How Can Local SMEs Position for Oil Contracts-Uganda
Africa Opportunities

How Can Local SMEs Position for Oil Contracts-Uganda

Talk of Ugandan businesses potentially earning big money from the country’s budding oil and gas sector is thrilling stuff, but also cause for worry.

The question is: How can one get to share part of the $1.5 billion specifically earmarked for local spending?

The government wants success stories that reflect well on its preferential policies and the regulatory framework that favours Ugandan enterprises.

It does not want a litany of regrets and recriminations.  Much is riding on the outcomes of the Local Content policy.

However, for the majority of the small and medium enterprise (SME) owners, the oil and gas sector is unknown territory.

The lay of the land is unfamiliar, even frightening due to what they see as the hurdles and unseen traps lying in wait to deny them the promised rewards.

Exciting as the prospects may be to make money as service providers this sense of trepidation will not go away.

To raise their game and prequalify for contracts, these small business people know they will have to cough up cash and which many just do not have.

Two years ago, the government mooted a plan to set up a National Content Development Fund to provide affordable financing, but as of now, it remains a plan.

On the other hand, to be cautious is good. As beginners, it does not make sense to rush headlong into a business environment you know little about.

For starters, being chummy with your bankers and having a lawyer you can readily call upon to explain the legal jargon are two bare essentials necessary to navigate the terrain ahead.

Whether you’re involved in security, transportation, office supplies, or catering, you’ll need an injection of significant capital to scale up your business to meet the demands of a whole new set of clientele.

The bank is your best go-to option, but to hedge their risks, banks require transparency and regulatory compliance.

The lenders may be willing, but then get cold feet when confronted with dodgy management practices particularly the lack of proper business records.

Good corporate governance is like sticking your toe through the gap in a door that opens up to countless opportunities.

People will at least listen to you and offer advice because your business integrity is there for all to see.

Any chances of Ugandan firms negotiating for joint ventures or partnerships with foreign companies will hinge on their corporate governance credentials.

Those with none need not bother, because in the oil industry international standards apply.

SME owners should ask themselves where does their enterprise fit in the oil and gas value chain and what do they have to do to become worthy contenders in a very competitive field also made up of well-established international companies.

To be realistic, most Ugandan SMEs will end up as sub-contractors of other sub-contractors simply because they do not have the capacity. This would not be such a bad thing considering the amount of money involved.

Gathering as much information as you can from official sources such as the Petroleum Authority of Uganda (PAU) and the Uganda National Oil Company (UNOC) is a sensible first move.

Another is consulting with the Uganda Chamber of Mines and Petroleum, the Association of Oil and Gas Suppliers (AUGOS) and the Federation of Small and Medium Enterprises.

Perhaps not everyone will be helpful, but the key issue is to get a feel of the industry.

Get to know the relevant facts. Preparedness is halfway to reducing the risk of failure. It may sound silly to some small business owners, but extensive research plays a critical role in helping you decide where to position your company. Reliable information at your fingertips, allows you to make rational business decisions.

Last year, Proscovia Nabbanja, the UNOC Chief Executive Officer said, “It is important that local companies are kept abreast of the developments in such a dynamic industry to help them develop business models that are adaptable.

This is fundamental if they are to remain relevant in such a competitive marketplace.”

Nabbanja’s piece of advice is a reminder of another dangerous trait Ugandan SME owners should avoid at all costs and this is making presumptions based on past experience.

For instance, perhaps you have been in the catering business for some time now, serving daily lunches to three reputable Kampala firms.

Clients have consistently praised the tastiness of your meals. Your cash flow is decent while debt is manageable and you feel ready to bid for a tender from an international oil company (IOC).

But after glancing through the thick tender document, it dawns on you that you have overestimated your company’s capacity in relation to the stated requirements of the IOC.

One of the usually several conditions ‘requires that the contractor perform the services in a manner deemed proficient by persons having special knowledge, training, and experience in those services.

The contractor shall give priority to the safety and protection of life, health, property and the environment.

The contractor is also generally responsible for obtaining any permits required for the performance of the work’.
Our caterer will have to provide proof that this condition is fully met to the letter.

Unfortunately, more than half of the staff acquired their skills on the job and have no certificates, diplomas or degrees. About now is when our caterer should begin thinking of getting partners.

According to a brief by the Uganda Investment Authority, establishing a modern catering service can prove to be a profitable business.

Caterers supply food to oil workers located on oil fields which tend to be isolated away from normal towns. This will mean having mobility and portable services.

UIA says the establishment of this project requires a total fixed cost of $25,000 with working capital of about $40,000 – sufficient for two months operating costs.

The project has a payback period of one year and three months with a 36% profit margin. The production will serve 400 clients daily for breakfast, lunch and supper.

A typical oil well team will consist of anywhere up to 200 – 400 people. This plan is based on serving two sites with a total of 400 people to feed. The capital requirement is estimated at $25,000. The figures are not cast in stone and are three years old, but one gets a pretty good idea of what finances are involved and the nature of the operations.

The point here is that this is the kind of vital information an SME owner in the catering business should possess even before considering bidding for a tender.  But you have to make the effort to look for it.