We shouldn't approach management of oil revenue with short-sightedness

I gather that the government and Tullow Oil have decided that crude oil produced under the so-called early Oil Pilot Scheme will now be transported from Eldoret to Mombasa by trucks and not by rail as originally conceived.

Under the scheme, we are targeting to transport 2,000 barrels of oil per day from Lokichar in Turkana to Mombasa through Eldoret. The plan is to ship the product to export markets from storage and loading facilities at the Kenya Petroleum Refineries.

We are perhaps going to be the first country in the world where crude oil is transported by road in the context of an existing railway line. Clearly, this is a crude way of transporting crude because rail has several clear advantages over road transport.

One is that the security and safety of the product is more controlled than on a road trip. You avoid road congestion, especially considering that the job involves moving between 12 and 15 trucks a day.

This is going to be a very lucrative contract for the trucking company that ends up clinching the deal.

Which is why it is not surprising that the air is rife with rumours and speculation, with vested interests spinning all manner of conspiracy theories to explain away the decision.

Rift Valley Railways, which operates the existing three-metre gauge railway network under a 15-year concession – and which was looking to clinching the deal, having all along been involved in the planning of the early oil pilot scheme – is understandably unhappy with the turn of events.

POLITICAL INFLUENCE

One strand of the theories floating around attributes the turn of events to the political influence of well-connected owners of trucking companies and their allies in the Jubilee administration.

I choose to look at the big picture. Have we planned well for oil revenues? We seem to be coming up with multiple legal frameworks for managing revenues from natural resources. The result is a regime with multiple laws, all touching on the management and sharing of revenue from natural resources: the new Mining Act, the Petroleum Bill, the Public Finance and Management Bill, and the new Bill sponsored by Baringo Senator Gideon Moi on local content.

Are we rushing to sell oil before preparing the ground? We set up a framework for managing oil revenues well in advance of drilling when the task force on parastatal reforms that was appointed by President Uhuru Kenyatta came up with the idea of a Sovereign Wealth Fund Bill as an over-arching law to guide the management of revenue from natural resources.

We all welcomed the idea of a sovereign wealth fund because what the presidential task force proposed was not only borrowed from the best practice in the world, but was also drafted to be in sync with the standards set by the International Monetary Fund on the management of sovereign wealth funds – the so-called Santiago Principles.

Today, it is widely accepted that the best framework for managing natural resource wealth is through a sovereign wealth fund. First, it allows you to invest current oil revenues for the benefit of present and future generations, thereby achieving inter-generational equity, as stipulated in our Constitution. In other words, you place financial assets in a special purpose investment vehicle that has no liabilities.

MUST PLAN

Because national resource revenues are finite, countries must plan for the time when the resources will have been depleted. Hence, the wisdom of transforming natural resource revenues into long-term financial assets that can generate revenues in the long term when the oil runs out.

Secondly, abundant oil revenues frequently lead to the phenomenon called the Dutch disease. This is because such revenues always lead to an unprecedented influx of dollars into the economy of the exporting country. Almost invariably, the trend is that such countries begin to shift resources from agriculture and manufacturing,

With the exchange rate strengthening, the non-oil exporting sector also loses its competitiveness.

The new sovereign wealth fund of Nigeria – the Nigerian Sovereign Investment Authority – was crafted along the lines of what the presidential task force proposed. Angola’s sovereign wealth fund has a target of mobilising $10 billion in five years.

And, we have seen cases where sovereign wealth funds have been deployed to bail out sectors of strategic importance. In Malaysia, Khazana Nasional bailed out Malaysia Airlines while Singapore’s sovereign wealth fund, Tamasek Holdings was used to shore up the country’s capital markets during the Asian financial crisis of 1997.

We should not approach the management of our oil revenues with short-sightedness.

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