Getting past governance barriers in the extractive industry

By Tioko Ekiru Emmanuel 

The extractives sector has the capacity to transform lives and reduce poverty. Africa, for instance, is the only continent in the world with regular and constant discoveries of new oil fields and other industrial minerals. But, despite its wealth, the continent continues to remains underdeveloped. This scenario has given rise to the phrase “resource curse.” 

Where Sierra Leone, Nigeria, the Central Africa Republic, Democratic Republic of Congo and South Sudan lead in the famous resource curse phenomenon, Norway, Canada, Ghana and Botswana stand out as hubs of good governance in managing natural resources.

Kenya’s growing extractives sector has sparked a spirited debate on how the revenue generated from its natural resources will be shared among various stakeholders – government (national and county), host communities and the investor. Stakeholders and observers wonder how government failed to put in place measures to ensure the host communities’ obtain benefits from the resources accrued from the sector. In many cases research has indicated that these communities do not derive any sustainable developmental benefit from the wealth extraction activities in their region and when they do, it is less than the magnitude of harm suffered.

From the onset, it appears the development challenges facing other countries in Africa or other parts of the world are alive in Kenya. The realities of the problems facing host communities in the extractive sector are horrible and traumatising. For example, in Turkana County, oil discovery has brought intra- and inter-communal tension. On a similar note, the issue of border conflict has been the key bone of contention as a result of oil and gas development. Painstakingly, the relationship between the investor companies and oil producing communities is often characterised by suspicion, lack of trust and violence. This was witnessed in October 2013 when Turkana residents stormed Tullow operation facilities demanding jobs. The firm’s operations were temporarily halted to give room for dialogue. In Kwale and Kilifi Counties where there are large deposits of minerals, the communities identify land disputes as a major cause of violent conflict. This implies that if the land is allocated to mining or drilling activities were to negatively affect pasture, food or food supplies conflict would likely arise. Further, the mining project has not benefited the host community. Here is what an informant says: 

“Mining is a major economic activity in Kwale, but benefits of the mining operation are not really visible. The mining companies like Titanium are reaping billions of shillings from local natural resources while giving very little back to the communities and to the county government. It also takes the raw materials without undertaking value addition at source, which could develop local industries to provide direct and indirect services in the value-addition process, to create employment and business opportunities for locals populations…” 

The problems encountered by the host communities demonstrate how ordinary people have been ignored while profit is obtained from their own land.  

The foregoing demonstrates there is necessity of setting in place robust legislative framework to govern extractive sector and address the concerns of all actors. 

Good governance 

For understandable reasons, good governance has its foundation in the Constitution. It is a catalyst of inclusivity which ensures the voice of everyone is involved in decisions reached. Good governance as a catalyst of inclusivity provides room for decision making, popular participation, and respect for the rule of law, observance of human rights, transparency and accountability, accommodation of diverse interest, equity, free access to information and prompt response to human needs. Generally, good governance has been defined as the exercise of political power to manage a nation’s affairs so as to secure and promote happiness, the good life, security and the welfare of the people or the public good. Bad governance is a major-set back to economic growth and development in Africa. Where there is no good governance, development becomes a mirage. 

Rule of law

The modern conception of rule of law has developed as a concept distinct from the “rule of man”, involving system of governance based on non-arbitrary rules as one opposed to one based on the power and whim of an absolute ruler. The concept of rule of law is not only important to governance, but equally to economic growth and proper management of natural resources. 

Nigeria in the context 

The legal framework governing the extractive sector in Kenya which includes the Petroleum Act (2019), Mining Act (2016), Energy Act (2019) all draw from the Constitution, and the spirit, values and principles envisaged in Article 10 of the Constitution. These statutes, besides a host of others, give effect to among others, Articles 60,62,66,69, and 71 of the Constitution. 

Other tenets include public participation, which is a prerequisite to consensus-building, and transparency and accountability.

Since the 1970s  Nigeria has received billions of money from oil sales. Since then, the Nigerian government has witnessed a lot of political turbulence – including  the vicious Biafra War, the civil war of the oil-producing Delta Region, and up to six coups.  

For a very long time, petroleum activities were unknown to the public. The state operated the entire extractive sector in the dark through military means. It became a conduit to enrich military brass, as well as political and administrative elites, which resulted in serious mismanagement of the natural resources in the eyes of public. 

Today, revenue accrued from the oil is shared between the three ties of government: the federal government gets about half of the oil revenues; the 36 state governments about a quarter; the 774 local governments one fifth while the rest flows into a special fund. The country set up the Special Fund Account in 2002 as an intervention fund for the development of the solid mineral sector, ecology and other critical areas of the economy. By dint of section 44(3) of the 1999 Constitution Nigerian government has been delegated with exclusive ownership of oil and mineral resources in trust for the people and their overall-wellbeing. Though Nigeria has been hailed as one of the leading country in producing petroleum, it is dead economically. 

Corruption has eaten into every fabric of the country systems. The effect of corruption in the country’s economy, and especially in the extractives sector, is horrifying. Corruption engenders the poor enthronement of bad and corrupt leaders, fans poor governance, ineffective administration, and pauperisation of the people. Scarce resources have been diverted into private pockets and this undermines, which hinders democracy and erodes the social fabric. 

As Faridi Waziri, the former Chairman of the Economic and Finance Crimes Commission (EFCC), Nigeria, put it:

“The war against corruption, like terrorism, is a special kind of war. It admits of no conventional methods. It is a war against human selfishness and greed. It is a war against rapid and senseless primitive capital accumulation. It is a war against decadence of mind, ethics and morals. Because of these special characteristics of the war, it requires a strong and uncompromising political will. It must be approached holistically. Casual and superficial approaches will not work. Rhetoric must match concrete action. Like all wars on salvation and restoration, friend will be hurt; families and associates will equally be hurt. And above all, politics have no place in the war.” 

Norway in context

Norway has a population of 5.1 million people, a stable economy averaging 2.2 percent annual growth rate, a GDP per capita of $100,178 and a GDP of $ 517 billion. Norway is one of Europe’s biggest economies. It was the first Scandinavian country to be accepted in 2009 as a candidate for the Extractive Industries Transparency Initiative (EITI). It is also one of the world’s few success stories pertaining oil management. 

The production of oil is cited to have commenced in 1974, after the oil crisis of 1973 when the nominal prices increased threefold, allowing for profits to exceed production costs. During the early years of oil production, Norway was able to design guidelines similar to the 12 precepts of the Natural Resource Charter, which are clustered into six themes: domestic governance, tax regimes, extraction decisions, revenue management, development investments and international competitiveness.

According to the Iraqi oil engineer Farouk al-Kasim, one of the most important precepts that explain Norway’s success in the extractive sector was the fact that Norwegian politicians in 1960s and 1970s agreed not to mention oil resources in elections, shielding the resource from politics. He further explains that the government was well aware of the “Dutch Disease”, which, without planning could cause serious damages to the economy. Today, despite a decline in oil production since 2001, when it peaked at 3.4 million barrels per day to an average of 1.9 million since 2001, the country stands still as the 14th most important producer in the world after Venezuela (2.5 million bpd).    

A survey conducted by the Revenue Watch institute and the Natural Resource centre rated Norway the best performing country in the management of revenues from the hydrocarbon sector. Similarly, the Resource Governance Index from the Revenue Watch institute ranked Norway as the best country in managing wealth fund in the world in the areas pertaining to institutional and legal setting, reporting practices, safeguards and quality controls, state –owned companies, natural resource funds, and enabling environment.

The country established sovereign fund in 1990 which the government deposits 100 percent of its oil and gas revenues, and then withdraws an average of 4 percent to pay for public services such as universal health care, free education, as well as a generous pension. The fund is aimed at supporting savings for future government spending and propping up the country’s oil revenues.  The fund is instructed by law to hold over 60 percent of its investment asset allocation in equity, 35 to 40 percent fixed income, and up to 5 percent in real estate.

Norway taxes 78 percent of the profits of the exploring companies, which are channelled to the fund; at the end of the financial year it refunds companies’ tax loss related to oil exploration. The tax has two components: a regular 28 percent tax on profits, which is the same income tax levied on every company in the country, and special 50 percent tax on profits earned from offshore oil and production.

The savings of the fund are strictly protected and managed based on the so-called ‘Ten Commandments’, an act of self-discipline that among other things establishes that nothing can be withdrawn from the fund until the oil runs out, government cannot use more than 4 percent for current expenses, and none of the investments from the fund can be placed in Norway. These guidelines are meant to enable the fund to act like a shock absorber for the county’s economy, countering inflation and forcing domestic competitiveness. 

For the purpose of sustaining its revenues, Norway has established a strict policy of market and risk assessments for any investment of the fund (stocks, bonds, and real estate). This strategy is based on the individual evaluations of all the countries, markets and companies in environmental, social and governance (ESG) issues, as a mean to reduce risk through diversification.

Finally, in terms of the licensing, the government in 2003 established the Awards Predefined Areas (APA) system, replacing the traditional annual North SEA Awards. The bidding process is very rigorous, and unlike many other licensing processes around the world, Norway does not grant exploitation rights to the lowest bidder, but to the best company based on its experience, expertise and work plan to develop any particular field.     

Lessons for Kenya

The most appealing element of the Norwegian model is the pension fund, which acts as a mechanism for inter-generational equity and wealth distribution to all actors in the extractive field. Further, Norway has excluded oil wealth from the political system to allow oil to be safely exploited. 

In order for extractive sector in Kenya to improve the welfare of its people including the host communities, the government must ensure revenues accrued from natural resources are properly managed. It must settle amicably the questions around land acquisition, compensation, displacements, resettlements, loss of livelihoods and install strong grievance management mechanisms, among others. Failure to sort these out at an early opportunity is going to haunt the industry at some point in future and in fact, any disagreement in the future between the community and the government or the investor, will provide the opportunity for the community to demand that these concerns be addressed. (