Tuesday, 29 April 2014

A journalist sought my opinion on East Africa's 'Black Gold'. This is what I told her. What do you think?

Q1. What does it mean for the region with the discovery of oil and gas in the East African Region?

Foremost, like in many other poor countries in Africa (Nigeria, Angola, Zambia) and South America (Peru, Bolivia, Ecuador) that have handled the influx of natural resources, the discovery of oil and gas in East Africa portends huge increases in revenues from export of oil and gas.

·         Larger revenue basket: It provides significant opportunities to increase state revenues which could be instrumental in developmental spending, addressing pressing issues of poverty, deprivation and inequality that are rife in the region.

·         Surplus energy: It would increase the stock of energy that could balance the prevailing energy deficit that the region has got to deal with. This could be critical in driving industrial development, and increasing competitiveness for foreign direct investment currently hamstrung by energy deficiencies.
·         The EAC integration project: It could also mean additional resources that could be invested in driving the integration agenda. This could also incentivize collective management of the natural resources, however it could as well elicit nationalistic idiosyncrasies that could severe intraregional relations

·         Tax implications: Depending on how much the actual find turns out to be, and the character of tax regimes that the different countries adopt, it could also mean a reduction of the tax burden shouldered by citizens 

However, like it has been widely researched and discussed (the discourse around the natural resource curse), the oil and gas find could also bring with it problems of governance and accountability. Natural resource revenues are pervasive not only for local political and governance systems but also for international relations (oil is often a strategic commodity for foreign policy). Oil can corrupt systems, provide incentives for poor economic policy and politics, compromise governance, and exacerbate corruption. It could induce and shape the political environment in a manner that could disincentivize the building of strong and effective institutions for accountability, democracy and good governance;

·     It could disrupt accountability systems built around tax and tax bargaining. Where fiscal revenues (mainly from oil or gas) swell, this could encourage laxity and undermine effective taxation.   
·        It could exacerbate preexisting political, social and institutional problems including bad governance, wasteful government spending, socio-economic inequalities and social conflict
·       Despite significant gains with decentralization policies across the region, a revenue boom from oil/gas exploitation could also tempt political elite to revert to recentralization and increase of central government control over new revenue streams

Q2. As a researcher what policies do you think the government should put in place in regards to the oil and gas discovery? Have the governments done enough in regards to legislations in this sector?
Reform Fiscal Policy

Robust fiscal policies will be critical as a central strategy for optimising the opportunities that resources could bring. Kenya, Uganda and Tanzania must learn from other developing states that have exploited natural resources.  These learnings are fundamental in designing prudent fiscal policies that recognise the exhaustibility and volatility of oil/gas revenues. They must strike a balance between what is allocated for government revenue and what portion is saved for fiscal sustainability.

·  Consider State capitalism – increase citizen stake in oil production: Institute mechanisms for government and citizens to invest in the whole value chain of oil production to increase opportunities for retaining proceeds in the region. Establish an investment bond through which citizens with idle money can invest in parastatals or increase stake in the multinational corporations contracted to do the exploitation.

·   Interrogate the state’s role in the management of oil: Think of alternative modalities for managing and sharing the proceeds of the resource find. The government must not be only entity to execute the sharing of oil wealth.

·   Expand oil footprint in the economy: Utilise revenues from oil to expand and diversify the economy, as well as invest in other sectors which could have a greater impact on employment and wealth creation. Use oil money to bolster inclusive growth - exploit oil  to  facilitate growth in other sectors

·  Design and execute effective tax regimes that ensure fairness: Negotiate strategically to ensure that MNCs do not repatriate large proportions of the proceeds. Maximise on revenues from investors, but also maintain a reasonable tax package to increase citizen stake in governance. Keep government accountable on exploitation and utilisation of resources.
·    Fiscal sustainability (ensure generational equity): Strive to achieve long term fiscal sustainability. Encourage flexibility in fiscal policy in order to effectively deal with unique developmental problems and pressing developmental needs. Aim to strike a balance between developmental spending and fiscal sustainability.

·   Reform budgeting structure to increase spending on development issues such as pro-poor sectors and exercise flexibility in fiscal policy to deal with unique developmental problems.

Liberate information and increase civil knowledge

Natural resources exploitation in Africa is shrouded with secrecy, opaqueness and discreteness. Information on progress with exploration, mining, bidding, contracting, sales as well revenues generated must be made open, accessible and available to the public. Deliberate and consistent efforts to open up information on dealings related to these resources must put them in public domain. Greater effort needs to be made in terms the e-governance agenda, the open data initiative and the right to information. Augment this with an apt revenue and expenditure tracking system to monitor what governments do with revenues and to ensure that proceeds from these resources are prioritised on reducing poverty, addressing developmental needs.

Develop appropriate legislative and institutional frameworks

Adequate and well thought through legislation must be instituted to regulate the exploitation of the natural resource wealth and to determine the integration of natural resource considerations into Public Finance Management laws. There must be an appropriate legal framework developed based on multi-stakeholder consensus before exploitation commences. Utilisation and expenditure of revenues must be treated more as a public finance management issue than natural resource exploitation imperative. Legislation could regulate:

·   Revenue sharing formulae: both in terms of proportions for government spending versus what is saved for fiscal sustainability, and sub-national sharing
·      Tax regimes for both investing MNCs and public tax payers
·  Policy and legislative space for citizens, citizen representatives, civil society organisations
·       Sustainable exploitation to ensure intergenerational equity

However policy options must take cognisance of and be effectively embedded in pre-existing political and institutional contexts otherwise this might risk exacerbating underlying problems. This is because as much as formal political institutions, policies and legislative frameworks can improve management of revenues and governance of natural resources, a resource bubble has the potential of changing underlying configuration of political interests around the distribution of such resources.

Increase citizen engagement: Expand CSO and media space

There has been significant expansion in public engagement and participation in recent years. This space provides an opportunity for CSOs and the media to actively take part as citizen representatives in overseeing the management of East Africa’s natural resource wealth. They must ensure government is accountable, and demand transparency in the dealings on the oil and gas finds. They must be proactive in influencing government action such as challenging malpractices, pushing policy suggestions, proposing new or revised legislation in order to maximise the benefits of natural resources.

 Q3. Does it mean the cost of doing business in region will go down?

The cost of doing business in any location (East Africa included) is in principal subject to an array of issues ranging from infrastructure, legal/policy issues, and personnel, to cost of production that transcend the scope and influence of increased oil and gas stocks. Nonetheless, this would affect the energy component of business inputs and the attendant impacts that it would have on other non-energy inputs that affect the overall cost of doing business.

Increased oil/gas production could mean lower energy costs that could translate into cheaper transport costs, lower overheads for industrial enterprises. It must be noted however that this is subject to local fiscal policies as well as global market forces.

Q4. Is the region ready for the black gold?

It is difficult to say yes or no to this question. Why, because i) readiness as is put in the question is rather relative and ii) the question of the actual magnitude of the resource find has not been resolved. However assuming that readiness in this context refers to the capacity to deal with the potential issues that the resource find will elicit, you could isolate: Policy, legislative and institutional aptitude, Civic knowledge/awareness and Planning as crucial pointers to the readiness of the region.

Considering policy, legislative and institutional preparedness, - the countries in the region looking forward to the rich resource finds have hardly thought through the requisite policies or legal frameworks that could regulate and support the management of these resources. Kenya for example is in the process of enacting a law to regulate mining that in fact still does not expressly attend to the humongous challenges that will come with exploiting oil when the time comes.  

·               There is a lot of speculation, misconceptions and high expectations surrounding the discovery of oil and gas in Kenya, Uganda and Tanzania which have not been effectively dealt with by the respective governments. The natural resource exploitation endeavours currently underway in the region are shrouded in a lot of secrecy and opaqueness. Information on progress is hardly in the public coffers. This has fuelled ignorance and continues to curtail efforts at keeping governments accountable on progress and engaging policy makers on what they would want done with the resources.

·                With regards to planning, it is important to recognise foremost that in most of the countries warming up to the discoveries, exploration has not been concluded. It means therefore that it is premature to tell or even estimate the size of the find. This information is very crucial for planning. The macro-plans of the three countries hardly touch on the prospects of these revenues and by default do not factor in these revenues in the macro dreams they have. The vision 2030 polices have little connection to the prospects of these resources for example yet they should ideally be funded by such resources

Q5. With the discovery of oil, will the bio-fuel projects be abandoned?

I am not an expert in bio-fuels in the region so am not in a position to authoritatively comment on this question. However it is probably relevant to underscore the impact of oil and gas production on the motivation to pursue other sources of energy. Oil or gas production (as has been experienced in other countries like South Sudan) has the capacity to diminish investment in other economic activities. This must however still be considered in light of the knowledge of the exact size of the estimated reserves. Where the reserve is not significant, the diminishing effect would not be pronounced. This could be variant depending on policies adopted by the different countries in the region. It could very well stifle the quest for other sources of cleaner energy in states where government freezes or under-invests in alternative sources like bio-fuels. In countries that adopt frameworks that balance exploitation with research and exploration of other possible options the result would be much different.  

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