Uganda’s decision to acquire a 20.15 per cent stake in Kenya Pipeline Company (KPC) will require a test of time to prove that this was smart business. This is after earlier indications showed that the country was – of no fault of its own – in a damn-if-you do, damn-if-you-don’t situation when it was presented with an opportunity to participate in the company’s Initial Public Offering (IPO).

By paying $255.4 million for the stake, landlocked Uganda, through the Uganda National Oil Company (UNOC), has been handed more leverage to call the shots over the management of an entity at the center of the supply of most of its petroleum products from the Kenyan coast of Mombasa.

There were worries that Uganda – even in the spirit of East Africa’s Ujamaa – had taken a long and risky bet in acquiring such a huge block of shares in KPC, especially when one considers that many investors had balked at the offer and scampered for cover.

With a few hours to the closure of the IPO, where the offer price was KShs 9 or $0.070 per share, investor requests for share purchases were depressingly low, leaving KPC in a desperate position to ensure that Uganda does not walk away without making a subscription.

The incentives that Kenya handed Uganda were strong enough for Uganda to agree to the offer price, considering KPC handles more than 90 percent of Ugandan-bound petroleum products.

The question is whether Uganda, which used borrowed funds to acquire the stake in KPC, had bitten more than it could chew.

Uganda’s Incentives

Kenya handed Uganda veto power on any changes to the pipeline tariff, a controversial number that many oil marketing companies (OMCs) have resisted whenever suggestions of an increase are made.

It is however hard to see how Uganda will implement its veto powers considering that the pipeline tariff is set by the Energy and Petroleum Regulatory Authority (EPRA), which operates from an arms-length position from KPC.

The pipeline tariff, which at the moment is set at KShs 5.44 or $0.042 per cubic meter per kilometer, solely accounts for all the revenues that KPC generates.

The company has already submitted a request to the regulator for an increase in the tariff for the next three years.

While Uganda will earn an interest from the increase in the tariff, it is now exposed to possible backlash from the OMCs since it is now a major shareholder in KPC, the sole operator of Kenya’s pipeline network.

Kenya Pipeline Company (KPC) storage facilities

There is a protection clause that has been embedded in Uganda’s share agreement, where the country has been handed veto power on any increase or reduction in the company’s share capital. This will protect Uganda’s stake from any share dilution.

Uganda has also been given the power to have at least two people of its choice appointed to the board of directors of KPC, a unit that offers strategic direction and oversight in the management of the company.

The current board of KPC has nine members, meaning the two slots that Uganda has been given might not count for much when it comes to swinging critical decisions.

Uganda will also have veto power on any revision of the dividend policy of KPC.

According to its prospectus for the IPO, KPC pays dividends to shareholders from surplus funds from its distributable profits and general reserves.

There is little indication that this policy is going to change in the near future, therefore Uganda might not have much to say on this matter. The company’s dividend payout has fluctuated over the last five years, with the company not issuing out any in 2023.

When there is need to change KPC’s business plan, Uganda will have veto power, according to the share agreement. Still, Uganda does not dominate the board of directors, which approves the business plan.

Just like the business plan, Uganda will have veto powers on any alteration of the Memorandum or Articles of Association of the company. This also requires board approval.

On paper, these veto powers to Uganda look like strong incentives that were too sweet to turn down. It is the reality on how Uganda will exercise its new powers in the management of the company that will determine whether this was worth it at all.

Away from KPC, Uganda is discussing with Tanzania over the construction of another petroleum products pipeline, with studies on the commercial viability expected to start soon.

Uganda is also moving ahead with plans to construct an oil refinery, which will widen its access to finished petroleum products.

UNOC says all these projects are needed to ensure security of supply of petroleum products.