16 March 2015

The Local Content Problem under the Petroleum Law Regime in Uganda

This article was written by Andrew Kibaya (Partner at Shonubi, Musoke & Co Advocates) and Hellen Nakiryowa (Senior Associate at Shonubi, Musoke & Co Advocates).

In keeping with the trends in other natural resource rich African countries, Uganda has in the recent past overhauled the primary legislation in the oil and gas sector by repealing the old and introducing new laws. In particular, the regulatory reforms have seen the passing of the Petroleum (Exploration, Development and Production) Act, 2013 (the Upstream Act) and the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act, 2013 (the Midstream Act) to regulate upstream and midstream oil and gas activities respectively in Uganda. Correspondingly, these laws commenced in April and June 2013.

The laws were passed amidst pressure on government to have deliberate policies to promote local content development, strengthen national industries and enable more direct sector benefits to indigenous people. It is therefore not surprising that both these laws have aggressive local content development obligations placed on the licensees, contractors and other industry players. The key emphasis in terms of such obligations is placed on the use of local raw materials, creation of a local skilled Ugandan workforce and sourcing of goods and services locally. This bold legislative move was grounded in the National Oil and Gas Policy of 2008 which head lighted the aspirations of the executive. 

Although the move is clear and the objectives are well articulated in the Policy, the wording of the provisions is not far from confusion. The unclear position of the provisions appears to presently pose challenges in interpretation, monitoring and implementation.

In particular, the Upstream Act requires all licensees to give preference to “goods produced or available in Uganda” and services which are rendered by “Uganda citizens and companies.” and in the event that any such goods and or services are not available within Uganda, an obligation is placed on the relevant contractor or licensee to acquire the same from a company which has a joint venture arrangement with a “Ugandan company” owning at least forty eight percent of the joint venture. Expressions such as “goods produced or available in Uganda” and Ugandan citizens are comprehendible. The same cannot be said of “Ugandan company”.

Whereas emphasis is placed on a Ugandan company, the law does not define the meaning of a Ugandan company. The current wording does not draw a distinction between company ownership, control, place of registration/incorporation, registration or incorporation. It is not clear whether when the Act refers to a Ugandan company, it means a company incorporated in Uganda, owned by Ugandans or controlled by Ugandan citizen. This makes the provisions susceptible to differing interpretations.

Guidance as to what amounts to a Ugandan company may be drawn from the current Companies Act, which refers to foreign companies as companies incorporated outside Uganda. By necessary implication, a Ugandan company would then be one that is incorporated in Uganda. This would be in line with common law; upon which the company law regime in Uganda is based, where a company is considered a citizen of a country where is it is incorporated. 

Whereas the above would appear to be a plausible interpretation, it still raises concerns as it would then mean that a company incorporated in Uganda but with all or majority shareholding or control being held by foreigners would be considered a Ugandan company and thus benefit from the priority under the petroleum laws. Conversely, such an interpretation would have the effect of excluding a company registered outside Uganda (but owned by Ugandan citizens) from benefitting from the provisions of the Upstream Act.

Therefore, for such an interpretation to be practical, it would have to operate with proper parameters intended to give effect to the local content policy in Uganda, which parameters currently do not exist.

In the alternative, the state of the law as is may be interpreted with the erroneous presumption that a foreign company incorporated outside Uganda but which subsequently registers a place of business in Ugandan would not differ from a newly formed company incorporated in Uganda. As a result,   both companies, by virtue of having places of business in Uganda would be considered as Ugandan companies.

This proposition that a foreign company can be considered a Ugandan company not only overlooks the distinction between a foreign company and a locally incorporated company as set out in the Companies Act but also creates an absurd result and brings the intended objects of the local content provisions into question as the level of participation of Ugandans in such circumstances would appear to be disregarded.

And yet, further guidance on the interpretation of the provision may be drawn from other Ugandan laws including Investment Code Act, the Land Act and the Public procurement laws; which acts variously define a foreign or a non-citizen company. However, looking at the content of these laws, the definitions vary from law to law and are centred on the objective of that particular law and may thus not augur well with the objects of Upstream Act.

Be that as it may, even if the Upstream law where to be given a more purposive interpretation; with a Ugandan company being interpreted to mean a company owned or substantially controlled by Ugandan citizens, this is likely to span a further question as to the likely disparity in the ability of Ugandan entities to proficiently meet the demands and competencies required in the industry. There may be only a small class of Ugandans that can meet the investor needs for partnership and it may then be a case of finding a local investor to merely meet local requirements without necessarily creating capacity or enhancing investor/company value.

Aside from the vague reference to a Ugandan company under the Upstream Act, a strict interpretation of the requirement further seems to suggest that the goods and services provision can only be made by a company in utter disregard for all other business entities like partnerships or even individuals with the necessary capacity to meet the requirements.

In comparison, the Midstream Act in relation to a similar provision addresses the above gap by providing wider and clearer wording as it refers to “registered entities owned by Ugandans.” This means that other business entities are put into consideration and emphasis is undoubtedly on local ownership.

However, the Midstream Act is itself not without uncertainty. It is not expressly provided as to whether foreign companies incorporated outside Uganda but owned by Ugandan nationals would have the benefits under the Act in the event that they formed a branch office in Uganda. In addition, the extent of local ownership of such registered entities is not clearly prescribed.

This lack of clarity and apparent contradiction between the localization requirements under the Upstream and Midstream laws presents significant challenges and renders the very objective of the provisions obscure given that provisions are currently susceptible to exploitation and misinterpretation. Perhaps even more concerning is that an investor interested in the oil industry in Uganda may not know with certainty if they are complying with the law or what is required of them. 

The new local content provisions, while representing a much needed revamp of the oil and gas laws in Uganda, in their current state, they appear to be controversial and a conceptual challenge that is undoubtedly bound to be riddled with monitoring and implementation hurdles. Resultantly, it may be difficult for the regulator to communicate a particular position and for the industry players to understand and accept the regulator’s position.

These unclear definitions and the glaring inconsistencies within the law as well as the seeming mismatch between the Oil and Gas Policy and the law itself appear to suggest that the provisions were included without due regard to the realities of the industry and thus impresses the need to put the two laws in tandem and also iron out the ambiguities. 

Local and international interested parties should lobby for the regulations to be passed to assist with the implementation of the oil and gas laws to be comprehensive and offer clarity in relation to the contradictions that currently exist.  These regulations usually only operationalise what is in the primary laws and so development of the proposed regulations may thus not be without challenge.

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