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Sunday, September 16, 2012

Kenya’s Oil: Curse or Boon

President Mwai Kibaki could not contain his excitement on March 26th 2012 when he announced the oil find in Kenya’s northwestern Turkana region. By this announcement, Kenya became the latest country to join the petroleum bonanza, after discoveries in Ghana, Democratic Republic of Congo Uganda, Tanzania, and Mozambique.

According to John Ghazvinian, author of Untapped: The Scramble for Africa's Oil, Africa is the most promising place on earth for new oil. Africa’s oil is of high quality and hence relatively inexpensive to refine.

Today, resource-exporting African countries are in the throes of booms that are reminiscent of 1970s. Many of these countries have been impoverished and economically stagnant for decades and resource booms present opportunities for growth. Receipts from natural resources should provide an essential source of financing for development, dwarfing aid flows. However, Africa’s resource boom presents a veritable conundrum: will these resources be a boon that stimulates wealth and prosperity, or a political and economic curse, which undermines governance and stymie inclusive economic growth?

The last global commodity boom of the 1970s failed to deliver transformational development for Africa. In a majority of Africa’s resource-rich countries, exploitation of natural resources is invariably linked to corruption, economic stagnation, social inequality, weak public services and widespread poverty. This apparent paradox is commonly referred to as the Resource Curse. Moreover, a casual glance at the stagnation in resource-rich African countries and the rapid growth in resource-poor East Asian seems consistent with the notion of a resource curse. 

In 2010, Treasury officials admitted before a parliamentary committee that the government was losing a third of the national budget to corruption. The greatest worry about Kenya’s oil is that it might further blight an already corrupted political and business elite. There is a real danger that Kenya’s oil could be a curse.

Here are some classical resource curse examples we could learn from. 

Angola is considered the archetypal case of the resource curse. Angola has immense mineral wealth. Besides being the largest oil producer in Africa, it is the world’s fourth largest source of diamonds. The proceeds of this vast wealth financed two and half decades of civil war, just two years after independence.

Angola’s poverty rate is estimated at 68%. Angola also ranks among the lowest in the world on other social indicators. According to a UNDP report of 2007, its combined school enrollment ratio was 25.6% and life expectancy was about 42 years. Reason for the curse: corruption is rife; millions of dollars in concessionaires’ bonuses are stashed abroad and much of the revenue is sequestered in a secret “parallel budget” with no public accountability.

For years, Konkola Copper Mines operated under a government contract of fixed royalty payment of 0.6% for the exploitation of Zambia’s copper reserves. In 2006/07, the Zambian government received only US$6.1million, while Konkola Copper Mines obtained more than US$301million in profits. In that same period, Zambia had the one of the poorest human development ratings, with 68% of the population surviving on less than US$1 a day and a life expectancy of 37 years.

50 years of oil production has not produced growth and prosperity in Nigeria.  The country relies on oil revenues for more than 80% of its national budget, yet the government is unable to determine the amount of oil extracted in the country. 50% of Nigerians live on less than US$1 a day. Its annual per capita income of US$1,400 is less than that of Senegal, which exports mainly fish and nuts.  Armed, hooded rebels operating under the name of the Movement for the Emancipation of the Niger Delta (MEND), have intensified attacks on oil platforms and pumping stations.

The business and political elite are the purveyors of the resource curse. I offer suggestions to curtail their hegemony and hopefully ensure equitable economic growth from Kenya’s oil resource revenues.

1.     The government must sign up to Extractive Industry Transparency Initiative (EITI) and institute transparency in the entire supply chain of the extractive industry, from specification of the rights for sale to negotiating resource extraction contracts to extraction rights, including duration and tax regime;
2.     Active engagement of civil society organizations to ensure government accountability with respect to contracts, scrutiny of revenue that accrues to the national budget, revenue allocation in spending budget and monitoring the behavior of private sector during exploration, and extraction of resources;
3.     Public disclosure of spending, including equity criteria, of revenue accrued from extractive industries within national and county budgets, including priorities for public investment and saving, reducing the risk of discretionary spending on populist projects;
4.     Leveraging multiple linkages through training and skill building for local communities, enterprise development of small and medium enterprises to provide inputs for extraction and allied operations and domestic processing to integrate the extractive industry products into the national economic structure.

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