The recent news that oil has been discovered in Turkana County has sparked a swathe of views advising Kenya on how to deal with its new found oil wealth.
Many have commented on the need to manage sky-high expectations, for a strong and credible national oil policy, for Kenya to join the Extractive Industries Transparency Initiative (EITI), and for immediate training of Kenyans to gain the technical skills the government will require managing complex contractual negotiations for oil extraction and transportation.
Most importantly, and even though it will be many years before oil flows, we have seen the beginnings of a vigorous and well informed national debate which started to draw on many lessons from other African countries, including Ghana, Nigeria, South Sudan and Uganda.
To promote transparent management of oil revenues and enable public scrutiny, a legal framework for oil revenue management would need to be considered.
In Ghana, from the public announcement of oil discovery in June 2007, it took nearly four years for the Petroleum Revenue Management Act to be passed.
The Act is now hailed as a world class piece of legislation, providing for the collection, allocation and management of upstream petroleum revenue, and defining a strong and transparent mechanism for monitoring oil receipts and for spending those revenues.
The Act requires the Minister of Finance to reconcile quarterly petroleum revenue receipts and expenditures and submit reports to the Parliament as well as publish the reports in the newspapers and online, and makes provision for four different types of audits of the petroleum accounts.
It also establishes the primacy of the national budget by prohibiting statutory earmarking of petroleum revenue to specific expenditures.
If it is faithfully implemented the Act will not only result in transparent oil revenue management but also improve public access to financial information more broadly in Ghana.
Another challenge is the volatility of international oil prices, which makes planning and budgeting for oil revenues difficult. World oil prices have been on a rollercoaster ride in recent years.
This means that if oil revenues comprise a significant portion of budgetary resources it will make it difficult to manage the expenditure program.
In South Sudan, where oil revenues typically account for around 98 per cent of the annual budget, this is a huge problem.
While Kenya will be far less reliant on oil revenues than South Sudan, having oil revenue stabilisation account can help to provide a buffer against short-term price fluctuations – the Ghana Stabilisation Fund provides a potential model.
But implementing such a mechanism in practice requires a strong political consensus that oil revenues should not all be spent immediately, irrespective of whether they were budgeted for or not.
Expectations will be particularly high in oil-producing areas. With huge wealth potentially lying beneath one of Kenya’s poorest counties, there will be pressures to distribute revenue flows from the oil-sector to oil producing areas.
The challenge will be to ensure that an adequate sharing arrangement is in place so that the people of Turkana realise tangible benefits from the oil.
International experience shows that well designed and implemented benefit-sharing can improve provision of key public services in areas affected by oil extraction.
But the converse is also true: poorly designed and implemented benefit sharing can breed resentment by local communities, even to the extent of generating conflict, as has been illustrated in the Niger delta in Nigeria.
Several elements are important in the design of sharing systems. It is important to increase the efficiency and transparency of revenue reporting: this should continue to be a national responsibility.
If revenue sharing is deemed appropriate, it will then be important to determine the overall amount. But while the total amount may become the focus of national debate, the devil is in the detail of the sharing process.
For example, it is important to maintain simplicity and transparency in revenue sharing: if rules are clear, well-designed, and seen as acceptable by key stakeholders there will be fewer grounds for mistrust between national and sub-national actors.
If Kenya does consider special provisions for the distribution of oil revenues to oil producing counties, it could instead consider using the intergovernmental transfer framework to do so.
For example, a share of oil revenues could be channeled through the Equalization Fund – which at present only has a constitutionally mandated 0.5 per cent of national revenues – assuming that oil discoveries are concentrated under marginalised areas.
Whatever mechanism is developed, the new inter-governmental coordination mechanisms provided for under the Inter-Governmental Relations Act, including the National and County Government Coordinating Summit, could play a role in its negotiation.
Any such mechanism should ensure that the volatility of oil revenues is not passed directly on to county governments.
It must also be accompanied by efforts to build county capacity in financial management, service delivery and accountability so that money is not wasted.
Inability to spend
The experience of sharing mining revenues in Ghana provides a cautionary tale.
It resulted in saturation of weak local governments and failed to deliver tangible benefits in terms of improved service delivery.
Revenue sharing schemes in countries like Peru and Nigeria tell a similar story: without strong government institutions greater decentralisation of oil revenues can result in local elites exploiting the resources for short term political gain, rather than the lasting benefits of their citizens.
Even before oil was discovered, spending capacity was always going to be a challenge for counties like Turkana under Kenya’s devolution process.
In 2009/10 Turkana County Council could not spend its very limited financial resources, running a budget surplus.
The redistribution resulting from the Commission on Revenue Allocation’s consultation formula could result in substantial transfers to counties like Turkana.
These counties will have new fiscal space to address their development needs. Their challenge will be to spend these resources well, which will require specific programs to strengthen local capacity, including nationwide policies to allow counties to recruit and retain skilled staff, and comprehensive support to building systems for public financial management and service delivery.
If the oil announcement adds impetus to these important aspects of the devolution process, it will already have started to repay the people of Turkana before a single barrel is filled.
Geoff Handley is a consultant and Public Financial Management expert with the World Bank