Uganda is standing on the verge of significant economic growth following the discovery of oil in 2006. The sale of the Lake Albert Rift Basin blocks to Tullow Oil and subsequently to its partners Total and CNOOC demonstrates the significant opportunity for investors and the future benefit to Uganda through oil revenues. This discovery should be transformational for the economy resulting in an improvement in the living standards of the current and future population of the country, provided that the oil proceeds are used wisely. There is every reason to believe that this will be the case given the messages that are emanating from the Ugandan government.
The global financial community has already indirectly played a role in Uganda through its support of Tullow Oil’s corporate financing, the proceeds of which are assisting Tullow in meeting its capital expenditure obligations. William Stevens, Global Head of Upstream Oil and Gas Structuring and Financing at HSBC in London, is of the view that ‘Resource or reserve based lending will form the basis of future inward investment. It is only a matter of time before banks will consider lending directly to fund Uganda’s development. A select group of lenders, including HSBC, may consider early-stage development financing based upon Contingent Resources and later seek to finance developments once Proven Reserves are crystalised, Field Development Plans are approved and the off-take arrangements are agreed’. Stevens goes on to say, ‘There is such an opportunity to develop a regional world-class oil and gas hub in Uganda, thereby bringing direct and indirect benefits to the population. In achieving this, a balance will need to be created between satisfying the domestic market with refined product and realising a higher value for the crude and satisfying investors through maximising export’.
Tullow’s financing, in which HSBC played a key role, is one example of how banks have supported investment in Uganda. It is anticipated that through continuing strong engagement with the government, it will be possible to see further opportunities in advisory, project finance and sovereign funding. As the economy grows, this should result in greater consumer-based spending. To cope with this, the domestic financial system will need to develop, under the control and guidance of the Bank of Uganda as the Central Bank, by implementing control measures to protect against some of the risks seen in other high growth markets across the region. If this is coupled with tight fiscal planning, there should be a significant improvement in Uganda’s financial metrics.
Even before the production of oil, Uganda’s economic statistics make positive reading. It has consistently posted strong economic growth of circa 6 per cent of GDP per annum, which should grow considerably once large scale oil production comes on stream in 2012. Government debt is modest following debt relief and is covered by Foreign Exchange reserves, an achievement which few countries can boast. This means that the ability of the government to borrow in anticipation of future oil revenues is theoretically strong. One example of this is the IMF granting a US$500 million non-concessional borrowing facility which will facilitate the capacity to access support from Export Credit Agencies for the financing of much needed infrastructure projects. These will further boost economic growth.
With wealth comes responsibility and it is the role of government to decide how best to deploy this new-found source of revenue. An important decision is whether to establish a sovereign wealth fund with the aim of diversifying the economy, or to spend on immediate domestic needs across infrastructure and social development. Often it is not a simple solution but rather a sophisticated combination of all which can lead to sustainable long-term economic growth in a country.
Many countries have established sovereign wealth funds to ensure that oil proceeds, or in some cases such as in Singapore and China, the surpluses from general trade receipts, are preserved for the benefit of future generations. These reserves are typically invested in international markets to achieve growth via dividends and capital growth. Phil Baines, Government Sector Chief Operating Officer and Co-Head for Africa with HSBC feels that banks have to play their part in facilitating the establishment and investment profiles of these funds. He points out that ‘Banks like HSBC have a long history of working with sovereign wealth funds to meet their objectives by offering a range of services from transaction banking such as payments and cash management and global custody, to foreign exchange and fixed income trading, to asset management and investment banking advisory services linked to strategic investments in equity, real estate and alternative investments’. Baines concludes that this presents a very exciting opportunity for Uganda.
The fortunate outcome of oil discoveries such as this is that it raises the profile of countries like Uganda leading to interest from international advisors. Banks will have their role to play in helping frame the growth potential of the country and navigate some of the pitfalls that have been experienced elsewhere.
One of the biggest questions facing the government is its capacity to save and spend in equal measure. While some argue for saving during these more prudent times, growth countries such as Uganda need to spend domestically in order to secure a strong future. This fuels a need to explore a means of sustainably funding long-term infrastructure needs while not over-burdening the economy with debt repayments.
‘Understanding how to create a sustainable sovereign funding platform is one of the most critical developmental steps for a country in growth mode,’ explains Andrew Dell. As HSBC’s Head of CEEMEA Global Capital Financing and Government Sector Co-Head of Africa, he has been involved in new markets long enough to know the pitfalls in accelerated growth via capital markets. He explains, ‘Appropriate advice around the most efficient funding techniques and a sound story regarding deployment of cash will protect both the issuers and the investors. This confidence will lead to long-term inward investment be it through capital markets, export-credit agency supported funding, project finance or direct equity which is vital to ensuring money invested is there to stay.’
Exposure to international markets, be it commodity or debt capital markets, also throws up some risks. Volatility in the markets can impact revenues and budget planning. These peaks and troughs need smoothing out using various market techniques which the government will need to consider.
Of equal importance is learning from the experience of other countries so that as much of the value of natural resources is retained in Uganda by developing onshore value-added capability through refining and exporting. In order for Uganda to capitalise on this, it will be necessary to invest heavily in refining projects as well as in the associated infrastructure. The role of project financing and export credit agencies will be key here. It is also important to Uganda’s prosperity that the future value of oil receipts is protected. While it is extremely fortuitous to Uganda that the price of oil continues to rise, there is no certainty that this will continue and that having the ability to lock-in future receipts at today’s price or today’s forward price is a prudent action. HSBC has developed strong expertise in this field via our joint venture with Total and we look forward to adding value to the Uganda Government in this regard.
As the market witnesses a new African star rising, so it realises that there is much work to be done. No doubt many specialists will travel to Kampala to offer their assistance. But it is for the people of Uganda to control their destiny and pay heed to the experience of their continental neighbours.
Krishna Patel, Chairman and CEO of HSBC Africa sums it up well. As he looks back over the long history of HSBC in Africa, he muses that ‘Many of the countries in which we operate in Africa are blessed with significant natural resource and potential. The role of international financiers is to ensure that we enable our clients to maximise the value of this potential. However, international banks also have a responsibility to take a long-term view on development so that a sound foundation is set for sustainable economic growth.’
Given that Mr Patel himself is a long-term HSBC Group General Manager with extensive experience in growing Emerging Markets businesses which have gone on to flourish, it is evident that HSBC is actually taking this responsibility seriously. This is demonstrated by the appointment of regional representatives who as senior bankers will be HSBC’s ‘eyes and ears’ in their respective region, seeking to identify supportable business opportunities and to utilise our network of product specialists to design appropriate solutions to address these opportunities. To emphasise the importance that HSBC attaches to East Africa, two coverage officers have actually been appointed in Jaap van Luijk and Abiy Fesseha, whose contact details are provided at the end of this article.
It is important that corporate involvement in the development of a country is undertaken in a responsible and socially acceptable manner and in so doing leaving a permanent footprint behind for future generations
Our commitment is also evidenced by the private equity investments now being made in Africa through HSBC’s Principal Investment division in a partnership approach alongside local businesses, HSBC clients and financial sponsors. HSBC Principal Investments has committed over US$100 million in ventures across Africa, including early stage, late stage and expansion capital; the philosophy being to invest in companies which offer positive economic, social and environmental benefit in the communities where they operate. In Uganda, HSBC Principal Investments is an anchor investor in The New Forests Company (NFC), a sustainable forestry company established to supply timber products to local and regional markets in sub-Saharan Africa. HSBC’s engagement has encouraged other organisations to support the company.
Ian Carr, Head of Global Banking HSBC Africa, has said ‘Our commitment to the region was recently underscored by our sponsorship of a British trade delegation, when we took 20 medium size companies on a road show throughout East Africa’. This, together with our recent involvement in the East Africa Oil and Gas conference in Kampala, are signs of our commitment to the region and to the future development of Uganda’.
In conclusion, Uganda is at an important juncture in its history. The international banking community has a vital role to play by working in partnership with the government of Uganda to carefully unlock the potential for the benefit of the current and future population of the country.