How Kenya can make the most of its oil and gas find

PHOTO | FILE Tullow Oil engineers work

at the oil rig at Ngamia One Well in Turkana

County in 2012. The discovery of oil in the

arid region has raised the locals’ expectations

and its is prudent for the government to manage

them early.  NATION MEDIA GROUP

Friday, October 25, 2013, By Nic Cheeseman

In Summary

• With the discovery of large oil deposits in Turkana, Kenya has now joined the club of resource-rich states
• The government has said little about how it wants to use oil revenues when they start to flow.

Recent finds of oil and gas across East and West Africa mean that by the end of the next decade, almost all African economies will be dominated by natural resources.

With the discovery of large oil deposits in Turkana, Kenya has now joined the club of resource-rich states. Making the most of this opportunity depends on the willingness of the government to save the proceeds of oil and gas and invest them in the future.

The importance of natural resources to the continent is growing by the year. Following the recent oil and gas discoveries in Africa, an issue that was previously only relevant to a small number of countries is now at the top of the political agenda for many more.

We are no longer just talking about the classic “resource economies” — DRC, Nigeria and South Africa. In the future, the debate about the impact of oil and the resource curse will focus on Ghana, Kenya, Uganda and Tanzania.

How well African countries manage their natural resources over the next decade is the single most important factor that will determine whether the continent manages to sustain its fragile economic recovery.

Given this, we must redouble our efforts to understand how African countries can best manage their extractive industries. But these efforts should not just focus on what African governments can do. Multinational companies and international governments have often pursued self-interested policies to the detriment of African people.

To push this inclusive agenda forwards, I joined forces with OXFAM to organise a one day workshop at the African Studies Centre of Oxford University last Thursday. We invited speakers from a wide range of backgrounds, including the Ugandan Foreign Affairs Minister Sam Kutesa, Ghanaian High Commissioner Kwaku Danso-Boafo, former Prime Minister of Zimbabwe Morgan Tsvangirai.

The chief economist of the African Development Bank and representatives of Rio Tinto, Tullow Oil, the Ford Foundation, and the Global Alliance for Tax Justice also spoke.

At the workshop, OXFAM Executive Director Winnie Byanyima said, “The resource curse has never been so stark and, with new mineral discoveries happening every day in Africa, has never been so vital to tackle. These huge new finds could mean tens of billions of dollars of taxes to pay for schools and hospitals— but only if this new wealth remains in Africa. Too often it has ended up in Zurich not Zambia, London not Liberia.”

PUBLIC SERVICES

But what should governments do with their resources? How much should they spend on improving public services? How much should they save for the future? These are some of the most pressing questions facing the Kenyan government today. Tony Venables, Director, Oxford Centre for the Analysis of Resource Rich Economies at Oxford University, had some answers.

Venables accepts that governments will naturally want to earmark some proportion of resource windfalls to alleviate the suffering of their people. However, he argues that in the long-run oil and gas will only benefit African economies if governments save the majority of their resource revenue and invest in the wider economy.

If a government spends all of its resource revenue on services such as healthcare, its people will be better off in the short term but the amount of revenue available to the government will not increase. But if the government saves for the future, using resource income to stimulate activity in other parts of the economy, it can generate new forms of income.

In the long run, creating more revenue streams will enable the government to spend even more money on public services. So the best way to serve ordinary Kenyans is not to spend all of the oil revenues now, but to carefully plan how to invest them for the future.

If a government decides to follow Venables’ advice, what should it invest in? The Norwegian Government invests a large amount of its oil money abroad. But it has already developed a strong economic base, so it can afford to invest abroad.

Venables argues that African states are not in the same position. They, therefore, need to invest more in the domestic economy.
This is not only important to promote economic growth, it also has spill-over benefits. As infrastructure improves, foreign and private investment is likely to rise— creating additional drivers of economic growth.

But governments may not be able to invest in the right areas at once. It may take time to prepare the economy so that it can handle new levels of investment. Venables suggests that because of this, it is usually a mistake for governments to spend all of their newfound resource wealth at once.

A far better strategy is to identify the key parts of the economy that would benefit most from investment, and to stagger expenditure in order to make sure that the right foundations are in place before the government starts to pour in resources. But this requires people to have patience.

This does not happen naturally. When oil is found, popular expectations are often hard to contain. Local communities demand new services, middle-men expect a bigger cut of the action, and voters expect greater rewards in return for their political support.

PUBLIC EXPECTATIONS

Venables argues that to correct these expectations, it is essential that the government moves early to manage public expectations. Political leaders must take their people with them in order to build public support for their policies. Voters will only see the value of saving and investing in the future if the government engages in an information campaign to explain the benefits of this policy to them.

So far, the Kenyan government has made it clear that it does want to plan for the future. Kenya’s Vision 2030 sets out a long-term strategy for economic development based on investing in a range of sectors, including agriculture, tourism, manufacturing, and IT.

But the government has said much less about how it wants to use oil revenues when they start to flow. To an extent this is understandable. Oil was found relatively recently and it is not yet clear exactly how much money the government will get, and when.

It would be a mistake to remain silent on these issues for long. Early action by the Ghanaian government has been very successful at generating public support for the idea that oil revenues should be saved to help the country cope in times of economic hardship.

The Kenyan government will find it much easier to use oil resources for the long-term benefit of the country if it follows suit.

Dr Cheeseman is the Director of the African Studies Centre at the University of Oxford