Promoting indigenous entrepreneurs in the

upstream sector: policies and practices

Lamon RuttenChief, Finance and Energy

UNCTAD

9th African Oil&Gas Trade and Finance ConferenceMaputo, Mozambique, 31 May – 3 June 2005

Asian tiger African elephant

NOT AN OFFICIAL UNCTAD RECORD

Overview

Step 1: open up upstream opportunities Step 2: create a proper legal and regulatory

environment Step 3: create proper financial environment Conclusion

Step 1: open up upstream opportunities

Fact: small, nimble companies are better at getting oil or gas out of small or mature oil fields than are large companies.

Fact: inside all large companies, there are highly competent staff who would be able to do a better job outside of the constricted environment of a large firm.

These two facts form the basis for the creation of private sector local upstream entrepreneurs.

National oil companies should not hold on to “marginal” fields, but sell them to the private sector

Competent staff has to be empowered to set up their own upstream companies.

Around the world, from developed countries, Asia and Latin America, entrepreneurs get a red carpet treatment…...

……while most African entrepreneurs face an obstacle course.

Step 2: create a proper legal and regulatory environment

In Africa, investors

"face the most inhospitable climate in

the world", and

"the costs of doing business are

horrendous, compared to the other parts of the

world.”

Michael Klein, Chief Economist, International Finance Corporation, at a Financial Times

infrastructure finance conference in May 2004

“It would be easier to do business on the moon than in some African

countries”

(a frustrated African investor, 2003)

One element in a proper regulatory environment: allow international partnerships

It is against the interests of African upstream entrepreneurs as a group (although not necessarily against the interests of some of them) to keep foreign investors out.

Rather, African entrepreneurs should seek to bring investors in, by convincing their governments to create attractive policy environments, and by offering value-added partnership opportunities. This will allow them to:

- improve management skills

- benefit of transfer of technologies

- improve market access

Step 3: create proper financial environment

Three elements:

• Empower banking sector to arrange reserve-based lending

• Ensure legal and regulatory regime is suitable for accessing offshore funding

• Stimulate venture and equity funds.

History has shown that direct subsidies or direct finance provided by the government to the “private sector” is a bad idea.

Government entrepreneurFinance (or

subsidized sale)

Government

Investment fund

Government entrepreneur

entrepreneurFinance (or

subsidized sale)

FinanceFinance

What is useful is for governments to put part of their windfall gains of high oil prices in specialized professionally managed investment funds instead of on savings accounts in western banks.

Conclusion: can an indigenous entrepreneur succeed in the upstream oil sector?

Yes, if (s)he know where (s)he is going

If (s)he is sufficiently determined

If (s)he has learned how to avoid the obstacles

And (s)he understands how best to make use of the available resources.

“When most African countries became independent during the 1960s, joining the political class was more appealing and rewarding than going into the private sector. So highly educated Africans did not hesitate to go to where the money and the prestige were. It was only those who could not be part of the ruling class that had to make do with being entrepreneurs and capitalists…

It’s no wonder that most African entrepreneurs lacked the understanding of what it would take to be successful entrepreneurs, lacking the necessary technical and management skills and the independence and confidence. They lacked consistent personal ambition and willingness to delegate authority for fear of sharing ownership, and failed to form partnerships to pool finance and managerial skills.”

Basil Enwegbara, The African Entrepreneur, MIT-TECH, November 2002

One possible obstacle: a one-man shop does not make an enterprise

Beyond upstream entrepreneurs: towards creating African independents

• The national oil company has to provide space

• The government has to provide a proper legal and regulatory system

• The financial sector has to be engaged

• Businessmen need to be willing to cooperate

There may be no tigers in Africa, but there is room enough for many elephants.

The road to success may be a slippery one…

… but if you are properly prepared, you will get to your destination.

Lamon.Rutten@unctad.org