Put in place proper policies before signing contracts

In a commentary published last week, Nobel Prize laureate for economics Prof Joseph E. Stiglitz cautioned African nations that have recently discovered natural resources to move with caution and not to be rushed by foreign companies into making sweetheart deals.

He warned that the companies want to minimise what they pay while the host nations want to maximise. So what is the way out?

“Well designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that if prices soar – as they have repeatedly – the windfall gain does not go only to the company.”

Last Friday, Energy minister Kiraitu Murungi called a Press conference in which he announced that Kenya plans to build a pipeline to supply oil to Tanzania and that a refinery will be built in Isiolo.

He also talked of a pipeline from Isiolo to Nakuru plus the 2,000 kilometre pipeline from Juba to Lamu.

While this is good, and any politician would love to make such announcements, we would like to echo the words of Prof Stiglitz who warns that natural resource-rich countries could end up getting peanuts from their resource if they do not first put in place proper laws, policies and institutions to govern such wealth.

The countries that ended up with the Dutch Disease are those that failed to enact proper laws or failed to negotiate agreements that favoured them.

We do not want Kenya to do desperate acts, or move as a result of pressure from the foreign companies to start putting up infrastructure even before the companies scouting for oil tell us about the commercial viability of their finds.

But even if they find crude oil of commercial quantity, the next stage should be on the revenue sharing agreements.

It is on this score that countries such as Angola and Nigeria have failed to get revenue from oil price windfalls while countries such as Botswana have been able to turn around their economies by wisely negotiating with mining companies.

Kenya should, therefore, not rush to sign crooked deals and will be far much better off it it waits to put up proper institutions to manage the oil exploration sector.