Lack of collateral for financing is one of the challenges hindering local SMEs’ participation in the oil and gas industry.
This was one of the issues discussed during the virtual industry dialogue for the month of September organised by the Uganda Chamber of Mines and Petroleum (UCMP), organised under the theme: Limitations to in-country value retention.
It is estimated that of the $20 billion of investment into Uganda’s economy from the oil and gas sector in the next five years, $6 billion is available for local companies to tap into and retain and SMEs would be some of the major beneficiaries of this investment.
According to CNOOC, the National Content Regulation 2016 gazettes several civil works for Ugandans, including Pre-Drilling Civil Works, Development of the KingFisher Oil Field Infrastructure, KingFisher Oil Field Treatment Facilities and the Development of KingFisher Oil Pipeline Feeder Line. Other opportunities include site preparation, camp upgrades, transportation and supply of construction materials such as cement, aggregates, sand, security and medical services.
In spite of these opportunities, only 40% of SMEs have access to bank loans and over 80% are not served or underserved by financial institutions. This is mainly because access to financing comes with the requirement of providing collateral, which most lack.
This reluctance to lend to SMEs is due to high-risk perception, information asymmetry between lenders and borrowers, poor corporate governance and market linkages. Additionally, SMEs struggle with undercapitalisation, inadequate technical and management skills, and lack of market access due to poor quality and non-standardised products.
Speaking during the discussion, Phillip Niwamanya, Absa bank Uganda’s Sector Head, Oil and Gas remarked, “The Oil and Gas space is unique. The kind of financing required is short term but that financing is tied to high standards in the sector. Financing in oil and gas is typically structured around contract requirements.”
He added that financing local contractors in the oil and gas industry requires looking at four risk areas; payment, performance, nature of the asset and environmental/social risks to ascertain the capability of the SME to fulfil the contract.
Banks in the oil and gas industry have, however, configured customized solutions to cater to the unique challenges of SMEs in Uganda and some solutions provided include uncollateralized lending, business advisory services, training and asset-based financing to assist SMEs perform their contractual obligations. Several of these solutions cater to SMEs throughout the contract lifecycle from bidding all the way to contract completion.
Maurice Amigola, the CEO of Minet Uganda, emphasised the importance of insurance providers creating products that cater to the different risk needs of the industry within the direct services, indirect services and specialist services, which would include local SMEs. Where local insurers lack capacity to take on the risks, there is an opportunity to work with other reinsurance companies to share risks.