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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