Kenya at crossroads over oil and gas reserves

Oil has been the talking point in much of Kenya’s public discourse in the last year—often for a mixture of optimistic and worrying reasons.

This is after it emerged that the country not only has substantial oil and gas reserves, but is also endowed with considerable mineral deposits.

The better part of the year has, however, been spent discussing the positive impact of oil on our economy, with various stakeholders digging in to stake their claim on the prospective oil windfall.

But few, apparently, took time to analyse the critical issues in the very complex nature of the extractive industry.

According to analysis by the Institute of Economic Affairs, we could be faced with three scenarios in the extractive sector; resource bliss, dilemma or curse.

Indeed, it finds that the dynamic characteristics of today’s operating environment of the extractive sector are key in determining future trends. While some of the factors driving the trends are new, most determinants stem from the socio-economic changes Kenya has gone through in the past decade.

In a ‘resource dilemma’ scenario, emphasis would be put on the growth of the extractive sector, with two-thirds of the Gross Domestic Product (GDP), over half of Government revenues, and nearly 75 per cent of exports being from the extractives. The country would achieve middle-income status by 2030 but other sectors like agriculture and manufacturing would shrink in what is known as the Dutch disease.

Disrupt operations

Due to the dominance of multinationals in the sector, transparency in resource governance and management is lacking. Stakeholder engagement is also weak, resulting in weak social licence to operate in the communities where the extractives are located.

A ‘resource curse’ would most likely occur if the Government nationalised the extractive sector. In that event, economic growth would stagnate and GDP decline due to the haphazard development of the sector and weaknesses in the policy, legal, institutional and fiscal frameworks. The inefficiencies of the public sector would plague the sector—seriously incapacitating them.

Corruption mars resource governance and management. Meanwhile, lack of stakeholder involvement would result in non-existent social licence to operate in the communities where the extractives are located, causing the communities to frequently disrupt operations. By 2030, Kenya would be a fragile state with low-income status.

The ‘resource bliss’ on the other hand sees the extractive sector becoming a major GDP earner, with agriculture, manufacturing, service, tourism, retail, and wholesale contributing significantly to the country’s economic growth, thus maintaining a balance trade.

The Government would establish an equal partnership with transnational companies, carefully working out revenue and risk sharing agreements that would enable the country to reap major benefits from the sector and equitably share in the risks.

Strong monetary policies would be established and allow for very transparent management of resources. Strong stakeholder engagement would ensure Kenya achieves an upper middle-class income status by 2024, surpassing the Vision 2030.

While the latest scenario is the most ideal, Kenya could find itself in any of the three scenarios if urgent steps to avoid the pitfalls are not taken.

Sound management of stakeholder power and interests in Kenya’s extractive sector, and transparent and equitable sharing of revenue generated by the industry can provide the foundation for long-term sustainable pro-poor growth with positive developmental outcomes that will largely contribute towards the realisation of Vision 2030. This requires efficient, equitable and sustainable use of sector resources.

The Government may reflect on relevant social, economic, and environmental factors when making decisions that aim to transform industry resources into other forms of wealth. If poorly managed, the sector could disintegrate as witnessed in a number of oil and mineral resource-rich countries in Africa.

The fact that politics and governance play a key role in natural resources management requires that policy and decision makers pay special attention to meaningful participation of local communities in the governance processes of the industry resources. This requires sustained consultation between stakeholders.

The Government should endeavour to convert existing oil, gas and mineral resources into human, social and financial capital and more sustainable livelihood opportunities, not only for the local communities where extraction is taking place, but nationally.

Social safeguards

Whereas these resources are an important source of growth, Government revenue and foreign investment in the industry do not automatically lead to positive developmental outcomes because a number of resource-rich countries are also among the poorest nations in the world experiencing high levels of conflict.

Policy makers ought to recognise the potential for the “resource curse” and work effectively to counter it. This requires good governance, strong institutions, effective regulation and rigorous environmental and social safeguards that would contribute towards the realisation of the potential of mineral wealth for pro-poor growth.

The Government should consider imposing maximum transparency from licencing and awarding of contracts, stipulating the Government’s share of revenue to the point of reinvestment of such revenue in social spending.

Sector activities

The national government, together with respective county governments, should establish accountability forums including stakeholders in the industry. The Government also needs to consider promoting mechanisms of checks and balances through Parliament and non-State actors.

Non-State actors and local community representatives need to be involved in decision making about the country’s extractive industry legislation and policy. The national and county governments should establish mechanisms to ensure local communities participate in decision making.

There is need for a communication strategy on the goings-on in the industry. The Government should consider regularly publishing details of revenues obtained from the extractive sector and how these are being applied towards development. Attention in this regard can also be given to local communities that have so far expressed their interests and concerns.

The Government should put in place regulatory mechanisms that protect communities affected by activities of the extracting companies, especially regarding the environmental impact of the industry’s activities. The Government should carry out independent impact assessments prior to approving extractive sector activities.

The Government needs to ensure that the country receives a significant proportion of revenue obtained in the industry while signing contracts with investors. National interest should prevail during the signing of contracts to ensure revenue distribution arrangements agreed on between the Government and investors do not jeopardise the future of the country.