The main purpose of this study is to carry out a critical analysis of the benefits of foreign capital in Project Financing in Uganda’s oil and gas sector.
Efforts to find oil in Uganda started as far back as the 1980s. However, the initial efforts were not successful in establishing commercially viable deposits in the country. Renewed and consistent exploration efforts commenced in 1980 which culminated into confirmation of commercially viable oil in 2006 . The companies currently licensed to explore, develop and produce petroleum in Uganda are; China National Offshore Oil Corporation Uganda Limited (CNOOC), Total and Total E& P. All these are aimed at facilitating investments in the oil and gas sector.
These company had to seek foreign capital to facilitate the major projects of oil exploration and development and to ensure a steady cash flow of funds to cater for the projects through project financing. This is very critical for the success of any project undertaken by the parties. Most developing countries looking for capital and the only way how they can finance their projects is through project financing in which they receive the continuous flow of cash for the life of the project after guaranteeing the bankability of the project through risk mitigation and other forms of security.
TABLE OF CONTENTS
DECLARATION
APPROVAL
DEDICATION
ACKNOWLEDGEMENT
LIST OF ACRONYMS
DFI Direct Foreign Investment
GoU Government of Uganda
TABLE OF INSTRUMENTS
ABSTRACT
CHAPTER ONE GENERAL INTRODUCTION
1.0. Introduction
1.1. Background to the Study
1.1.1. Historical perspective
1.3. The Statement of the Problem
1.4. Purpose of the Study
1.5. OBJECTIVES OF THE STUDY.
1.5.1. Main Objectives of the study
1.5.2. Specific Objectives of the Study
1.6. Research Questions
1.7. Scope of the Study
1.7.1. Content Scope
1.7.2. Time scope.
1.7.3. Geographical scope.
1.8. Justification of the study.
1.9. Significance of the Study.
1.9.1. To the Researcher.
1.9.2. To policy makers.
1.9.3. To students.
1.10. Framework.
1.11. Theoretical Framework
1.12.0. Chapter synopsis.
1.12.1. Chapter one. Introduction.
1.12.2. Chapter Two. Literature Review.
1.12.3. Chapter Three. Methodology.
1.12.4. Chapter Four. Benefits and disadvantages of foreign capital in project financing and foreign investments in Uganda's oil and gas sector.
1.12.5. Chapter five. Recommendations on Mitigation measure.
CHAPTER TWO LITERATURE REVIEW
2.1. Introduction
2.3.1. The Project Company
2.3.2. The Contract Structure
2.3.3. Refinancing Project Finance Deals
2.4. The various forms of project financing available.
2.5. The effectiveness and benefits of project financing
CHAPTER THREE RESEARCH METHODOLOGY
3.0. Introduction
3.1. Doctrinal legal research method
3.2. Doctrinal Method as a Two-Part Process
3.2.1. Research Design
3.3. Research Method
3.4.1 Document Instrument
3.4.2 Sources of Data
3.4.3 Data Analysis Plan and Presentation
3.4.4 Ethical Consideration
3.5.0 Limitation
3.5.1. Limitations of the Study
3.5.2 Cost of the Research:
3.6. Chapter Summary
3.7. Conclusion
CHAPTER FOUR. EFFECTIVENESS OF BENEFITS OF PROJECT FINACING OF THE OIL AND GAS SECTOR
4.0 Introduction
4.1. The effectiveness and benefits of project financing to Uganda's economy
4.2.0. Advantages and disadvantages of Project Financing
4.3. An overview of benefitting Local Content and Companies
CHAPTER FIVE ANALYSIS, SUMMARIES, CONCLUSIONS, AND RECOMMENDATIONS:
5.0 . Recommendations how Major Risk Categories Can Mitigated to Enhance Benefits of Foreign Capital in Project Finance of Uganda's Oil and Gas Industry.
5.5.2. Extension of credit (credit risk)
5.5.3. Development of the project (FEED) stage or Pre- completion or construction stage
5.5.4.1. Activity/ planning risks
5.5.4.6. Performance Risk/Operation Risk.
5.5.4.1. Commercial Risk/Currency Risk
5.5.4.8. Credit Risk
5.5.4.9. Financial risks
5.5.4.10. Supply risks;
5.5.5.1. Construction and Completion Risk
5.5.5.2. Environmental Risk.
5.5.6. General Recommendations
5.5.7. Areas for Future Research
5.5.8. Conclusion
REFERENCES
Books
Articles and Journals
Internet Sources
DECLARATION
I, ADAMS RAJAB KIBWANGA, do hereby declare that this Dissertation entitled “AN ANALYSIS OF THE BENEFITS OF FOREIGN CAPITAL IN PROJECT FINANCING OF UGANDA'S OIL AND GAS SECTOR.” is entirely my original work, except where acknowledged, and it has never been submitted to any other University or any other institution of higher learning for the award of a degree. I also certify that this Dissertation was particularly prepared by me for the partial fulfilment for the award of Master of Laws in Oil and Gas of Uganda Christian University.
Abbildung in dieser Leseprobe nicht enthalten
APPROVAL
This is to certify that this Dissertation entitled “AN ANALYSIS OF THE BENEFITS OF
FOREIGN CAPITAL IN PROJECT FINANCING OF UGANDAS OIL AND GAS
SECTOR.”, has been done under my supervision and now it's ready for submission.
Abbildung in dieser Leseprobe nicht enthalten
DEDICATION
I dedicate this effort to my wife - Sakina Adam Kibwanga,
and
Our children; Rajab Adam Onono-Kibwanga Jr., Annan Okeng Makmot - Kibwanga, Mariam
Awor Kibwanga, Sofia-Mae Kibwanga, Kayla Kibwanga, Alaysha Kibwanga, Rania Akia
Kibwanga and Radia Akila Kibwanga.
ACKNOWLEDGEMENT
The work of this nature cannot be the effort of one person. It is a product of many but above all I must thank the Almighty God, the source of knowledge and wisdom, for having seen me through it.
I also wish to acknowledge all the people who made this thesis possible. I cannot mention all their names here without leaving out others but there are a few I cannot resist mentioning. I thank my kind and sagacious supervisor, Mr. Emmanuel Elau, my father - Mr. Rajab Shaban Kibwanga for a giving me a good academic foundation, my wife -Sakina Adam Kibwanga for being patient with me as I study, my classmates for sharing knowledge and experiences, and my workmates for standing in for me as I take this course.
All the shortcomings in the final text, if any, remain mine.
LIST OF ACRONYMS
Abbildung in dieser Leseprobe nicht enthalten
TABLE OF INSTRUMENTS
The 1995 Constitution of the Republic of Uganda
Capital Markets Authority Act (Cap.84)
Companies Act 2012.
Foreign Exchange Act 2004
Income Tax Act, (Cap. 340)
Investment Code Act, 2019 (replaced the Investment Code Act, Cap 92).
National Social Security Fund Act
Petroleum (Exploration, Development and Production) Act 2013 (Upstream Act)
Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act, 2013 (Midstream Act)
Public Finance Management Act, 2015
Tax Procedures Code Act 2014
Trade Licensing Act (Cap. 101)
Uganda Citizenship and Immigration Control Act,
Value Added Tax Act, (Cap. 349).
REGULATIONS
Midstream General Regulations; 2016
Midstream HSE Regulations; 2016
Midstream National Content Regulations; 2016
Petroleum Supply (General) Regulations; 2009
Upstream General Regulations; 2016
Upstream HSC Regulations; 2016
Upstream Metering Regulations; 2016
Upstream National Content Regulations, 2016
POLICIES
National Oil and Gas Policy (NOGP); 2008
National Local Content Policy for the Petroleum Subsector in Uganda; 2017
GOVERNMENT PUBLICATIONS
Model Production Sharing Agreement
ABSTRACT
This study sets out as an investigation into the conceptualization, application and harvesting of benefits of project financing in Uganda's oil and gas sector. It is prompted by the dearth of information on big project financing in the country and it is further catapulted by the need to trace the linings of the intricate lay-outs of international project financing and its domestication in Uganda. It looks at the major players in project financing, sources of project financing, major challenges and mitigation, advantages of project financing and ways of sustaining project financing in Uganda's oil and gas industry.
The study looks at the deep meaning of project financing and the justification for its existence. To achieve this, it explores the legal and conceptual framework relating to project financing while using Uganda's jurisdictional territory both as a yard stick and a springboard. A yard-stick because these projects must measure up to the legal requirements of countries in which they are rolled out. A springboard because it is only from the laid-out municipal legal and conceptual regime that a meaningful and relevant conversation is sustained and a customized discourse is attained.
It is therefore of no surprise that in pursuit of the deeper understanding of variables that influence the optimization, or lack of it, of the benefits of project financing in Uganda this research qualitatively delves into statutes, rules, regulations, standards and existing literature to mention but a few. It projects out an inquisitive topic which manifests a clear research problem and as well as generates objectives and questions which questions themselves are juxtaposed against the justifications. It is a flowing process which is occasionally, and for good measure, punctuated with the review of the existing status quo.
Finally, this effort is aimed at providing answers to the stated research questions while at the same time contributing towards the body of knowledge on optimizing the benefits of project financing in Uganda. All these is done on the backdrop of presenting the final product as an effort needed to fulfill an academic requirement for the award of a master of laws degree -this does not mean watering down the other usefulness of the research effort but rather strengthening and augmenting its quality and purpose.
CHAPTER ONE GENERAL INTRODUCTION
1.0. Introduction
Efforts to find oil in Uganda started as far back as the 1980s. However, the initial efforts were not successful in establishing commercially viable deposits in the country. Renewed and consistent exploration efforts commenced in 1980 which culminated into confirmation of commercially viable oil in 20061. The companies currently licensed to explore, develop and produce petroleum in Uganda are; China National Offshore Oil Corporation Uganda Limited (CNOOC), Total and Total E& P2. All these are aimed at facilitating investments in the oil and gas sector.
These company had to seek foreign capital to facilitate the major projects of oil exploration and development and to ensure a steady cash flow of funds to cater for the projects through project financing. This is very critical for the success of any project undertaken by the parties.3 Most developing countries looking for capital and the only way how they can finance their projects is through project financing in which they receive the continuous flow of cash for the life of the project after guaranteeing the bankability of the project through risk mitigation and other forms of security.4
1.1. Background to the Study
The background to the study is presented in four perspectives: the historical, theoretical, conceptual and contextual.
1.1.1. Historical perspective
Following the first commercial discovery of petroleum in Uganda in 2006, government considered putting swift measures in place to address comprehensive and efficient aspects of exploration, development, production and commercialization of the country's oil and gas resources.5 These strategies included enacting the National Oil and Gas Policy in 2008, formulation of the petroleum upstream and midstream laws in 2013 and attendant regulations in 2016, and formation of the Petroleum Authority of Uganda to regulate the different players in the sub sector and Uganda National Oil Company to handle commercial interests of the state and state participation in 2016.
The history of foreign investments dates back to many centuries of business innovations. Capital flow investments outside national boarders first began as individual activities which involved only the activities of family business and it was later followed by economic entities in the companies of model sizes which grew into international large multinational corporations6. Mira Wilkins states that the Sumerians were the first ones to hire people abroad to do business for them at around 2500 BC for the purpose of selling their trading goods followed by the Italian bankers of Brand and Peruzzi in England representing the papacy and later joined by the Dutch and the British in India. However, in Uganda, foreign trade is traced back to the period before the coming of the British colonialist. Kingdoms like Buganda and Bunyoro used to trade with each other and other entities and even in the long-distance trade7. After the coming of the British, foreign investments through trade in agricultural products and later investments were intensified after independence.
In today's Uganda, there are many efforts aimed at attracting more investments in the country and this has led to the creation of the Uganda Investment Authority. Investments in oil and gas were started by the Rockefeller family in 1870s after the discovery of oil of which they used to create the standard oil company which was broken down by the USA anti-monopoly laws to create more players in the oil sector8.
The fall in oil prices may, however, affect petroleum investors in the oil and gas sector due to the large amount of capital invested in exploration activities. During the period of high oil prices, the investors now tend to focus on the country's fiscal regimes with regard to the valuation of oil and gas exploration and production9. An effective and attractive petroleum fiscal regime is vital and challenging in some developing counties. Uganda is a resource rich developing country with estimated proven natural gas and oil reserves of 500 billion cubic feet and so far with 6.5 billion barrels respectively. As a developing country, petroleum exploration in Uganda is mainly carried out by overseas investors10 African Development Bank (ADB)11.
Therefore, it is vital to ensure that the projects undertaken becomes attractive to petroleum investors through reforms that will lead to economic growth. In the inevitable relationship between governments and the oil industry, two broad systems of granting rights to investors have developed over the years: that is, the concessionary system and the contractual scheme which are essential in the formulation and design of the fiscal regime according to Phillp D, Michael K and Charles M.C. Person. These can also be done through a set of laws, regulations, and agreements in a country which govern the benefits derived from petroleum exploration and production.
1.1.2 Legal Framework on Oil and Gas Exploration Project Financing in Uganda.
The primary source of regulation of the Ugandan oil sector is the 1995 Constitution of Uganda, which inter alia requires the Government to ensure that resources are used for the benefit of all Ugandans.12
From the 1990s onwards, more serious efforts were devoted to exploration of hydrocarbons in the Albertine area in the north-western part of the country. However, no petroleum exploration or production took off in Uganda until 2000 which culminated into the pronouncement of oil and gas discovery in sufficient quantities in 2006.13 It is therefore not surprising that Uganda lacked a comprehensive legal framework to regulate her oil sector for so long. The law applicable to the management of all activities in Uganda's oil and gas sector was the Petroleum (Exploration and Production) Act, No. 20 of 1985.14
Act No. 20 of 1985 covered exploration, discovery, and production, the obligations of licensees, and the registration, transfer and cancellation of licenses, restrictions and surface rights, and financial matters. However, given that no oil had yet been discovered in exploitable quantities, that legislation was barely used.
The Parliament of Uganda is mandated to make laws regulating the exploitation of petroleum and minerals,15 and the sharing of royalties arising from petroleum exploitation and other related activities. As a result, Uganda currently has a number of laws, policies and regulations in place to govern the oil and gas sector. Some of these include the National Oil and Gas Policy (NOGP) 2008.
Recently enacted laws in Uganda that affect project financing include: Data Protection and Privacy Act 2019, Investment Act, 2019, National Environment Management Authority Act, 2019, Security Interests in Movable Property Act, 2019, Civil Aviation Authority (Amendment) Act, 2019, African Export Import Bank Agreement (Implementation) Act, 2019 and Human Rights Enforcement Act, 2019, the Oil and Gas Revenue Management Policy (OGRMP) 2012; the Petroleum (Exploration, Development and Production) Act, 2013 (the ‘Upstream Act'); the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act, 2013 (the ‘Midstream Act'); and the Public Finance Management Act (PFMA) of 2015 and all these were aimed at improving attracting project financing and investments in Uganda's oil and gas sector due to the many risks involved in financing big oil and gas infrastructural projects and also trying to ensure continuous cash flow for the projects.
1.2. Conceptual perspective of the study
The conceptual perspective is informed by the benefits of foreign capital in project financing of projects in Uganda's oil and gas sector as a way of improving more foreign direct investments in the industry. For example, looking at the risk mitigation mechanism put in place which may increase the bankability of Ugandan oil projects which will in turn attract more foreign investments due to the advantages associated with projects financing of oil and gas projects. Since there is a lot of underinvestments and capital issues in Uganda's oil and gas sector which has crippled production for years due to limited foreign investments in the industry.
The study will seek to analyze whether there are sufficient benefits of foreign capital in project financing by looking at the advantages and disadvantage of the project financing in Uganda's oil and gas industry.
1.2.1. Contextual perspective of the study
Uganda is found in East African region and, like many other countries in Africa that are empowered with natural resources and in particular oil and gas, it is likely to suffer from limited foreign capital investments. In 2006, Uganda discovered commercially viable quantities of proven oil reserves estimated to be 6.7 billion barrels of crude. This meant that Uganda needed more foreign capital to be able to start-up its oil exploration and development. It then became clear that undertaking project financing may be the easiest solution to tackle this problem. There, however, emerged challenges for example the ensuring of the bankability of the project through risk mitigation mechanism and other forms of insurance to the lenders to make sure that there is a steady flow of cash up to the completion of the oil and gas projects. These projects are capital intensive in nature whereas local and developing countries lack capital to handle them on their own.16
This explains the continued delays of oil and gas production in Uganda's oil and gas industry. Therefore, this study will investigate the benefits of foreign capital, in relationship to project financing and how bankable can a project be to be able to attract foreign investors in Uganda's oil and gas sector.
1.3. The Statement of the Problem
Project financing is one the key elements of financing projects in the oil and gas sector and this is done through attracting foreign capital to ensure the continuous flow of the funds to the projects to ensure their completion and also return on their investments. The advantages of these foreign capital to the projects are very critical in ensuring the success of the oil and gas sector. Therefore, without capital the project would totally collapse like a house of cards.
Accessing equity from foreign investors is the easiest and most used ways of gathering capital in project financing since it ensures the mitigation of risks to the project. However, presence of foreign capital may not necessarily mean that the project will have a steady cash flow of monies to finish it and to ensure the returns of investments to the investors due to many factors which are normally associated with project financing and major one is risk management and mitigation. if the risk is not well mitigated, then this can create a big problem for the project despite having foreign capital in place. The concept of project financing entails the transmission of capital from one point -of - concentrate to another point -of -scarcity whereby the capital is intended to be employed in viable projects to generate more money from which the point -of- concentrate is repaid its initial investments plus interests and/or profits17.
However, the stakeholders are always taken up by the need to make the project work that they hardly measure the benefits of foreign capital in project financing. All major projects are undertaken through international project financing; however, the project lenders and promoters are always profit oriented not benefit oriented. It therefore follows that the Government of Uganda (GoU) needs to measure the benefits of foreign capital in project financing when it comes to recouping the benefits of foreign capital in project financing in Uganda. This study therefore, assesses whether these assumed benefits are actually being realized and if so, how they have been enhanced in the oil and gas project finance so that Ugandans may benefit from them through financing of the oil and gas sector.
1.4. Purpose of the Study
The main purpose of this study is to carry out a critical analysis of the benefits of foreign capital in Project Financing in Uganda's oil and gas sector.
1.5. OBJECTIVES OF THE STUDY.
These objectives are divided into main and specific objects of the study
1.5.1. Main Objectives of the study
The general objective of this study was to analyze the benefits of foreign capital in Project Financing in Uganda's oil and gas sector.
1.5.2. Specific Objectives of the Study
This study is intended to achieve the following specific objectives:
1. To explore the major risks and mitigation measures in project financing of Uganda's oil and gas sector.
2. To identify the various forms of project financing available in Uganda's oil and gas sector.
3. To identify the effectiveness and benefits of project financing to Uganda's oil and gas sector.
4. To offer recommendation on how foreign capital can be used to boost project financing in Uganda's oil and gas sector.
1.6. Research Questions
1. What are the major risks and mitigation measures in project financing of Uganda's oil and gas sector?
2. What are the various forms of project financing available in Uganda's oil and gas sector?
3. What and how effective are the benefits of project financing in attracting foreign capital in Uganda's oil and gas sector?
4. What are the recommendations on how foreign capital can be used effectively in project financing in Uganda's oil and gas industry?
1.7. Scope of the Study
The scope of the study was divided into three perspectives, these include content, time and Geographical scope.
1.7.1. Content Scope
The content of the study was based on a critique of the oil and gas legal regime in recouping the benefits of foreign capital in project financing in Uganda. Risks and mitigation measures in project financing, legal and regulatory framework of project financing, types of project financing, sources of funds for project financing, advantages and disadvantages of project financing.
The study has finally focused on project financing, the legal aspects of project financing and areas for legal reform and institutional improvement in project financing. It has also analysed the conceptual framework for project financing, legal and regulatory framework for project financing in Uganda, international project financing and traced the benefits of project financing in Uganda.
1.7.2. Time scope.
The study considered a period of 10 years spanning from 2010 up to 2020, the time period from 2020 when the discovery of commercially viable quantities of Oil and Gas reservoirs up to since most of the project that involved financing were kick started during these period of time for example, the establishment of the Uganda Development Bank Limited (UDB) which was the first national development finance institution (DFI) in Uganda established under Decree No. 23 of 1972 (later the Uganda Development Bank Act Cap. 56 of 1972),18 which Act sought to “establish the Uganda Development Bank and the Credit Guarantee Fund and for other matters connected therewith”.
1.7.3. Geographical scope.
This study was carried out in Uganda since the research focused on Uganda's as country in terms of assessing its oil and Gas industry in terms of foreign capital and project financing. Uganda is found in East Africa neighboring Kenya in the East, Tanzania in the south, and D.R. Congo in the west, South Sudan in the North and Rwanda in the south Western part of East Africa. It's located in the heart of Africa in the central sub-Saharan region of Africa. Its Oil and Gas fields are located near the part of Uganda and D.R. Congo. The total current population of Uganda is 46,256,510.19 The latest GDP figures of Uganda is USD$21.49 billion.20 Uganda's economy has expanded steadily over the past decade with a marked growth in the construction, oil and gas and telecommunications sectors. The economy is highly dependent on agriculture and natural resources. Although Uganda is mainly covered by Precambrian metamorphic and igneous rocks, 20% of the country is underlain by sedimentary rocks, which have the potential for generating and accumulating petroleum deposits.21
1.8. Justification of the study.
Earlier research on project financing have not stated how project financing affects a developing economy like Uganda which is struggling to attract more foreign capital to kick start its oil and gas production which has been idle due to a numbly of factors including limited foreign capital. This research is quality in nature where by it relied on literature review by reviewing documents and both primary and secondary sources. This was analyzed to find out the efficacy and the relationship between foreign capital and the bankability of any project under project financing in Uganda's oil and gas sector. This research is justified on helping to find out how beneficial foreign capital is to project financing in Uganda's oil and gas sector.
The effectiveness and benefits of project financing to Uganda's economy and economic development lacks clear documentation. The various forms of project financing available in Uganda's economy and their impacts on local investments in Uganda also lacks documentation. It is important to obtain an understanding of project financing to address the risks involved in its execution. The need for appropriate recommendations on project financing in Uganda and whether the expectations attached to project financing are being met in Uganda justifies carrying out the study.
Furthermore, the study has answered whether there are ways that project financing can be made more useful to Uganda than it is already and the challenges being faced by project financing. Finally, the study has addressed itself on the similarities and differences between foreign and local project financing and the mechanisms in place, or that can be put in place, to ensure that benefits of project financing are measurable.
1.9. Significance of the Study.
1.9.1. To the Researcher.
The study helps the researcher to acquire knowledge on the effectiveness of project financing. Also, University researchers are expected to benefit by adding knowledge on project financing in Uganda specifically the developing countries generally. Scholar stakeholders and academicians on the subject of project financing uses the study as a point of future reference in their academic endeavors.
Finally, this study benefits the researcher by enabling the researcher fulfil the award of a Master of Laws of Uganda Christian University (UCU). The report serves as a reference for other future University researchers in a similar subject.
1.9.2. To policy makers.
This study helps to recommend and illustrate practical solutions to policy makers. Policy makers are able to learn new practical approaches pertaining to the benefits of foreign capital in project financing of Uganda's oil and gas sector.
The various stakeholders in project financing are expected to benefit by having known the effectiveness of project financing. The policy-maker stakeholders are expected to get a basis of encouraging organizations in project financing.
1.9.3. To students.
This study is of importance in that it is used by students who would want to learn more about the issues concerning the efficacy of the benefits of foreign capital in project financing of Uganda's oil and gas sector. Pertinent issues that are discussed are not only for the oil and gas sector but the knowledge acquired can be used for other extractive industries at large. This study will further be used as a source of information from which students can refer in case of any serious issues pertaining to the study in question.
1.10. Framework.
They are two types of frameworks, the theoretical which deals with the ideal and real situation of the research problem and the conceptual framework which deals which how the research variable interacts to form the existing problem and upon that basis I will use the theoretical framework because shows how the dependant, independent and intervening variables interacts which makes it easy to solve the research problem
The conceptual framework identifies the variable in the study. Benefits of Foreign capital in
Uganda's oil and gas sector.is the independent variable whereas the project financing as the dependent variable.
1.11. Theoretical Framework
Theoretically foreign capital is very beneficial to any project under project financing due to the mitigation measures undertaken by parties involved in the oil and gas project. It's expected that if a project is bankable, then it is able to attract foreign investments or capital. However, in reality, project financing in Uganda's oil and gas sector has been slow and little foreign capital has been registered and it's what this researcher is trying to investigate the crippling foreign direct investments in Uganda's oil and gas industry and this has led to delays in explorations and development due to limited cash flow.
The project can be thought of as a box, walled off pursuant to the lender requirements, into which financing is advanced, from which a product is sold, back into which proceeds of those sales are received, and out of which loans, and interest, are repaid.22 The project debt is either non-recourse or limited recourse to the project sponsors, so the sponsors' risk is limited to their equity investment in the project.
Because of its reliance on project cash flow for loan repayment, a project financing arrangement intrudes deeply into the operation of the project.23 Each material contract is reviewed and signed off on by the lenders, and changes will require lender approval. The need to assure cash flow generally leads to requirements to hedge prices during the loan term, where a commodity is involved, and to hedge currency risk during the loan term, where proceeds received by the project are in a different currency from the loan. Project cash flow is controlled through a requirement that proceeds received by the project be deposited into a series of accounts controlled by the lenders, from which funds are disbursed in accordance with a predetermined 'waterfall' (priority) scheme.
1.12.0. Chapter synopsis.
Structure of the Research paper.
The study is divided into six chapters.
1.12.1. Chapter one. Introduction.
This chapter introduces the study, presents a general introduction, historical background, problem statement, justification, Research Objectives and Questions, scope of the study, significance of the study, frameworks of the study, chapter synopsis and the operational words and definitions of the study.
1.12.2. Chapter Two. Literature Review.
Contains a review of the relevant literature on project financing and the benefits it has on oil and gas projects, risks involved and the mitigation measures contract structure, refinancing deals, various forms of project financing, benefits of project financing in oil and gas industry, risk distribution, revolving financing disorder, refinancing regulatory costs and the conclusion.
1.12.3. Chapter Three. Methodology.
This part looked at the research methodology, research design, study population, data sources, way of analyzing data and research, ethical considerations and limitations of the study.
1.12.4. Chapter Four. Benefits and disadvantages of foreign capital in project financing and foreign investments in Uganda's oil and gas sector.
Ways of resource motivation, concept of project financing, types of project financing, advantages and disadvantages of projects financing, effectiveness of the benefits of foreign capital to project financing Uganda's oil and gas projects, ways of financing oil and gas projects, sustainability of foreign capital as a way of improving projects and conclusion
1.12.5. Chapter five. Recommendations on Mitigation measure.
This section includes summaries and conclusions, recommendations as well as outlines areas for future research.
CHAPTER TWO LITERATURE REVIEW
2.1. Introduction
This chapter is particularly concerned with the review of literature on project financing and the legal aspects of project financing as well as areas for legal reform and institutional improvement in project financing. The empirical literature reviews literature on project financing and the legal aspects including the identification of gaps needed for legal reform and institutional improvement. The literature review gives a critique and research gaps of each component and conclude with a brief conclusion.
According to Hart24, literature review is “the selection of available documents on the topic which contain information, ideas, data and evidence written from a particular standpoint to fulfil certain aims or express certain views on the topic and the effective evaluation of these documents in relation to the research being proposed.” This chapter therefore presents the theoretical framework of the research and review of relevant previous research.25
Library and desk research methods was also employed to review national policy, international and regional legal framework that provides for proper management of the petroleum revenues. In the review, the strength and weaknesses of the legal framework were analysed. Also, important textbooks and articles were reviewed to obtain and contextualize scholarly opinions for the guidance of this paper. The paper also relied on some internet sources for secondary or tertiary information to support the study especially in ascertaining current global trends in the industry so as to find out the efficacy of Uganda's compliance with international environmental law of health and safety in Uganda's oil and gas sector.
As Christopher McCrudden comments, ‘if legal academic work shows anything, it shows that an applicable legal norm on anything but the most banal question is likely to be complex, nuanced and contested'.26 However, if we take legislation as an example, the laws are passed by parliament and the words are written down. In that sense there is a positive statement of the law. It is at the next step where the law or rule is interpreted and analyzed within a specific context that the outcome becomes ‘contingent' or conditional on the expertise, views and methods of the individual researcher.
Having located this wealth of documents, the second step is more nebulous. Is it actually possible to plan and describe this second aspect of the doctrinal research methodology in an intelligible way for an ‘outsider'? As Geoffrey Samuel has queried, ‘Can legal reasoning be demystified?'27 Can the legal researcher describe what it is to undertake the distinct form of analysis involved in thinking like a lawyer? Perhaps it is simply the case that the ‘medium is the message',28 so that the doctrinal discussion and analysis of the law encapsulates and demonstrates the extent of research that has taken place and on which the arguments are.
Therefore, the purpose of this literature is to examine the extent of benefits of foreign capital on project financing in Uganda's oil and gas sector.
2.2. Project Financing
Project financing is the long-term financing of infrastructure and industrial projects based upon the project cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equity investors, known as 'sponsors', and a 'syndicate' of banks or other lending institutions that provide loans to the operation.
According to Scott, they are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors.29 The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets and are able to assume control of the project if the project company has difficulties complying with the loan terms. However, Scott did not discuss how effective are the benefits of project financing, or the impact of project financing on local investments in a developing economy like Uganda which this study critically addresses.
Graham Vinter30 has given an analysis of project financing basing on the practical needs of the beneficiaries. He also looked at the various forms of investment vehicles and their effectiveness to the benefitting economies. He did not, however, analyze the actual benefits to the host country which this study intends to address.31
Denton Wilde Sapte32 has explained the history and the rationale of project financing from a hard and cold legal perspective. The interest of the authors was to give a procedural understanding of project financing but in the process did not tackle the interest of the benefitting country whether the expectations attached on project financing are being met or what, and how relevant, are project financers in Uganda? This has left a gap which this research intends to fill by answering the questions left unanswered.
According to Gatti33 the project finance technique makes it possible to raise the financial resources needed to develop an economic initiative primarily through a bank loan that is repaid from the cash flows generated by the project itself. In this sense repayment is secured by these cash flows. Describing the legal aspects of project finance means outlining how financial and economic or industrial planning for the development of the project is reflected in a system of legal or contractual relationships that are binding for the participants. If this system is not possible or is not reliable, the project finance deal itself is not possible.
However, Gatti34 did not analyse the various forms of project financing available in a developing economy like Uganda or the challenges being faced by project financing? This study critically analyses these gaps. It is probably fair to say that the legal issues inherent to project finance essentially revolve around two basic concepts or groups of concepts that is the project company and its economic/legal function and the network of contracts (first and foremost, the credit agreement) that regulate the relationship between the different players in the project.35
Addressing legal issues also means contending with (or at least delineating) an initial structural complication. The legal framework of project finance originated in common law systems. Within the framework of codified legal systems (for example the civil law systems), the legal construction of project finance becomes a search for the available legal instruments that are fit for the purpose of project finance. This means taking notions born in contexts other than project finance and adapting them to the specific needs of this technique.
In many circumstances this is just not possible, and, as a consequence, market practice has come to accept financing projects on the basis of ‘‘legal structures'' much less suited to the purpose than what would be possible in a common law context.36 This is a sign of the vitality of this financing technique, for it rises above and beyond the possible structural rigidity of the legal environment to which it has to be adapted. Fundamentally, project finance is a financing technique or a financing structure as opposed to a legal concept in the strict sense.37
A legal analysis of project finance, therefore, basically consists of studying a specific example of a typical project finance deal and how it takes shape around the project company and the contracts relating to the project and their interconnections.38
2.3.1. The Project Company
According to Peter K, et al, in project finance, an initiative is developed ‘‘in'' or ‘‘through'' a project company, which is actually the borrower of the financing. From this perspective, the project company is defined as a new company and a special-purpose vehicle (SPV). This latter expression is not exclusive to project finance and in fact is normally is used in all structured finance deals that require a company for a single purpose (for reasons that are in part the same as those regarding project finance).39
According to Clifford Chance, there are particular reasons why the project has to be developed in an SPV, either in terms of the economic or the industrial nature of the project or the bankability of the investment in abstract terms.
[...]
1 The Oil & Gas sector Uganda: Frequently asked questions. Ministry of Energy and Development, December 2014.
2 Ibid
3 Helge Switala (2020). Project finance and obtaining sufficient funding for the successful completion of a project. Project Manager: Development Bank of Southern Africa
4 Helge Switala (2020). Project finance and obtaining sufficient funding for the successful completion of a project. Project Manager: Development Bank of Southern Africa
5 Ministry of Energy and Mineral Development (2020): Uganda's Second Oil and Gas Licensing Round.
6 Mira Wilkins, the history of foreign investment in Europe 1992.
7 Rwakakamba M & Lukwaga D (2013) Farmers in Uganda's oil economy, deal or no deal, Kampala, Uganda, Agency for Transformation
8 Mira Wilkins, the history of foreign investment in Europe 1992.
9
Carol Nakhle, Petroleum, sharing the oil wealth, a study of petroleum taxation yesterday, today and tomorrow (London, Rutledge, 2008) 149-150.
10 Khine African Development Bank report 2018.
11 African Development Bank Report maximizing the benefits from Africa's Oil and Resources.
12 See Objective XIII of the National Objectives and Directive Principles of State Policy, and Article 244(1) of the 1995 Constitution of Uganda.
13 Bainomugisha, A., H. Kivengyere and B. Tusasirwe (2006). ‘Escaping the Oil Curse and Making Poverty History: A Review of the Oil and Gas Policy and Legal Framework for Uganda'. ACODE Policy Research Series, No.20. Retrieved from: https://www.africaportal.org/publications/escaping-the-oil-curse-and-making-poverty-history-a-review-of-the-oil-and-gas-policy- andlegal-framework-for-uganda/. Accessed on 12th Nov 2020. All use subject to https://about.jstor.org/terms.
14 Since repealed by the Petroleum (Exploration, Development and Production) Act 2013.
15 Article 244(2) of the Constitution
16 Helge Switala (2020). Project finance and obtaining sufficient funding for the successful completion of a project. Project Manager: Development Bank of Southern Africa
17 Third Amended and Restated Credit Agreement (16th October, 2018). Oasis Petroleum Inc., as Parent, Oasis Petroleum North America LLC, as Borrower the other Credit Parties Party hereto, Wells Fargo Bank, N.A., as Administrative Agent and the Lenders Party hereto Sole Lead Arranger and Sole Bookrunner Wells Fargo Securities, LLC. From https://www.sec.gov/Archives/edgar/data/1486159/000148615918000039/oasispetroleum-3rdarcredit.htm on 19th November, 2020.
18 The main objective of UDB was to promote and finance investment in various commercial sectors of the economy with particular emphasis on agriculture, industry, tourism, housing and commerce. In order to achieve its objective, UDB was empowered, by its statute, to provide financing in the form of loans and by way of equity participation using funds borrowed from both local and foreign sources. As per the decree that established it, UDB was required to finance projects that were technically feasible, commercially and economically viable and socially desirable. Priority was given to: Existing projects requiring small assistance to improve their operations; Projects with a scope to maximize utilization of the country's resources and add value to local products; Projects aiming to produce quality products at internationally competitive prices targeted for export; and Projects creating new job opportunities.
19 Based on Worldometer elaboration of the latest United Nations data. Accessed 13th November, 2020.
20 Angualia Busiku & Co. Advocates (2020). Guide to Establishing and doing Business in Uganda; Uganda Law Firm Website: https://lawyers-uganda.com/. Accessed 12th November, 2020
21 Ministry of Energy and Mineral Development (2008). National Oil and Gas Policy for Uganda
22 Sidley A. (2020). What is Project Finance? Global April 2020.
23 Ibid
24 HART, C., Doing a Literature Review: Releasing the Social Science Research Imagination. London: Sage Publications 1998
25 Barifaijo, K., Basheka, B. and Oonyu, J. How to write a good Dissertation Thesis, 1st Edition, The New Vision printing and publishing Company Limited, Kampala. 20100
26 Christopher McCrudden, ‘Legal Research and the Social Sciences'[2006] (October) Law Quarterly Review 632, 648.
27 Geoffrey Samuel, ‘Can Legal Reasoning Be Demystified?' (2009) 29(2) Legal Studies 181; Larry Alexander and Emily Sherwin, Demystifying Legal Reasoning (Cambridge University Press, 2008); Geoffrey Samuel, ‘Does One Need an Understanding of Methodology in Law before One Can Understand Methodology in Comparative Law?' in Van Hoecke, above n 77, 177.
28 Marshall McLuhan, Understanding Media: The Extensions of Man (Mentor, 1964).
29 Scott Hoffman (2007). The Law & Business of International Project Finance (3rd 2007, Cambridge Univ. Press).
30 Graham Vinter (1998). Project Finance: A Legal Guide, pp.3, 2nd Edition, Sweet and Maxwell (London) 1998
31 Ibid
32 Denton Wilde Sapte (2010). Guide to Project Finance. Denton Wilde Sapte LLP (informally Dentons) was an international law firm headquartered in London, United Kingdom. It merged with the United States-based law firm Sonnenschein Nath & Rosenthal in September 2010, forming SNR Denton.
33 Gatti S. (2008). Project Finance in Theory and Practice: Designing, Structuring, and Financing Private and Public Projects. Academic Press Advanced Finance Series. ISBN 13: 978-0-12-373699-4.
34 Ibid
35 Ibid
36 Ibid
37 Denton Wilde Sapte (2010). Guide to Project Finance. Denton Wilde Sapte LLP (informally Dentons) was an international law firm headquartered in London, United Kingdom. It merged with the United States-based law firm Sonnenschein Nath & Rosenthal in September 2010, forming SNR Denton.
38 Ibid
39 Christopher McCrudden, ‘Legal Research and the Social Sciences'2006 (October) Law Quarterly Review 632, 648
- Citar trabajo
- Adams Rajab Makmot-Kibwanga (Autor), 2021, The Benefits of Foreign Capital in Project Financing of Uganda's Oil and Gas Sector, Múnich, GRIN Verlag, https://www.grin.com/document/1361249
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