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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. 

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