KISERO: A sovereign wealth bond to safeguard oil money - Daily Nation

A sovereign wealth bond to safeguard oil money

Wednesday July 4 2018

Oil exploration

A police vehicle escorts trucks loaded with crude oil from Ngamia 8 oil fields in Turkana County on June 3, 2018. PHOTO | FILE | NATION MEDIA GROUP 

By JAINDI KISERO
More by this Author

The forthcoming visit of President John Magufuli of Tanzania got me thinking about the subject of management of national resource revenues: Whether we have clearly thought through how we want to manage the oil wealth once production commences in earnest.

Indeed, President Magufuli has lately faced incessant attacks, especially by the Western media, over his controversial disputes with multinational mining firms on the sharing of revenues.

Although some of his decisions on mining contracts have been very controversial, the good thing is that Dr Magufuli’s battles with multinationals have mobilised the citizens of that country into recognising that the national interest must be key in the dealings between multinationals and a country.

In Kenya, what is being debated is how we should be sharing revenues between the centre and host communities.

We recently witnessed members of the Turkana community come out to demonstrate by blocking trucks transporting crude oil to Mombasa under the government’s early oil programme.

Clearly, we will need a sounder framework for managing national resource revenues.

SHARING AGREEMENTS

Are the production sharing agreements with these multinationals the appropriate tools for us? Or are the service contracts model, as practised in most of the Middle East and in Ecuador, the most appropriate in our circumstances?

Without doubt, the concerns of the Turkana community needs to be dealt with in transparent negotiations. However, the bigger debate should be overall management of oil revenues.

The best model is to manage national resource revenues through a sovereign wealth fund. That comes with the following advantages.

First, it allows you to save money for future generation. Secondly, it allows you to manage fluctuations in oil revenues. Thirdly, you have a tool to help to manage adverse impacts on the macro-economy. A sovereign wealth fund could also be a good source of money to invest in infrastructure.

And, to ring-fence the fund from plunder by finance ministers and stop them from looking at it with lustful eyes, sovereign wealth funds have what is known as a ‘fiscal rule’, stipulating that only returns from investment of the fund can be withdrawn and used to support national budgets.

BUDGET DEFICIT

Thus, a sovereign wealth fund will force a finance minister onto managing his national budget deficit without looking at the money from national resource funds.

Sovereign wealth funds have been used successfully across the world, most notably in Norway, but also in the Middle East, Malaysia, Singapore and China. Even the US state of Alaska and Australia have established very successful and well-run funds.

In Africa, Botswana always earns plaudits for using its sovereign wealth fund — the ‘pulu fund’ — to successfully manage her diamond revenues. It is so well-run that it helped to give the country better sovereign ratings than some of the smaller European countries.

I at times get the feeling that we are yet to come up with a good framework and that arrangements such as government’s early oil pilot scheme have set us on the wrong path. Does it surprise you that we are already seeing demonstrations and threats to block the trucks by citizens?

TACTICAL ERROR

Clearly, the government made a tactical error in terms of managing the expectations of the host community.

You don’t expect the ordinary man and woman in Turkana to see huge trucks passing by villages, shipping away crude oil out of the country, and still expect them to believe that no money is being made and that there is nothing to be shared with them.

We all know that the oil exploration and production is a capital-intensive industry which generates very few jobs.

But does that matter? If you don’t do a good job at managing expectations, the Turkana will continue demanding jobs and blocking roads.

Tightening security by deploying more policemen in the area may help on the short-run. But reaching an understanding with the local people through transparent negotiation is what will create sustainable harmony. Which brings me back to the case for a sovereign wealth fund for Kenya.

PARASTATAL REFORMS

More than five years ago, the presidential task force on parastatal reforms recommended establishment of a sovereign wealth fund.

Indeed, President Uhuru Kenyatta formally accepted the recommendations way back in November 2013.

The recommendations came complete with a Kenya Sovereign Wealth Fund Bill.

Months later, the National Treasury came up with a rival Bill — the National Sovereign Fund Bill. To date, we don’t know what happened to the proposal.

Kenya must avoid going the route of African nations who have plundered all their natural resource wealth. The starting point should be, go back to the Kenya National Sovereign Wealth Fund Bill.

Advertisement