Auditor General Faults Government On Oil Deals

On April 26, at the 4th Oil and Gas Convention, organized by the Ministry of Energy and Mineral Development in conjunction with the Uganda Chamber of Mines and Petroleum, the Prime Minister of Uganda, Ruhakana Rugunda spoke with a lot of optimism about Uganda’s eye for first oil by around 2020.

First, he said, big steps had been made after government signing the contract for the construction of the $4 billion oil refinery with the Albertine Graben Refinery Consortium after more than one year of negotiations. He said efforts to get other key projects like oil roads, the pipeline, the Airport were in high gear.  

He also said that government had put in place a sound legal and policy framework that paved way for the formation of key institutions of government and the private sector to take part in the oil and gas sector.

He also said that government remains committed to working with the private sector, the people of Uganda in ensuring that the country gains from the oil and gas sector.  

As Rugunda spoke all this, earlier reports from institutions of government, researchers, civil society had indicated several gaps that needed urgent attention from mainly government so as not to compromise the ambitious target of getting first oil.  

Key among the entities raising a red card was the Office of the Auditor General that also cared to give recommendations in its latest annual report for 2017. His recommendations were not different from those that had been raised by other key sector players at several fora.

Unclear funding of Oil Company

One of the institutions that Rugunda was referring to in his speech at the oil convention was the Uganda National Oil Company. This was brought to life by Article 49 of the Petroleum (Exploration, Development and Production) Act, 2013. The role of the company is to manage Uganda’s commercial aspects with regard to petroleum activities and the participating interests of the state in the petroleum agreements. 

Its role further includes the management of the business aspects of the state with regard to petroleum, proposing new upstream, midstream and downstream ventures, both locally and internationally and developing expertise in the oil and gas sector. 

However, according to the AG report (2017), it is not specifically stated how the company will be financed. 

For the company to duly undertake its daily operations and its obligation, as a participant in the joint ventures and production sharing agreements and government representative in the refinery and pipeline projects, it needs an established source of income. This was a big worry to sector players when the report was released early this year. 

Many said, including the AG that failure to provide funding would hamper the company from undertaking its obligation thereby affecting the timely completion of projects and would eventually make it default on any joint ventures with other International Oil Companies. 

In his recommendations, the AG advised management to engage the Ministry of Finance Planning and Economic Development to ensure that funds are provided to the company to enable it manage the country’s commercial aspects with regard to petroleum activities and the participating interests of the state in the petroleum agreements. 

In addition, the report indicates that, the share capital of UNOC was Shs10 billion, comprising 10,000 ordinary shares each with a share value of Shs 1 million each. The Ministry of Energy and Mineral Development (MEMD) had a shareholding of 51% while the Ministry of Finance, Planning and Economic Development had 49%. However, by the time of audit, the report notes that none of the shareholders had paid for the shares of the Company. 

Meanwhile, for the company to operate in the initial period, a total of Shs 1.3 billion was disbursed to UNOC by the Ministry of Energy to meet company operational expenses. The failure by the shareholders to pay up for the share capital greatly hindered the company’s operations. 

“I advised that the company to engage the shareholders with a view to ensuring that they meet their obligations so that the entity can undertake its activities geared towards fulfilling its mandate,” the AG notes in the report. 

Compensation queries  

Following the commercial oil discoveries in the Albertine Graben and the decision by the government to construct an oil refinery in Kabaale, Buseruka sub-county, Hoima district, a Resettlement Action Plan (RAP) was developed by the Ministry of Energy to guide compensation and or resettlement of an estimated 7,118 Project Affected Persons (PAPs) in this area. The PAPs comprised 1,221 households and 2,473 directly affected land owners and licensees. 

Despite the social sensitivity of the exercise and the substantial investment in the project of Shs64 billion, there are concerns that the eight months compensation project which began on  June 13, 2013 and was expected to have ended by  February 13, 2014 is still far from completion with significant delays in compensation of over four years. 

As such, the Office of the Auditor General conducted a Value for Money audit covering six financial years [2011/12-2016/2017] with the objective of assessing whether the ministry of energy adequately compensated the people in a timely manner. 

In their findings, they say the project experienced significant delays in the implementation of major Resettlement Action Plan (RAP) activities, ranging from 20 months to over four years. 

It was noted that whereas the monitoring and evaluation activities were supposed to be continuous from inception, the consultant was procured in June 2017. Similarly, the livelihood restoration programme which was scheduled to be implemented by September 2013 commenced in August 2017. 

Additionally, the procurement of an NGO to carry out compliance audits on the implementation of the RAP had not started by the time of audit (November 2017). Delayed implementation of the RAP necessitated extending the contract of Strategic Friends International (SFI), a consultant engaged to manage the RAP five times and increased the cost of the consultancy services by a hooping Shs 1.2bn. 

In terms of adequacy and cash compensation, the AG report notes that out of the 2,680 persons who were eligible for cash compensation, 2,657 had been paid by the time of audit (November, 2017) representing 99%. It was however noted that out of the 2,657 PAPs, only 104 (representing 4%) were paid within the prescribed timeframe. 

There were significant delays ranging from less than six months to over two years to compensate the remaining 2,553 (96%) of PAPs. Consequently, by the time they received their money, the price of land in neighboring villages had risen, making it difficult for them to acquire land of equivalent size. 

Sadly, the report notes that whereas the Chief Government Valuer (CGV) approved the valuation methodology submitted by Strategic Friends International (SFI) showing the procedures to be used for valuation of property permanent in nature, the methodology was not followed during valuation of customary land in the five villages of Nyamasoga and Nyahaira, Bukoona A, Katooke and Kayera. 

The value of customary land was overvalued in two villages and undervalued in three. These anomalies resulted in a loss of Shs 295 million to government and Shs 16 million to the project affected persons. Unapproved rates were used for compensation of almost all the persons affected. 

The report indicates that 43.2% of sampled PAPs had their crops valued at rates different from the recommended rates by the district land board. And that although the cash compensation was done over several years, the ministry of energy did not adjust the compensation values to cater for the market price adjustments in the various years of payment. 

In 2016/17 when updated rates for properties were approved by the government valuer, only two PAPs had their rates revalued. Consequently, their total payments increased from Shs1.029 billion and Shs74 million to Shs2.2 billion and Shs189 million respectively. This violated the principle of fairness in compensation and left some PAPs dissatisfied. 

As all that was going on, the construction of the houses for the PAPs and other resettlement infrastructure such as schools and health centres which was supposed to commence in October/November 2013 was delayed by two years. 

The residential houses and Buseruka Health centre III were completed in 2017 while the construction of the schools was not yet complete by the time of audit in November 2017. 

However, forty six resettlement houses were constructed in accordance with contract specifications. However, the report notes that, there were instances of poor workmanship, mainly on the schools. For example, the concrete tank bases had failed, cracks were noted on some floors, tie beams for the trusses were failing, and precast slabs were poorly aligned. 

Whereas the PAPs were consulted during land acquisition, their concerns were not considered during implementation by SFI.

In addition, it was noted that whereas the resettlement plan registered 7,118 project affected persons, in total, there was no documentation of how this number of persons was identified and neither was there an explicit list to show all the persons due to absence of primary data. 

There was also a variance between the number of persons reported during the census and those that were actually paid. Around 2,473 persons were identified during the resettlement action plan while 2,657 were paid. 

General recommendations

In his report, the AG recommended that; the ministry of energy should ensure that key planned project activities are prioritised, closely supervised and monitored to ensure that the expected deliverables are achieved as planned. 

In addition the AG recommended that going forward; the ministry should ensure that comprehensive planning is done, including sensitization of the project affected persons, and the involvement of NGOs, so as to quicken the disclosure exercise. It also recommends that the resettlement action plan consultant adheres to compensation guidelines for purposes of fairness. Also project affected persons should be profiled so as to ensure timely payment to avoid speculation. 

That the government valuer closely supervises and monitors the valuation exercise for future compensation projects and ensure that the approved valuation methodology is adhered to by the implementing entity or consultant. 

Overall for the oil and gas sector, the report says, there were notable achievements in the compensation of project affected persons in the refinery project and that the ministry of energy successfully compensated 99% of the persons who were eligible for compensation.

Some infrastructure works such as construction of 46 residential houses and improvement and expansion of Buseruka Health centre had been completed and handed over to the ministry. On a positive note, the quality of the infrastructure was to a great extent assessed as satisfactory. 

That said, however, significant delays were noted in the overall implementation of the project particularly in payment of affected persons and construction of resettlement infrastructure. Key activities of the resettlement plan such as procurement of a consultant to undertake monitoring and evaluation of the project, construction of schools and places of worship, as well as implementation of the livelihood restoration programme were delayed as well. 

The use of unapproved or obsolete valuation rates was noted in almost all the years of compensation, and rates were not applied uniformly thereby causing grievances and delays in the compensation process. Failure to adhere to the project affected person’s proposals during construction of resettlement houses also affected acceptance. 

“It is hoped that the proposed recommendations will go a long way in improving the management of future compensation projects,” the AG report reads in part. 

Quick oil sector facts  

  • Uganda confirmed 6.5 billion barrels of oil in about 20% of the potential area of which about 1.5 billion barrels is recoverable
  • Uganda expects a total investment of about US$15 -US$20bn in the sub-sector in the next 3-5 years. These include about US$8 bn in the upstream development, US$4bn in building the crude oil export pipeline, US$3.5bn in building a refinery and other investments in support of infrastructure like the airport, roads and more.

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