KAMPALA: Local suppliers will have access to cheaper loans from banks to enable them to compete for lucrative jobs in the oil and gas sector. The affordable credit is being pushed by the Energy Ministry as part of the efforts to fulfil the local content requirements.
The Head of the National Content in the Directorate of Petroleum, Brian Ochaki Kabalega, says there are plans to establish a local content development fund from which local suppliers can access cheaper credit.
Local content generally refers to the use of domestic suppliers, employment of nationals, and transfer of technology, skills, and know-how from multinationals to domestic suppliers.
It is emerging that while some of the jobs in the oil and gas sector have been ring-fenced for Ugandans, many firms cannot fulfil their obligations because of a lack of cheaper credit.
According to Ochaki, money from the local content development fund will be channelled through local banks to oil and gas suppliers.
“The sector is capital intensive, so a lot of our local players struggle with the issue of financing. So we propose a 1% surcharge on all tier-one contracts. And that money will go into a bank. So the money will be managed by the bank or any financial institution. ” said Ochaki.
Some local suppliers have complained about the high-interest rates charged by commercial banks. They say the high-interest rates and the strict requirements have made local financing for the oil and gas sector inaccessible.
When indigenous suppliers win a contract, they are required to provide a performance guarantee, an advance payment guarantee, and other forms of guarantees before they are given the go-ahead. Those guarantees are normally given by banks.
In some incidents, the main contractors require assets like vehicles, among others. Those requirements and a lack of credit have been identified as a major hindrance to indigenous companies from supplying the capital-intensive oil and gas sector.
Stanbic Bank’s executive Head of Banking and Non-Bank Financial Institutions, James Karama, says Stanbic has provided such guarantees to enable local suppliers to execute the contracts.
In some cases, they want assets to run the operations; pickups, yellow metal. We also provide these through our vehicle asset finance. Then, in some instances, they want to import machines and they want to open letters of credit. We also provide that, “he said.
So where you hear the complaints, it is probably when the company’s track record, its financial performance, the balance sheet, or the capital in the business is not well-aligned with the exposure that they want to take on, added Karama.
The announcement of the Final Investment Decision (FID) by the Joint Venture Partners on Lake Albert Development projects and the East African Crude Oil Pipeline opens up the sector for lucrative contracts.
One major fear is that some local suppliers may remain spectators as construction of the facilities takes off. Financing by banks would be one way of securing those deals.
What Karama encourages would be for local suppliers to pool resources through joint ventures and partnerships. So look for a partner who takes the lead or you maintain the lead depending on the type of service. There are some services that are ring-fenced for Ugandan companies. And there, Ugandans are encouraged to take the lead. ”
Karama says that with joint ventures, Ugandan companies will be able to cover their gasp in terms of financing, technical abilities, and experience in delivering the contracts.
Recently, the Executive Director of the Petroleum Authority of Uganda (PAU), Earnest Rubondo, revealed that oil companies submitted contracts worth over US $6 billion for over 40 work packages for the Tilenga, Kingfisher, and East African Crude Oil Pipeline (EACOP) projects.
You will note that some of the companies that have been awarded these Tier One contracts include some of the biggest and well-established engineering companies in the world. They also have significant capital bases. This is an important achievement, as these Tier One contractors, with large market capitalization, are expected to set up base in the country, “said Rubondo.
He estimates that national content will retain 40% of the USD15–20 billion invested during the development phase.
According to Rubondo, the definition of the participation of Ugandans in the sector has been subdivided into national participation as well as community participation.
“A lot of work has been done in this area, and the first thing is information. The oil companies are required to hold stakeholder workshops where they inform all the players. Concerning the upcoming activities and the volume of goods requiredAnd they do that before they advertise, “revealed Rubondo.
He agrees that one of the challenges Ugandans have is the aspect of finance.