How to turn resource curse into national blessing

By Kamotho Waiganjo
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Our discussion on the extractive industry two weeks ago ended with a warning to Kenya to beware the “resource curse”; the malady that ails oil producing nations especially in Africa.

Numerous examples show that unless a country deliberately organises its structures and systems to avoid this malaise, the battle-hardened actors that stride the extractive industry have the will and ability to drive the industry in a manner that enriches them and their local benefactors at the expense of the citizenry.

The good news is that the resource curse is not an inevitable reality. Many examples of nations that have revolutionalised their development through prudent use of these God given resources abound. The most quoted is Norway where it is now estimated that its oil based Sovereign Fund has converted each Norwegian to a millionaire. Other countries like Malaysia, some of the Gulf countries, and a few countries in Africa have positive profiles that emerging oil producing nations can emulate.

The beginning point for any country that discovers this resource is to recognise that beginning exploitation before there is a clear legal and regulatory framework is extremely risky.

This framework should outline how the country will balance the various interests in the sector, from those of government and oil companies each conflicting with the other’s desire to maximise revenues and profits, to local communities that want to see the local impact of oil wealth, and even the interests of future generations, oil being a finite resource.

Even issues of how to manage the resource so as to strengthen local industry are matters of deliberate policy. In the absence of such a policy the temptation is to utilise the bulk of revenue from the resource into non-productive activities without diversifying into income generating investments, eventually weakening the economy irredeemably.

The legal framework should also clearly outline minimum standards of transparency and accountability to ensure that the corruption that is such a constant feature of this sector is minimised, if not eliminated.

The institutional framework should determine how the various agencies that will handle different aspects of the process, from licensing for exploration, revenue management to environmental protection will relate so as to allow sufficient checks and balances without increasing unnecessary bureaucratic inefficiencies and opening opportunities for rent seeking.

Kenya is fortunate because the Constitution provides the most critical and essential principles that must inform resource exploitation.

That is, however, only a base format. The ongoing review of the oil and petroleum policy and legislation provides an opportunity to address these issues learning from international best practice. Many oil-producing countries also lose out in contract negotiation with international companies. International expertise is also expensive and many countries balk at expending monies on this expertise. What complicates the matter further is that in most cases the oil companies have more information on the resource than the oil-producing nation.

This technical and information asymmetry inevitably leads to exploitative contracts with unfair compensation structures, skewed opportunities for renegotiation and even insufficient environmental protection safeguards. This inexorably leads to massive disaffection and like happened in parts of Central America, successor governments invariably renege on such contracts damaging their brand as investment destinations. There is alternative to investing in negotiating expertise.

There are numerous other ways in which countries can evade the resource curse. But ultimately the best protector of a nation’s resources is an accountable government.

Even with the best legal systems, the massive benefits that accrue from this industry are a great incentive for abuse.

One hopes that Kenya’s democratic transition, in which successive governments are increasingly accountable, creates an opportunity to prove Afro-skeptics wrong, as we exploit our resource so well, converting it from a curse to a blessing.