tariff. We are going to have another huge Dam, Karuma. The Chinese will build and finance most of it. If you think the tariff will drop, well, unless UEB makes it back. To pay for all this energy, the tariff is likely to edge higher. If we get more industries, then, maybe then we won’t pay that much. So even with the tariff, Umeme has to collect the money. They have improved that to 94percent -2012. Then comes in bill estimation!! There is a planned roll-out of prepaid meters – already for some people in Kampala these meters can be seen. They are mandatory, you either get one or get abused by a sub-contractor. The roll-out for the whole country is expected to cost USD300m. Who will pay for it? You. While we pay our bills, some government agencies default. Remember what became of Uganda Airlines? The government racked up a bill that they didn’t pay, sometimes. This cost the airline and it is partly why it went under.  

Point here is, yes we need the FDI, but Umeme’s is not doing charity work, neither for themselves nor for us. We have to keep asking the questions, no matter how “stupid” they sound. If we stop asking, then who will, yet we are the ones who pay the price. If the elite can’t explain the basics, then who will? If they assume, “yeah, Ugandans suffer from lack-of-intellectualism-so-let-us-ignore-them” then how do "they" expect the apathy to go away? The more we discuss Umeme, the more open they become. A Ugandan SME needs efficient supply of electricity. 

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The first thing any business reporter who wants to write about the stock market is told is: “buy shares.” That way you’ll understand how our small stock exchange works. So that way, you become an investor, sometimes, you forget you're a journalist. So yes, despite the "machinations" about Umeme, the demand for the shares of the company has been on a rise.The reason: Institutional investors. Institutional investors, mostly offshore [Mauritius] seem confident. Umeme Limited, Uganda, is 60percent owned by Umeme Holdings - managed and owned by Actis. For one,it has most sophisticated tax arrangements. The holding company that owns Umeme is domiciled in Mauritius [tax haven]. Prof. Guttorm Schjelderup calls this [tax havens] a facilitator of “sophisticated tax planning.” It is a listed company. Disclosure is not problem. Olympus is a listed company in Japan. Enron was listed on the NYSE. Listed banks have rigged Libor, been fined and the world moved on. 

Dear Hon. Tumwebaze, thank you for showing us how "things" can be done

"It is a melancholy object to those who walk through this great town, or travel in the country, when they see the streets, the roads, and cabin-doors crowded with beggars of the female sex, followed by three, four, or six children, all in rags, ad importuning every passenger for an alms," Jonathan Swift, A Modest Proposal

Dear Hon. Frank Tumwebaze, 

I would first of all like to thank you for keeping time, at least for once. Last month, we had to wait for an event to kick-off because the minister had delayed by over an hour. He offered no apologies. Instead the emcee would go on to say that they thank the minister for sparing sometime in his busy schedule to come and grace the event. Guess what Hon Tumwebaze, we also had a busy schedule but made it on time to the event. And that minister is not you, it someone else I do not want to mention. So now you understand why I appreciate that you kept time. I just hope we keep up the spirit, maybe that way, this country can move forward.

There is this councillor who was bungled out of City Hall. Did you see that? I mean, there are video clips of “Omussajja wa Bwino” being lifted out of City Hall. Meanwhile while you were busy conducting your role as minister, the police also treated a lawyer like a rag-tag, a nobody, a thug and a goon. The video clips make for some absurd viewing from my point of view. Of course as always, your defense on such matters is always rather interesting to read. It is from this point that I request that since you rub shoulders with the President, maybe we should treat people who steal public funds the same way. Remember the billions that went missing from our coffers and donors decided to pull the plugs? I wonder why we don’t adopt such an approach for them.

I understand that currently most of the culprits including Mr Kazinda himself are “facing the full force of the law,” a phrase that you really like to use most of the time. Our very own courts are doing their jobs, despite the sluggish progress. These courts are constitutional, aren’t they?  You know what though? the KCCA Act that you quote supersedes the constitution. Not so? Please help me understand your emphasis on two-thirds majority in the act yet we’ve a constitution? So I also think considering that a small matter of a court order or even lack of presence of the defense team in City Hall, the best way to deliver a sucker-punch to people in-the-wrong should be so blanket. Let’s crucify them. Not so? 

I know you have a rather assertive way of speaking and sometimes heckling tendencies [refer to The Fourth Estate on NTV] and of course you can always plead plausible deniability; that you had no idea there was a court order. Indeed, how could you have known? In fact I think whoever steals public resources should not be allowed a defense at all. We should lock their lawyers out of the courtroom and use our starved police officers to keep them out. I also want a ministry of rape and defilement to be formed so we can have cases expedited since our courts are wasting their time. Don’t you agree with that?

In 1701, Jonathan Swift in A Mediation Upon a Broomstick wrote, "But a broomstick, perhaps you will say, is an emblem of a tree standing on its head; and pray what is man, but a topsy-turvy creature, his animal faculties perpetually mounted on his rational, his head where his heels should be, grovelling on the earth! and yet, with all his faults, he sets up to be a universal reformer and corrector of abuses, a remover of grievances, rakes into every slut's corner of nature, bringing hidden corruption to the light, and raises a mighty dust where there was none before, sharing deeply all the while in the very same pollutions he pretends to sweep away."

Before you interrupt me on this point, please note that the short story is a satirical piece, so in case you haven’t read it, please do read between the lines.

I hope you understand my point Hon. Minister. Meanwhile we all understand Kampala can be a filthy city and well, Jenifer has done a fine job. You know I'm business reporter, right? Even when a CEO is doing a fine job, she/he is answerable to a board. That board must consist of non-executive members to play that oversight role to keep the CEO in check. Oh, well, there is parliament and councillors, they can always keep her in check. What is interesting though, is the Lord Mayor and the Executive Director never appeared to agree on anything but we still got things done. Didn’t we? Maybe, whoever we disagree with in our places of work, we should push them out. Kick them out in fact. Blackmail them into making a mistake, and then let them fall “into the cups” – like we say.  Do you know those wonderful "middle sectors" we have on Jinja Road? We beautified them but now they have partly been destroyed due to reconstruction of a 6lane road. Was this part of the broader plan for KCCA? I do not know. 

You know Hon Minister, when a company has built a good brand, is making money and shareholders are happy, rarely does the head of the board chairman be offered for chopping. If he is incompetent, then he’ll be kicked out. Like many of us will be if we under perform at work.  Well, Hon Minister, KCCA is a better organization than ever and what I’ve been wondering is that for all those under performing ministries, why don’t have the PS’s moved or sacked the same way. I mean why not? Did you read the latest Auditor Generals report? Oh dear, oh dear, Statutory bodies are losing tax payers money, but surprise, surprise, we still have the bosses seated at the top comfortably. Why not adopt the same moves you used to remove these people?

Let me conclude my letter by saying, I appreciate the work you are doing; I mean who knew an elected leader would be impeached? Maybe it is about time we also impeach under performing public officials. You have orchestrated a political and legal masterstroke and now, Lukwago & co will spend hours, days and months on a legal wild goose chase as you make amendments to the KCCA Act. In the meantime, "they" could gain political capital and sympathy.

Thank you for your time Hon. Minister.

Yours Sincerely,



NB: Some say they are tired of sausages. I think they should be specific and tell us whether they don't like the Fresh Cut ones - because of the advert - or Sausage King. 

Forget the cross-listing pomp, it is but just that

Coffee!! At best, it is Nescafe, not Good African Coffee or Star Café. A tale of Ugandan Hotels. A tale for another day.

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Here is the context. The Uganda Securities Exchange is vibrant, well, sometimes: Only on days when a company lists – locally – or cross-lists. The pomp there after glides away with limited activity except for companies like Umeme and Stanbic Bank. Uganda Clays used to be in that category, but it’s been unimpressive over the years for the reasons that are mostly copy and paste each year. Debt and low sales. This week, Uchumi one of the largest Supermarket chains in East Africa was cross-listed on the USE after the doing the same on Rwanda Securities Exchange (RSE). This is a "big company," currently valued at US$70m. For the USE – without a CEO & acting CEO – this is much welcome boost, considering this will be one of its best performing year if numbers are anything to go by. Its market capitalization – in simpler terms, the value – will increase and the white boards will have one more ticker symbol: UCHM.

A cross listed company is ideally having a company floated on another stock market that is not its primary listing. The NSE – an exciting market & largest in EA – is Uchumi’s primary listing, and now the USE – located in an arcade along Kampala road – is its secondary listing. Ideally, this listing is a good move. On the first day, 9,000 shares are traded creating a turnover of Shs5.2m. If the momentum remained the same, then the USE would be an exciting place to hang-out. Well, this is not the case. Like they say – I do not remember who came up with the phrase – “numbers don’t lie” but sometimes can also be deceptive.

The USE has a total 8 cross-listed companies including Kenya Airways, Jubilee Insurance, Centum Investments – I believe one of EA’s best Investment companies -, EABL – I wonder why UBL, their subsidiary is not listed locally -, Equity Bank, KCB and now Uchumi. In the history of the USE, the highest or best trading year – 2010 - for cross-listed equities was when shares worth Shs4.6bn were traded. This was for EABL. EABL has also recorded the highest turnover of any cross-listed company. In 2011, Centum traded at least Shs3.6bn worth of shares, but it was in that same year that it cross-listed. Institutional investors gobbled up the shares. 

Picture from Daily Monitor 

UMEME is the only cross-listed company from Uganda on the NSE and it has only traded once – only 1,000 shares back in September. It made headlines, we were happy. I wrote this, “The challenge for Umeme now will be having enough liquidity to satisfy the demand in Nairobi – if they do get overwhelming demand.” These numbers are not the deceptive ones. Cross-listing simply doesn’t make sense, at face value so they will say. Again they will add, I am being too simplistic. "What does an award-less journalist know?" First, in my simplicity, why would I buy shares for a company listed in Kenya, yet I could just make a call to my Nairobi broker to get me some shares? Of course considering that brokerage firms here in Uganda are huffing and buffing, sometimes due to declining business. So just to support my Ugandans in order for them to earn commission of trades, I’d buy the shares. But “meh,” it is my money not theirs. 

The second issue is that cross-listed companies will come on day one and allocate shares to Ugandans. In fact Uchumi has lined up at least 265.4million shares for the USE but will there be demand? The boards will indicate blues and reds on the white board. I know, yes we still use these.  The blue marker is for bids and offers, whereas the red is mainly to indicate a done deal. After this “event” we’ll have some snacks, chat about the market and we’ll write all the lovely stories. The next few days, the counter name will fade or gather dust. Uchumi makes the claim that cross-listing will allow it raise money to expand. I laugh. Ideally cross-listing helps raise money. Investopedia reads: “Some of the advantages to cross-listing include having shares trade in multiple time zones and in multiple currencies. This gives issuing companies more liquidity and a greater ability to raise capital.” Our markets are not well developed. It is not our fault. People don’t understand.

Uchumi is planning a rights issue – shares given at a discount price to share holders in order to raise money. Did they need to cross-list to raise the money? Yes & No!!! Some Ugandan shareholders already owned part of the company after they used the NSE. Only demand will tell. But history tells us, the shares might not be gobbled up. 

Third is the small matter – read big matter – of transfer of shares through an electronic system. It worked for UMEME, then the USE CEO left, and now there’s information asymmetry. If the system worked, transfer of shares would be rapid, but if it doesn't  then buying a cross-listed company from this market would be “erm” a nonstarter - again. 

But why do companies do it? Visibility is one. Uchumi, already a known company is not only a supermarket chain but is now listed in Kenya, Uganda and Rwanda. Investor confidence is up ahead of raising capital for expansion. And yes we are East Africa, a Community. Who wouldn't want to be part of this? Since Uchumi is part of the USE, any developments make the headlines. Investors are happy. Money will be raised.

They will say this is simplistic, but that it what it is. I’m a journalist. I walk to the USE. The brokers will say, “owolugabo” has come. Cross-listing is an event. It should be more than just that but that is only if our markets become more integrated. Kenya, Rwanda and Uganda are not Tanzania. 

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I like tea. Anytime is tea time. I sniff the leaves. The plantations have some great aroma. Kericho Gold – Kenyan made tea – is what I like. We have Ugandan tea. Its packaging is poor. It is ordinary. 

Ugandans; Why you should give a damn about the mining sector

Last week, Uganda hosted a Mineral Wealth Conference, whose main focus was looking at how to invest in this sector. Mining has over the years – since 2006 – been living in the shadows of the oil sector – and rightly so. The mining sector is only 0.3percent of Uganda’s GDP. In 2006 when the first major oil finds were made, the minerals sector was struggling – at least less than 20 exploration licenses were issued then. By end of 2010, a donor funded project led to an airborne survey of the whole country to indicate the “mineral potential” of Uganda – with the exception of Karamoja. As soon as the survey was completed, there was a “gold rush.” License applications shot up from 70 to an incredible 625 by mid-2012. Additionally, the tax revenues from this sector shot up from Ushs25.1bn in 2010/11 to Ushs431bn in 2011/12, a rise of more than 1600%.

Ushs431bn appears to be a large sum of money, but it isn’t. Uganda has been exporting iron ore – at least until a directive by President Museveni last year stopped this. The iron exports, some receipted others not, have made their way to DRC and Kenya. Interestingly though, more than 70percent of exploration licenses offered have not submitted any returns/results – including some big companies like Steel Rolling Mills. Steel Rolling Mills holds about 7 exploration licenses for iron ore – can be used in making of steel – but it has not submitted returns to the Department of Geological Survey and Mines, preferring to rely on scrap metal and other imports. No value addition to minerals; guess who is losing out? Uganda.

The Department of Geological Survey and Mines (DGSM) is understaffed, with at least only one person supervising almost five districts. Supervision of activities on these mines has proven to be difficult. The department admits this. In some instances, the department officials have been denied access to mines, for instance the Kasese Cobalt Company Limited (KCCL) and some gold mines in Masindi - an Indian firm is said to have been mining Gold using an exploration license. Of course, there is the "invisible powerful hand" that usually pulls the strings. With this limited supervision of the sector, one can only tell how much money Uganda is hemorrhaging from “illegal” mining activity. With the Uganda government jubilant about funding 80percent of its Ushs13trillion budget, this money is not enough to meet the financial needs of this country. We could do with some extra cash.

The limited attention the department gets is telling as it receives limited funding, even the commissioner admits it. All the money that the department receives goes to URA. The department only gets allocations from the ministry of finance. The officials from the department are also susceptible to bribery by mine owners, simply because they don’t have “enough” money. At the end of the day, Uganda is the one losing out the most. Some people acquire licenses just to “hawk” them around, even when they have no record or experience of mining. In 2012, there was the clear case of Hima Cement, with experience in limestone mining lost a license to a little known EA Gold Sniffing. EA Gold Sniffing’s interest wasn’t to explore for limestone, but rather to sale it to the highest bidder – Canada’s Brandenburg Corp.

Mining can also further deepen the cleavages that exist in a country. Communities maybe distorted by companies coming to do some mining. Uganda mining potential is getting more hype, but with civil society mostly concerned about the oil, mining communities are fighting their own battles. In Tororo, residents of Sukulu are fighting for their land as NILEFOS, a subsidiary of the Madvhani Group struggles to compensate them. The mining act clearly states that to mine minerals underground, one must acquire surface rights – from land owners. At the end of land valuation in Sukulu, total compensation totaled to Ushs135bn with each household proposed to get an average of Ushs53m. The amount was said to be high and the parties involved don’t want to pay. This could morph into forced evictions if we are not careful. 

Additionally, mining distorts communities and can easily take them away from agricultural activities, lead to child labor and massive school drop-outs. Some of these are happening, but as long as the country downplays them, the situation could get out of hand.

Finally, you’ve probably heard that Kilembe Mines were finally taken over by a consortium led by Tibet-Hima of China. In October this year, the company started work on the mines in a Private Public Partnership with government. The Uganda government in 1997/98 entered an arrangement to own 25percent stake in Kasese Cobalt Company Limited. The government, through Kilembe Mines secured an $8m loan from the European Investment Bank to acquire this stake. To-date, the government has never received dividend payment because profits have never been declared. Revenues are depleted by shareholder loans – provided by the 75% shareholder - meaning priority goes to paying this off. Currently, MFC Industrial owns 75% stake in KCCL through complex offshore subsidiaries. In August 2013, the company officially started restoring the land as “copper tailings” – where cobalt is mined – run out. At the end of the whole period what Uganda has gained are just tax revenues – even so, the company has evaded taxes before. Again, who is losing? Uganda.

We ought to wake up and smell the coffee before it is too late. 

Africa is rising. Ask the Investors!!! How Actis minted billions in Uganda, from just two companies

Private equity exits in Uganda are rarely heard of, large ones at that. Actis, a British private equity firm, came to the forefront in Uganda in 2005 as it came in to manage a portfolio of assets run by the Commonwealth Development Corporation (CDC). In 2012, Actis begun a partial exit from Uganda – exit is not a word they like to use though – after selling a 38 percent stake in Umeme by taking the power distributor public. Later in 2013, May to be exact, they sold a 45 percent stake in Dfcu Bank, Uganda’s sixth largest bank. Actis in its partial exit from Ugandan companies’ has exhibited the country as fertile ground for investment returns.

The Umeme shareholder loan
Umeme at the time of listing was valued at $178m, of which $66.73m or 38percent was sold to the public through an IPO in November 2012. The eventual listing, as Actis’ Tashi Lassalle notes was meant “to allow retail and the people of Uganda to invest.” She adds, “From our experience the ownership of a national utility company by domestic customers model works well...” On the other hand, however, Umeme had a debt burden, not that big though, but one where it was forking out interest payment of 12percent. Close to US$27m or Ushs66.9bn was the outstanding balance of this shareholder loan to Umeme Ltd, from Actis through a holding company called Umeme Holdings in Mauritius. The IPO was meant to raise money to pay-off the outstanding balance of this loan.

Essentially the accounting geniuses at Actis insist they have not taken any dividends out of Umeme’s profits since 2005, at least until it went public and posted a profit at the end of 2012. Shareholders carefully structured a loan to Umeme, which they say had a high interest bearing. In fact, they concentrated on building a pool of retained earnings, now at Ushs141bn from a partly Ushs42bn in 2007.

“...the Company has not paid dividends since its inception, although Umeme has paid an increasing level of shareholder loan interest for the past three years as a means of distributing cash to shareholders,” reads the Umeme IPO prospectus. At 12percent interest, Umeme shareholders, since 2009, got paid. Furthermore, interest on a loan has to be paid despite the performance of the company, in this case, the loan carefully hedged shareholders against non-payment just in-case the company makes losses. Luckily, the company has only posted a loss of Ushs2.8bn in 2010, since 2007.

The shareholders loan, initiated in 2005, was to cater for capital investments in the utility company, a requirement for the concession. The Umeme IPO prospectus reads that the loan was “....to provide funding to Umeme related to the original target investment of US$65m..... The loan had a grace period of 4 years and repayment of the loan principal was expected to be in 7 equal annual installments effective 2009.” By end of 2011, Umeme was required to have paid back Ushs37.7bn of the loan, but it had only paid a total Ushs25.7bn since 2009. On this capital investment, they were guaranteed a handsome 20 percent return, annually.

At the end of the day, after a shareholder loan injection of Ushs47.6bn in 2005 and 2007, Actis walked away with an estimated Ushs92.6bn – a few billions short of the retained earnings of 2011 - after interest and principle. After posting Ushs57.1bn net profit in 2012, the very first dividend payout totaled Ushs24.3bn [Ushs15 per share]. Actis, through Umeme Holdings has over 975million shares [60.08%], translating into a total dividend payout out of Ushs14.6bn - before withholding tax of 15percent - , another handsome payday.

Furthermore, Actis insists it has created investor value in Umeme as a business. At a recent AGM, the Company Directors noted that they’ll keep continue “...generating sufficient profits to sustain and build the business while providing value to shareholders.” Currently, Umeme is trading at Ushs360 a 23.6percent rise from Ushs275, the IPO price. Value created; Perhaps.

The US$42m Dfcu stake sale
Actis started managing the Commonwealth Development Corporation (CDC) 60.02percent shareholding in Dfcu Bank in 2004. In the same year, Dfcu went public with 30percent stake, as government and the World Banks’ IFC divested their interest in the bank, at Ushs230per share. On the day Dfcu was listed in 2004, the share price surged to Ushs305.

Since then, Dfcu has grown and Actis, is quick to express the investor value created for the last 10years.
“Today, DFCU is the 5th largest bank by assets, with an estimated asset base of US$387m (2012), representing approximately 7% of the total bank assets in Uganda. This represents 5x growth in the asset base – a 9 year CAGR of 18.5% (2003: US$84m to 2012: US$387m),” notes Actis’ Lassalle.

Five months after selling a stake in Umeme, Actis sold a 45.05 percent stake in Dfcu – retaining 15percent – to Robabank (27.54 percent) and NORFUND (17.54 percent). The sell was the largest equity block trade facilitated by the Uganda Securities Exchange (USE) and Actis, sold at Ushs1030 per share, translating into a take home of Ushs111.9bn (US$42m).

From a small time bank, to a big time bank whose asset base had been expanding, the partial exit a handsome return to Actis. Since 2004, Dfcu has posted net profits, the highest being Ushs31.5bn in 2011, and maintained a dividend of policy, on average, of 37percent of profit after tax. Actis, since 2004 has been earning a dividend from the 60.02percent (111,923,594 million shares) shareholding in Dfcu. For instance, between 2005 and 2012, Actis has earned over Ushs21.1bn in dividend payouts – excluding withholding tax. Furthermore, Actis was able to sidestep Capital Gains Tax obligations - on stake sale - to Uganda Revenue Authority, considering that as a listed company in Uganda, it doesn’t apply.

No wonder Michael Turner, Director of East Africa, Actis Capital LLP, notes “this [transaction] was unique in the history of Uganda.” Actis, with two partial exits in Uganda, has shown that there’s a return on investment but only if you are as smart as they are.

Mining speculators "rear their ugly heads"

Kenya recently cancelled mining licences due to irregularities in the awarding process. I wrote this piece in December 2012; however, it wasn't published. I've decided to share it.


You may have probably watched the Bank Of Uganda Governor Emmanuel Tumusiime-Mutebile in video clips saying “I have the capacity to burn their fingers.” He was referring to speculators who were betting on the Uganda Shilling making it volatile and making money out of it. However, speculation and currency trading cannot be separated, so maybe Mutebile’s words just remain threats. In yet another government department, The Department of Geological Survey and Mines (DGSM), there are indications they want to crack the whip on speculators holding exploration and mining licences, but doing no work.

Uganda’s mineral sector is already experiencing letdowns even before it takes off significantly to the level of Tanzania – East Africa’s largest Gold Producer. Such is the case that in 2012, a little known company East Africa Gold Sniffing acquired a limestone exploration licence after the previous holder – Hima Cement a Subsidiary of the Lafarge group – did not apply to renew the licence in the provided time. Even if someone at Hima Cement was incompetent enough not to notice that the 21 year old license was expiring, analysts note that it could have at least lost out to a reputable and known limestone mining company.  Hima Cement which says it contributes about Ushs45bn in revenues to the government instead lost the license to East Africa Gold Sniffing a company, with little – if not no experience in mining at all.

East Africa Gold Sniffing is categorized as one such speculator that exploited the loopholes within the legal framework to acquire a license. To begin with, records from the DGSM (July 2012) indicate that there are 582 licence holders around the country, of those 5 are for Kilembe Mines, 4 to Hima Cement, 6 to Steel Rolling Mills and 6 to Tororo Cement. The rest, are held by individuals and various companies – both genuine and obscure. For instance, there a host of about seven companies, which in total hold about 26 licenses of which the contact person for all the companies is one Pravin Ghelani. The companies registered are registered as Fergie Minerals and Metals Mining Company, Esimo Industries Uganda Limited, Esta Industries, Nelvo International, Hard Rock Engineering and Doher Industries Limited. Notably though, none of these companies have filled returns for their mining activities.

When Ghelani was contacted by The CEO Magazine, he declined to comment.

There are other companies holding licenses, that have not submitted any returns. Notably, some of them are represented by one Law Firm which has a link to East Africa Gold Sniffing. Kusaasira Dennis is an oil, gas and minerals attorney with Kusaasira and Co. Advocates and Consultants – a law firm mainly handling oil, gas and mining ventures. His law firm represents five companies, of which there is one active one. The companies held a total of 61 licenses and by June 2012, none had submitted returns, an indication of speculative tendencies.

According to Edwards Katto the assistant commissioner at DGSM, the country is losing out on much needed revenues because some license holders are holding back, “waiting for the highest bidder.” Uganda accrued fiscal revenues of $14.6m in 2011 from the mining sector. However Katto notes that the country could have earned more if other licence holders were in production. The bulk of the mining revenues come from Hima Cement, Tororo Cement, and Kasese Cobalt Company.

Katto further notes that the speculators make Uganda’s mining sector expensive for investment. “If speculator holds a licence, they will lookout for the highest bidder to buy their stake,” he says. “The country here will lose out because either the big companies would rather wait for a new licencing regime, rather than acquire a speculative company at a higher price,” he adds.

Why speculate?
The legal framework currently allows anyone who has the money to hold a license, which makes it easy for the speculators to pounce. According to DGSM, a one year prospective license costs about Ushs150,000, acquiring an exploration license will costs about Ushs650,000 with Ushs10,000 paid annually for the three years. A retention license for two year costs about Ushs450,000 and a mining lease – held for 15 years – will cost Ushs2million and annual fees per hectare of Ushs10,000. According Johnny Sassirwe the Chairperson of the National Artisanal and Small-Scale Miners Association, this allows Ugandans based in the mining communities to participate in mining activities and attract international investors.

“There is an opportunity for local small-scale miners to benefit if the cost of acquiring a licence is low. This encourages local participation. Also, if a big mining company approaches us with a good offer, then we can easily sale,” Sasirwe points out.

Furthermore, Kusaasira – of Kusaasira and Co. Advocates - uses the section thirty of the Mineral Act of 2003 to emphasize that they are working within the required legal framework.

“ The Mining Act allows farm-downs or total transfer of interests or share in mineral rights, with the consent of the Commissioner, and consent only to be withheld only if the proposed transferee does not quality to acquire the mineral right in question,” Kusaasira adds.

The current licencing regime has been “first come, first served,” is easy to maneuver if you have prior information on the status of particular mining area. Once an individual has this information, they can apply for a licence and get it if they are first ones to do so. The Hima Cement and East Africa Gold Sniffing case is yet to be resolved as the latter has dragged the government to court for “suspending” the licence. The challenge is, the government may be required to compensate – heavily – if the licence is to be cancelled because the policy was clear, “first come, first served.” The Brandenburg Energy Group – a Canadian Mining Company – had written a Letter Of Intent (LOI) to East Africa Gold Sniffing to acquire 100% stake in the company. Brandenburg expressed interest after East Africa Gold Sniffing had just been given the limestone exploration licence.

“EA Gold has appealed the decision of the Minister, and EA Gold has stated that it is confident that the Exploration License will revert to EA Gold; in which case, EA Gold will be in position to complete the transaction with Brandenburg,” reads a statement from the Brandenburg Group.

Kusaasira does point out that the end result is for licence holder is to make money and that if prices of the minerals on the global market are too low, then “why produce?”
For instance, Gulf Resources which holds the lucrative Vermiculite mining rights in Manafwa district had to suspend mining operations earlier this year becomes of declining global prices. Gulf Resources was producing about 22,000tonnes vermiculite per annum but was forced to scale back to 18,000tonns by Dupre Minerals Limited, a UK based company which was purchasing 100% of the produce. According to the company website, this was a result of the economic woes in Europe.

“Gulf Industrials Limited (ASX: GLF) wishes to advise that on an interim basis it has stopped production at its Namekara Vermiculite Project in Uganda until stock levels are reduced to a manageable level. Dupré Minerals Limited (“Dupré”), a leading UK based vermiculite distributor and the exclusive distributor of the production at Namekara Vermiculite Project continues to purchase the company’s vermiculite at reduced levels until the vermiculite markets pick up,” reads a statement from Gulf Industrial Limited.

On the other hand, the mining act doesn’t make it clear when it comes to the offences and mentions that anyone who submits false returns will be fined one hundred and fifty currency points – Ushs3million (Each currency point is Ushs20,000). However, the law makes it clear that a location license can be revoked by the commissioner if “within a period of six months from the date the licence was granted or renewed no mining operations have commenced under the licence.”

The location lease is one that is meant for small-scale miners who can spend a maximum of Ushs10m. The same licence differs from the mining licence in that it is meant for minerals that do not require specialized technology. Notably, the same revocation restrictions do not apply to the mining licence.
On this point DGSMs’ Katto agrees that there is a loophole but is quick to say that they begun issuing notices to non-complaint, inactive mining companies with licences.

“We are currently blacklisting these companies and serving them with a letter of notice.” However, there is a far greater challenge for DGSM – funding. “With limited funding,” Katto notes, “supervising and monitoring licence holders will remain a challenge.”

Licencing suspended
The Uganda government in early November placed a moratorium on issuing new licences as reported in The East African newspaper. The moratorium is partly a move to deal with speculators as the department moves into competitive bidding for the mining licences – a move they say would attract genuine mining companies into the business.

This however does not guarantee production also. For instance when Rio Tinto – a global mining and minerals company - held a mining licence for vermiculite in Manafwa between 2006 and 2009, but the only work documented was drilling of 64 wells for resource recognition, setting up of transportation infrastructure and market research. Sources within DGSM confirmed that no actual vermiculite was extracted for purposes of selling during the period Rio Tinto was holding the licence. This meant that the mining company held onto the licence until they sold their interests to Gulf Resources a subsidiary of Gulf Industrial – a listed company on the Australian Stock Exchange (ASX).

“Competitive bidding alone is not the solution if speculators are to be reduced in number. Remember, you cannot have a market without speculators because some will still beat the system. Broader reforms like increasing the minimum investment amount and punishments for deliberate failure to carryout mining activities are needed,” says Martin Drito, an MP for Madi-Okollo in Arua.

 He has wealth of experience in the minerals sector and an advisor to the president of Guinea on mineral policy between 1998 and 2004.