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Monday, June 23, 2014

Kenya's National Sovereign Wealth Fund Bill Recipe for Resource Curse

Australia’s Pancontinental Oil and Gas has made the first ever oil and gas discovery off the East African coast. The discovery is significant because it is the first proof of a prospective oil system in the Lamu basin offshore Kenya.

It is highly likely that hydrocarbons and mineral resources could account for 20 to 30 percent of Kenya’s GDP and more than half of its total exports. The high share of GDP makes the extractive sector very important to the economy. But extractive resources are finite and could, potentially, have long-term negative consequences on the economy.

The effect of extractive resource revenues on the economy – the resource curse – is the staple of development economists who have shown that resource wealth is invariably associated with poor economic performance. Over forty years ago, economists identified an explanation, the “Dutch disease”.

The Dutch disease refers to the adverse effects of the extractive resources through real exchange rate appreciation. As currency gets stronger local manufacturing and agriculture becomes less competitive. At the same time, local manufacturers face stiffer competition from cheap imports. In addition to affecting exchange rates and making non-extractive sector exports less competitive, resource wealth also affects the political economy of resource rich countries where the struggle for a share of resource wealth becomes the central focus of politics.

Through a sovereign wealth fund, resource rich countries have the possibility of avoiding the resource curse. The government recently published the National Sovereign Wealth Fund Bill, 2014. The Bill seeks to address the resource curse by: protecting and stabilizing the budget and economy from volatility in revenues; providing a mechanism for transforming nonrenewable assets into diversified financial assets; allocating resources to priority socio-economic projects; and, establishing a future generations fund to ensure that both present and future generations can benefit from non-renewable commodity wealth.

The stated purpose of the National Sovereign Wealth Fund Bill, 2014 is novel and laudable. In the wake of massive deposits of extractive resources, the spirit of the bill signals the government’s intent to inject best practice and accountability in managing revenues accruing from extractive resource. However, the governance structure and the investment management framework proposed in the Bill raise significant accountability questions.

In my view immense control of the Sovereign Wealth Fund (hereafter referred to as the Fund) is vested in the executive without a clear framework for accountability to parliament and other critical stakeholder groups. The highest decision-making organ of the Fund is a council chaired by the president. This implies that the investment priorities of the Fund are solely motivated by partisan political exigencies and executive fiat.

Management of sovereign wealth fund is highly professional and skill-intensive. An overbearing involvement of the executive would politicize the implementation of the Fund’s investment strategies and deny fund managers the latitude to operate independently and professionally. The highest decision-making organ of the Fund should be an executive board directly accountable to parliament.

The Bill does not set a transparent investment management framework, including guidelines for prohibited use and how much budget support can be obtained from the fund. It is troubling that the Cabinet Secretary to the National Treasury, with approval of the council – comprising the president, three Cabinet Secretaries, the Attorney General, chairperson of the Fund Board and the CEO of the Board – will issue investment guidelines. 

The absence of checks and balances as well as parliamentary oversight on this crucial process is disconcerting. It is instructive that the president appoints all the members of the council, except the Fund CEO. Hence, it is highly probably that investment priorities will be driven by short-term partisan political goals rather than long-term national strategic objectives.

Moreover, the Bill does not create a legal and institutional framework for public accountability. There is need to create an accountability committee comprising civil society organizations, Law Society of Kenya, trade unions, youth organizations, religious organizations, media, academia, policy research organizations and institute of certified accountants.

Given half a century history of executive impunity, graft and a lack of accountability in public institutions, the National Sovereign Wealth Fund Bill, 2014 creates a slush fund for the executive and leaves the door wide open for mismanagement. Considering that revenue from extractive resources will constitute the largest proportion the Fund, the Bill opens the floodgates for a virulent resource curse.

The Bill needs amendment to provide for stronger parliamentary oversight and greater public accountability. 

Monday, June 16, 2014

Why poaching affects all of us

Kenyans and the international conservation community are outraged at the death, in the hands of poachers, of Africa’s most iconic and beloved elephant. Satao carcass was found with two ghastly holes on his face from where his magnificent tusks once projected with awesome majesty. Satao roamed Kenya’s Tsavo East National Park for nearly 50 years.

The surge in illegal ivory trade is due to high demand for ivory products in China and the United States of America. Militias and terrorists profit hugely from the unprecedented surge in the value of ivory and using the proceeds to fund mayhem. It is estimated that poachers have killed over 35,000 African elephants in the last couple of years.

Last week I argued that President Kenyatta’s personal involvement was crucial to ending poaching. A good friend asked why I thought tens of millions of ordinary Kenyans who struggle to feed, clothe and provide shelter for their families should give a hoot about wildlife. My friend argues that elephants and rhinos are merely objects of fascination for mostly western tourists and a small minority of affluent Kenyans.  

This comment got me thinking about the thousands of Kenyan farmers and pastoralists who live close to our game reserves and national parks. They know a have a different story about wildlife. For them these animals especially elephants, hippos and lions conjure images of death and destruction. In 2013, hundreds of elephants destroyed crops in Mwatate constituency. Similarly, in 2012 herdsmen angry with the predators killing their livestock speared six lions to death in Kitengela. One of the herdsmen who lost his goats said they were forced to kill the lions even though he understood that they were a treasured heritage.

The apathy and grievance felt by millions of Kenyans about wildlife is not trivial. Kenya Wildlife Service must urgently the issue of human wildlife conflict. Moreover, for millions of Kenyans who bear the cost of conservation, often at a huge personal loss, adequate reparation must flow and revenues from tourism must trickle down in direct and tangible ways. If we are to win the war on poaching, we must get local communities on the side of conservation. It is time to consider a payment scheme to persuade local communities to pursue livelihood options that are compatible with conservation objectives.

Here is why millions of Kenyans who carry the inordinate burden of conservation as well as the tens of millions who have no contact or experience with our most valued heritage must care for wildlife and be concerned about poaching.

Data from World Travel and Tourism Council shows that travel and tourism’s total contribution to Kenya’s GDP was 13.7 percent, supported 778, 500 jobs (11.9 percent of total employment), accounted for 7.5 percent of total capital investment while visitor exports contributed to 18.6 percent of our total exports in 2011. Tourism is vital to the national economy and contributes directly and indirectly to the livelihoods of millions of Kenyans. Kenya’s tourism thrives on wildlife, and is beholden to the majestic appeal of large mammals like the elephant and the rhino. Extinction, in the hands of poachers, of these iconic mammals could orchestrate a catastrophic contraction of our economy.

It is believed that Al Shabaab rakes in circa US$600,000 a month from poaching to fund its activities. Ivory has been found in Al Shabaab in strongholds inside Somalia. In the 2014/2015-budget proposal, the government will spend Ksh.155 billion – about 10 percent of the total budget on security. The budget will be used to hunt down C in Somalia (Ksh. 71.3 billion), enhance policing (Ksh.66.2 billion) and intelligence capacity (Ksh.17.4 billion) here at home to prevent terrorist attacks against innocent citizens and our economic infrastructure. It is very likely that massive spending on security could be crowding out allocations to vital growth sectors such agriculture, which received a paltry 4 percent of the total budget.

Owing to a huge slump in international tourism due to rising insecurity, the exchequer will allow employers tax deductions of amounting to Ksh. 2.4 billions to boost domestic tourism for the next 12 months.  Moreover, Kenya Association of Hotel Keepers and Caterers revealed that over 7500 hotel workers in the coast have lost their jobs largely due to travel advisories.

We all must say no to poaching and illegal wildlife trade. It ruins our economy and distorts priorities for budgetary allocations. 

Monday, June 9, 2014

Kenya's president Uhuru Kenyatta must act now to save Kenya's wildlife

Some things are worth repeating. So I will say this again. Wildlife conservation in Kenya is in deep crisis. The future of our wildlife and all forms of biodiversity, plants, and animals as wells landscapes is grave. In 2013 Kenya’s first lady, Margaret Kenyatta, warned elephants could go extinct in just two decades.

Early this year Dr. Richard Leakey observed that dozens of poaching bosses had been allowed to act with outrageous impunity, orchestrating massacres that could result in the extinction of elephants and rhino. Leakey’s remarks and the outrage by many conservationists and concerned citizens was provoked by the fact that in just three months since January we lost 18 rhinos and more than 50 elephants.

In April, five senior officials at KWS were suspended as part of government investigations into mismanagement and an upsurge of poaching. This action was largely seen as the government’s response to blistering criticism and growing public concern that Kenya could be losing the war against poaching.

Last week, a team of conservationists conducting wildlife census in the Mara counted 117 fresh and old elephant carcasses, with their tusks missing. It is highly unlikely that the elephants died from old age or disease or predation. It is highly likely that poachers killed all 117 elephants. It is highly likely that public servants, at KWS, our security apparatus, customs and immigration officers as well as ordinary citizens looked the other way and aided criminals to spirit away large quantities of ivory thus ruining tourism and diminishing our priceless heritage.

Last week authorities seized 228 whole elephant tusks and 74 pieces of ivory as they were packed ready for export in Mombasa. Senior KWS officials confirmed that based on the size and complexion some of the tusks were obtained from elephants outside of Kenya. The quantity of illicit ivory traded has more than doubled since 2007 and the African elephant faces the most serious threat since the ban on commercial trade in ivory in 1989. 

Again, here is something I have said before, which is worth repeating. The inexorable decline of rhino and elephant will change irreversibly, the structure and workings of savanna and forest ecosystems, putting in peril hundreds of wildlife species and threating the livelihoods of pastoral societies. Such dramatic habitat changes could wipe Kenya off the list of leading wildlife tourism destinations.
The biggest threat to tourism in Kenya is not travel advisories. Rampant poaching, which threatens our wildlife and their habitats is the real threat to tourism. But habitat loss through expansion of infrastructure, agriculture and settlement presents an equally significant challenge maintaining viable populations of rhinos and elephants.

In the fight against poaching two things are worth repeating. First, more boots on the ground, with more rangers, is not adequate to confront the sophisticated logistical and organizing capacity of poachers. Second, just like drug lords, local poaching bosses and their acolytes within national conservation agencies are extremely well connected in business and politics. In some African countries poaching money is used to finance presidential campaigns. With the soaring value of ivory and rhino horn it is inevitable that militias, terrorists and politicians will want to profit from it. And we know that public officials profit enormously from corruption associated with poaching.

South African National Parks and private conservancies in Kenya have deployed high-tech systems comprising GPS tracking technologies, aircraft and drones to secure rhino and elephant herds. The deployment of high-tech has led to an astronomical escalation of the cost of conservation per hectare. In the meantime, there has been a huge increase in poaching in the past two years.

What is needed is reliable collection and analysis of large data on movement of elephant or rhino, deployment of rangers, poaching activity, weather data, habitat conditions and using models to identify patterns, including correlations and associations. The goal is to track wildlife and predict where poacher might strike. The goal is to deploy rangers more efficiently, prevent poaching and preemptively strike poachers.

We can hold the line on poaching and prevent the inexorable decline of wildlife. But it will take leadership from the executive to: 1) neutralize the political and financial potency of the poaching bosses; 2) revamp KWS and national intelligence assets to protect wildlife and respond robustly to the threat of poaching; and, 3) enforce national land use guidelines to forestall loss of vital wildlife habitat and promote sustainable land management.  

Monday, June 2, 2014

Kenya's oil wealth can drive transformative economic growth in marginalized counties

Kenya could strike significant quantities of oil in the most marginalized counties, where over 50-80 percent of the population lives below the poverty line. This uncanny overlap struck me when I looked at the poverty headcount based on the 2009 census data along side the current oil exploration blocks ( refer to maps above) located in counties such as Turkana, Baringo, Kisumu, Mandera, Wajir, Garissa, Tana River, Lamu, Kilifi and Kwale. 

For these hitherto marginalized counties, the discovery of oil is perceived as the definitive signal that the long shadow of poverty is finally passing. However, analysis of the experience of Africa’s resource rich countries demonstrates that oil wealth does not correlate well with socio-economic prosperity. On the contrary, oil rich countries often perform worse than their resource-poor peers in terms of human development, governance and long-term economic growth. This phenomenon is known as the “Resource Curse”.

Resource rich countries that experience the resource curse tend to be weak at harnessing such resources to benefit their economies and populations. Invariably, the resource curse is associated with low economic growth, deeper poverty, widening inequality, civil strife and more authoritarian government.

Three explanations have been offered for the resource curse. First, large oil export revenues often cause the local currency to appreciate against other currencies making non-oil related goods and services less competitive, crowding out local manufacturing and agriculture. Second, volatility of oil revenues through cycles of booms and busts often wreck havoc, with devastating consequences for fiscal planning and economic governance. Third, oil wealth tends to make governments more authoritarian and unaccountable to their citizens. Recent studies show that in a majority of African countries oil discovery invariably leads to increased corruption and competition for vital state resources by political and ethnic elites.

Kenya has a window of opportunity to institute appropriate institutional mechanisms to leverage its hydrocarbon wealth for economic transformation and avoid the resource curse. Recent developments are reason for optimism. With support of the World Bank the government is committed to reviewing legal, regulatory and fiscal framework for effective, inclusive and transparent management of oil and gas resources. Furthermore, the government is working with the World Bank to harness hydrocarbon resources to support domestic growth and forestall adverse macro-economic and social impacts.

However, Kenya is neither a compliant nor candidate country for the Extractive Industries Transparency Initiative (EITI). The aim of EITI is to ensure that all revenue payments by oil, gas and mining companies are independently verified and disclosed to the public, thus helping citizens to exercise oversight, increase transparency, and reduce the risk of corruption and mismanagement.

In the absence of EITI, the disclosure requirement by the European Union (EU) could help improve the transparency of payments made to the government by the extractive industries. Thanks to Tullow Oil’s special report, whose release to the local media was meticulously executed, we know that the Anglo-Irish firm paid KES1.9 billion to the exchequer. Such disclosure provides civil society and local communities with the information they need to hold the government accountable for income made from exploiting oil resources. Although critical, EU mandatory disclosure requirement alone is not sufficient for transparency. Kenya must be strongly encouraged to adopt the EITI process.

Social investment of by extractive industries is also critical to averting a resource curse. Starlon Ikaal, petroleum engineer at Tullow Oil, is an outstanding role model to thousands of young Turkana boys and girls. Ikaal is one of the 25 Kenyan students who benefited from Tullow Oil’s KES 125 million-scholarship scheme. Although modest, Tullow Oil’s leadership through the scholarship scheme demonstrates the transformative power of enlightened social investing. Ikaal’s is a story of transformation, especially in a county where 82 percent of the population has no education and less than 6 percent of the population work for pay.

Five safeguards are critical to avoiding the resource curse. These include: 1) a petroleum revenue management framework, including a sovereign wealth fund with a cap how much oil revenue is allocated to the national budget; 2) revenue sharing informed by distributive policies, taking into account the crippling poverty levels in resource rich counties; 3) a local impact investment alliance, which brings together the county government, community groups, extractive industries, private sector and donors to focus on transformative social and economic projects; 4) establishment of extractive sector-civil society transparency oversight; 5) requirement of parliamentary approval of all mineral, gas and petroleum agreements. 


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