How our overblown expectations of what oil is going to do for our country are likely to cause trouble
I had always thought about the “oil curse” in terms of the “Dutch Disease” and the adverse incentives it creates that foster corruption in politics. The Dutch Disease refers to the tendency of oil revenue windfalls to kill other productive sectors of the economy. This happens when oil revenues lead to the appreciation in the value of the national currency thereby making a country’s other exports less competitive.
There is also the corrupting effect of oil on national politics. For instance, all governments need money to secure their political survival. This money can be used for basic things like paying the security services to ensure law and order. It can also be used to buy off powerful elites and make them loyal to the government. Governments also need revenues pay for public services for their citizens in order to secure their loyalty.
If revenue is collected as taxes from multitudes of anonymous citizens in the marketplace, government would be driven by self-interest to govern in a more enlightened way. Such governments would be inclined to negotiate with citizens about the appropriate political institutions and public policies that can increase their productivity, a factor that would drive economic growth thereby increasing public revenues. If not handled well, citizens can withhold their productive effort and thereby cause economic decline and a sharp fall in government revenues. Governments that depend on multitudes of their citizens for tax revenue would be more inclined to value citizen consent in governing.
Now mineral windfalls (just like foreign aid) undermine these incentives. With a rich mineral, a government can sit on a hole in the earth, pump out large quantities of oil at a handsome profit and pay for its public expenditure needs. This tends to discourage such a government from forging productive arrangements with its citizens. If you look at many mineral rich countries that have come to tears, this has been a major factor.
However, I think I have always ignored a third factor. The real danger for Uganda may not only come from how government handles the oil revenues but from overblown expectations. Ugandans harbour expectations of what oil revenue will do that defy all imagination. It seems Ugandans expect that when we begin selling oil, our roads will be paved with marble, our street lamps decorated with diamonds and our sidewalks made of gold. Once oil begins to flow, these overblown expectations will drive our politics into a particular direction so that regardless of the facts, the struggles unleashed could lead this nation to disaster.
This lesson began to take shape in my mind when then youth MP for Western Uganda presented documents in parliament in October 2011 alleging ministers had been paid millions of dollars in bribes by oil companies. Parliament sat and in a charged debate, without any effort to establish the authenticity of the documents, passed 14 resolutions literary halting all activities in the oil industry. Anyone who tried to call for caution, including the First Lady, Janet Museveni, was shut down.
This lesson finally made a home recently when Ugandans employed by the French oil company, Total Uganda, went on strike claiming they were being poorly paid.
Now imagine that the least paid fresh university graduate at Total earns anything between Shs4 million to Shs5 million. Some of the people who went on strike earn more than Shs15m per month. On top of this each one of them has club membership at Kabira or Sheraton, free lunch of Shs500,000 a month, medical insurance for a spouse and up four biological children, a life insurance policy, and transport allowance of Shs500,000 per month. They have opportunities for training both in Uganda and abroad. Every year every Total staff member gets a salary increment and a bonus for those who perform well.
I called PriceWaterhouse Coopers (PWC), the audit firm that does annual surveys of wages across all sectors – public and private. They told me on average, a fresh graduate in Uganda earns Shs800,000 per month. So why do Total staff members feel underpaid?
I think it is because of these overblown expectations about the oil; they work for an oil production company and believe that they should earn much more.
But how rich will oil make Uganda? At peak (which is expected to be reached by end of the second year of production), Uganda will be producing 230,000 barrels a day. Even if the prices of oil increase to $100 a barrel (today it is $55), that would translate into $8.3 billion in revenue. In the first three to four years, the oil companies will be recovering their investment costs at a rate of 60% of total oil revenue. Therefore, actual revenue will be $3.4 billion. Under the revenue sharing agreements, government takes 70% and the oil companies 30%. So government revenue will be $2.4 billion. We can add here royalties and corporation tax from the oil companies, and the total would still not exceed $3 billion.
For a poor country like Uganda, $3 billion in extra government revenue per year is a lot of money. Indeed after oil companies recover their initial investment, the government’s take will reach almost 80 of total oil revenues i.e. $6.4 billion – which is the entire budget of Uganda today. But it is not a lot to foster a fundamental change in the quality and quantity of public goods and services.
In fact we need to divide this revenue by the population of about 45m by 2022, during the period when oil companies are recovering their initial investment cost. That gives us only $67 dollars per person, after which it increases to $142 per person. This is not the kind of money that paves roads with gold or decorates traffic lights with diamonds. In the context of our poverty, however, political demagogues and ignorant journalists will combine with wannabe pundits to tell tall stories of how much this money can do.
This toxic combination of high ignorance and little knowledge will get married to overblown expectations to pollute the political atmosphere to dangerous levels. I really hate to be a prophet of doom but I notice that more than the Dutch disease and corruption, it is overblown expectations that will cause trouble. Inside the government alone, there will be serious competition on who gets what while outside of it, people will be scheming on how to get into power and grab the spoils.