How transparency laws could help region gain wealth from oil riches

Mineral wealth should be a blessing not a curse. That, at least, is what Kenya, Uganda and Tanzania are hoping for from their recent discoveries of vast oil and natural gas reserves.

Kenya’s economy has not historically been known as an exporter of oil or minerals. According to Government estimates, extractives currently contribute just 1 per cent to Kenya’s GDP, which amounts to less than 2 per cent of total export revenues.

It is now estimated, however, that the sector could provide 10 per cent of GDP as a result of the recently discovered oil. London-listed Tullow Oil and Africa Oil have led the way in drilling in northern Kenya, with Tullow estimating that Kenya has at least 600 million barrels of oil.

Having discovered a large bounty of black gold on its soil, the trick will be to ensure East African governments reap the rewards from their resources. In Kenya’s case, the Jubilee government hopes oil production will start in 2018.

Analysts and NGOs say legislation and transparency are needed to guarantee a fair slice of what could be a very large pie.

But the Mining Bill, which proposes to overhaul the 74-year-old existing regulation, has yet to be signed off by President Uhuru Kenyatta, despite being backed by the National Assembly last October.

But it is extensive new reporting requirements in European and US law that are likely to do the most to shape Kenya’s fledging extractives sector.

The European Union’s Accounting and Transparency directives agreed on in 2013 by government ministers require companies in the extractive and logging sectors to publish annual reports.

These will disclose details of all tax, bonuses and other payments made to governments for every individual project or contract undertaken by a firm over a 100,000 euro (Sh10 million) threshold.

Reporting rules

The country-by-country reporting rules apply to all listed and large unlisted companies registered in the EU, without exemption. They must report their payments to governments worldwide annually, starting this January.

The new regime was painstakingly agreed on over two years in the teeth of opposition from a handful of governments and a powerful industry.

Europe-based companies have complained that the reporting requirements would put them at a competitive disadvantage compared to their Chinese, Russian and Indian rivals.

One of the amendments bitterly fought over was a so-called criminal exemptions clause that would exempt companies from reporting payments if disclosure would breach local law, widely seen as a potential loophole to allow corrupt governments to collude with multinationals.

The EU regime is modelled on the US Dodd-Frank Act Section 1504 which, though signed into law five years ago, has not yet been implemented because of a lawsuit filed by American Petroleum.

Out of poverty

EU and US transparency laws cover 65 per cent of the value of extractive companies in the world’s major capital markets, including Chinese, Russian, Brazilian and other state-owned companies.

With equivalent reporting requirements in Canada, 84 of the world’s 100 largest oil and gas companies, and 58 of the world’s 100 largest mining companies, will be required to report country and project-level payments.

The question now is how the rules will be applied alongside Kenya’s nearly-completed Mining Bill, and whether it will change the culture of an industry that often seems comfortable to operate in the shadows.

Will greater transparency help end the ‘resource curse’? Or, as claimed by several executives with European firms, will it simply put them at a competitive disadvantage against rival firms without such transparency requirements?

Gitahi Gachahi, the chief executive at accountancy giant Ernst & Young, said the new reporting requirements are “very welcome mechanisms”, the implementation of which “Africa should take seriously”.

“If we can ensure the formulas and rules are done properly ... the amount of revenue we can generate will lift Africa out of poverty,” he said.

Meanwhile, Rwanda, Uganda and Kenya are not among the 48 countries to have signed the extractive industries transparency initiative (EITI) under which companies and governments disclose their financial arrangements. But now that the latter two have discovered substantial oil reserves, ignoring the world standard will become harder.

The only trouble with the EITI is that, unlike US and EU laws, it is not legally binding. Governments that fail to comply with the reporting rules risk nothing greater than political embarrassment.

Still, Kenya’s business community appears keen for the transparency regime to be implemented.

Mr Gachahi said the Jubilee government, and all of sub-Saharan Africa, should sign up to the EITI “to make sure all of us are playing by the same rules”.

“Many countries have the tendency to be greedy. Kenya must avoid this temptation,” added Lodewijk Briet, the EU’s former ambassador to Kenya.

Today, even in a climate where there are no reporting requirements for extractive companies, sub-Saharan Africa’s income from its minerals and natural resources is around six times the amount it receives in aid.

Combined with robust domestic law, analysts are hopeful country-by-country reporting will, if implemented properly, shine a light on the payments made to governments by companies extracting a country’s mineral wealth.