Key challenges Kenya is likely to face from oil, gas discoveries

By James Shikwati

The discoveries of oil and gas provide a great opportunity for Kenya to tap on its coastline to invest in refineries that will supply both the region and international oil needs. However, the discoveries have the potential to either fuel development or increase challenges on the country’s socio-political landscape.

 Kenya is likely to escape the “resource curse” in its oil and gas find if it stays the course to fully implement its new constitutional order.

The country can take advantage of 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

The first challenge for an African country with lucrative natural resources is how to address and maintain nation-state legitimacy.

By voting in the new constitution in 2010, the country’s 42 ethnic communities helped legitimise Kenya as a unitary nation-state. This legitimacy is further 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 overshadows 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 it to exports of raw material and importation finished products.

The third challenge is on environmental concerns. Negative environmental impact occurs in all phases of oil and gas exploitation. Impact starts with temporary settlements put up in areas where the oil is found, the rocks, mud and chemicals coming out when drilling occurs and events of leakage. A leaking oil well can pollute land and water ecosystems making them fail to sustain plant and animal life.

 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 fuelled by an alliance between public and private sector to disinherit the citizenry.

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. The oil and gas find might spur a disincentive to chase “small monies” but provide an incentive to go after bigger money.

 The sixth challenge is that of lost growth. Countries tend to forget their day-to-day economic activities in favour 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 favour of revenues from natural resources.

The seventh challenge is a deluge of experts and initiatives. 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.

 The eighth challenge is political activism on oil and gas find. The recent fiasco over the Mau water tower restoration illustrates 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. Strong institutions will play a critical role in safeguarding the interests of both Kenyans and investors.

 James Shikwati is the Director of Inter Region Economic Network (IREN) and Co-Edited the book “Geological Resources and Good Governance in Sub – Saharan Africa” with Prof Jurgen Runge in 2012