Oil and Gas: Kenya’s Eight Challenges

The discoveries of oil and gas provide a great opportunity for Kenya to reposition herself as a business hub in the region. The country can now tap on its coastline to invest in refineries that will supply both the region and international oil needs, boost the country's energy production and ultimately drive up industrialization. Oil and gas have the potential to either help realize Development visions or increase socio-political challenges in respective countries. The oil and gas find should be celebrated as a catalyst to transform Kenya into an investment destination and a source of additional revenue to the country.

If Kenya stays the course to fully implement its new constitutional order, she is likely to escape the 'resource curse' in her oil and gas find. The country has an additional safeguard in the United States of America's Dodd-Frank Act and the European Union's 'EU Transparency Directive' that make it mandatory for corporations listed on stock markets in those countries to report on extractive sector payments to governments. It is up to Kenyans to cast their nets wider for information to verify what government and corporations report locally.

The first challenge for an African country with lucrative natural resources is how to address and maintain its legitimacy. By voting in the new constitution in 2010, the country's 42 ethnic communities helped legitimize Kenya as a unitary nation-state. This legitimacy is bound to be entrenched depending on how the country manages the transition from the old to the new order under the new administration. A botched transition will escalate suspicion that will transform the oil and gas find into fuel that will feed ethnic conflict and instability.

The second challenge is the global market system. Fixation on revenues and revenue sharing overshadow the reality of how the global market system plays into a country's gains or losses. Traditionally, Africa has been a victim of a skewed market order that has relegated the continent to exporting raw materials and importing finished products. This type of market order compromised the ability to grow a knowledge economy and determine leadership in the continent's geological resources and financial services. The oil sector has its market leaders and organizations. These have been in the sector for decades and set the oil market standards. The country should therefore be cautious in its celebration of the oil and lay strategies on how to effectively navigate the global market order.

The third challenge is on environmental concerns. Negative environmental impacts occur in all phases of oil and gas exploitation, starting with the camps or temporary settlements put up in areas where the oil is found; the rocks, mud and chemicals coming out when drilling occurs; and oil leakage. A leaking oil well can pollute land and water ecosystems making them unable to sustain plant and animal life. It is therefore important to have environmental stewardship in the exploration, exploitation and use of oil and gas products.

The fourth challenge is the possible elevation of corruption from the usual 'kitu kidogo' (small 'kickback') to 'kitu kikubwa' (big 'kickback'). Elevated corruption can potentially be fueled by an alliance between public and private sector to disinherit the citizenry. Where the mindset that access to power translates to an ethnic community's 'turn to eat' exists, the presence of a high paying natural resource makes the quest for political power even more competitive. It is therefore important to create clear and transparent structures on revenue management and distribution to help diffuse potential tension.

The fifth challenge is a weak revenue collection system. It is easier for the government to collect taxes from visible corporate entities than from unregistered and informal entities. In the beverages industry; the government has found it easier to rely on formal brewers that control less than 40% of the alcoholic beverages sector than to chase after the informal brewers. The oil and gas find might spur a disincentive to chase 'small monies' but provide an incentive to go after bigger money. The government might find it more efficient to simply put its hands on oil money and ignore other sectors thereby killing the quest to build a robust revenue collection system.

The sixth challenge is that of lost growth. Countries tend to forget their day-to-day economic activities in favor of revenues from natural resources. Professor Paul Collier refers to such a situation as the 'natural resource trap.' The trap is described in terms of natural resource exports that increase the value of an exporting country's currency against other currencies which make other activities from the same country uncompetitive, consequently leading to abandoning of other tradable products in favor of revenues from natural resources. If oil and gas becomes Kenya's key foreign exchange earner, traditional exports such as cut flowers, fresh fruits and vegetables, among others, will be threatened. Floriculture employs close to 60,000 people. If Kenya fails to diversify in favor of easy oil money, it is likely to increase the army of unemployed people on the streets. Increased unemployment will lead to insecurity and social support budget.

The seventh challenge is a deluge of experts and initiatives buzzing in the ears of Kenya's policy makers. Weak government institutions in resource rich countries in sub Saharan Africa have given license to international initiatives out to tame excesses in the extractive sector industry. Such initiatives fail to address the fact that corruption and natural resource related conflicts have an element of international value chain. International laws that make it easier for one to open offshore business and shield their identities make it easier for local elites in Africa to collude with their counterparts abroad to defraud the continent. In such a situation, transparency initiatives championed by international agencies simply fall in the trap of protecting international business concerns through limited aspects of transparency while revenues from oil and gas leak from national coffers. Both the political and technocrat arm of government must weigh all advice and initiate organic standards governed by well thought out legal framework to ensure aspects of transparency in revenue collection and allocation systems.

The eighth challenge is political activism on oil and gas finds. The recent fiasco over the Mau water tower reclamation is a pointer to the fact that political activism can transform good effort into negative energy. Residents in oil rich zones might be pushed to feel more entitled than say residents from Ndakaini dam who supply Nairobi city with water. The last thing an investor wants to be confronted with is a continuous battle with communities incited by the rent seeking political class. This calls for urgent need to strengthen the role and independence of the judiciary, legislature and executive. Strong institutions will play a critical role in safeguarding the interests of both Kenyans and investors. Individuals and state organs must manage unrealistic expectations, guard against misallocation of resources and vet political interests to tame possible enactment of populist but unrealistic policies.

By James Shikwati
The author [email protected] is Director of Inter Region Economic Network (IREN). He Co-Edited the book 'Geological Resources and Good Governance in Sub - Saharan Africa' with Prof. Jurgen Runge in 2012.