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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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