Why Kenya’s oil and minerals sector is crying out for a transparency plan

The investors’ interest in Kenya’s extractive sector has led the country to global limelight, notwithstanding the recent waves of insecurity concerns, as evidenced by the increased foreign direct investment (FDI).

With recent discoveries of oil, gas and other minerals, it is estimated that the sector’s contribution to the gross domestic product (GDP) is likely to increase from one per cent to above 10 per cent in future. Such an increase offers an opportunity for the sector to catalyse and hasten Kenya’s transformational economic takeoff that has stalled for over 50 years.

Taking cognisance of these opportunities and challenges, the government has added the extractive sector under the economic pillar of Vision 2030 and notably referenced the sector in the Medium Term Plan of 2013-2018.

This renewed focus on the sector has been bombarded by audible voices of the private sector and civil society that call for a transformative and inclusive approach to mitigate the risk and leverage on the opportunities to maximise use of mineral resources. Such an approach should encompass an immediate development and adoption of a good governance framework before the extractions are fully operational.

Currently, Kenya is on an investment promotion phase of developing the sector with an ongoing serious consultative and legislative reform agenda in line with international best practices. The sector is now a beehive of activity, driven by local interests without a proper coordination mechanism.

Extractive sectors encompass exploration and development of resources that are geography-specific. Ventures in these sectors tend to be physically and commercially high risk in nature and politically sensitive.

Furthermore, it is probabilistic to determine the existence, extent and quality of resources, as well as production costs and future world market prices. Profitability is not assured, and the fact that the resources are finite requires the continual acquisition of new deposits.

Since the possessory rights of these resources are vested in the state, contracting firms may have to be aware of government policies and regulations in more detail than they would in other sectors. The government decides whether resources are privately owned or state property. If they are state-owned, the development can be conducted by a state company or contracted to a private firm. Most countries grant development rights to private companies through negotiation or bidding.

Specifically, the extractive sectors are high capital-intensive and are characterised by long lead times, incomplete information and disproportionate abilities for the parties to bear the risks involved in the venture. Such attributes expose the sector to susceptibility of information asymmetry that increases the probabilities of market and government failures, more so in developing countries’ extractive sectors, whose ability to absorb some sector risks tends to be glaringly weak.

In these countries, the mining contracts are usually awarded to international firms with requisite experiences. These firms tend to be seasonal players of the extractive sectors, and possess a repository of vital information of the sector that they have built over the years.

Being the custodian of such important information enables them to extract some incomplete mining contracts in their favour. This has been the root cause of tragic experiences of the extractive sector of developing countries.

Drawing lessons from such unfortunate experiences, the new entrants to the extractive sector like Kenya must negotiate the best possible deal given its specific circumstances. Such negotiations for production sharing contracts, for instance, must be alive to risks such as  increase in corruption and other illicit financial outflows, inefficient contracting, price volatility and crowding-out effect on labour-intensive sectors of the economy.

In addition, there are risks of environmental degradation and negative externalities on local communities, conflicts and political instabilities.

Mitigation of these risks and others calls for a transparency strategy, a supporting pillar of good governance. However, such a strategy must recognise possible conflict of interest attributable to the duality of the government’s role as a trustee of public resources as well as a regulator of the sector.

Competitive market

One basic tenet of competitive market is perfect information. Precisely, the parties to any transaction must be fully informed about the nature of any exchange to ensure that both receive a benefit. This suggests that full disclosure of information prior to the exchange, promotes efficiency. Through efficiency and equity, economists support transparency.

From an economist’s view point, transparency is a government’s regulatory tool that mandates corporations and other organisations to disclose factual information about their product and practice to the public.

The governmental interventions are predicated on the premise that market and political process are characterised by information asymmetries that generate market failures. Such failures are inevitable, because private firms and government agencies have exclusive access of some information about their products and practices, and always have compelling reasons to keep much of it confidential.

Mandated disclosures compel the disclosing party to avail information to the users with an intention of behaviour change by the parties involved.

The veracity of the information is a necessary but not a sufficient condition for effectiveness of the disclosure system. Such effectiveness is determined by the combined behaviour changes of the parties involved, measured against some specific desired policy goal.

Kenya’s disclosure system has historically been glaringly ineffective due to the extractive sectors’ miniature contribution to GDP in the past.

However, this is about to change with Kenya’s announcement of its commitment to the Open Government Partnership (OGP). Moreover, the government has made some overtures directed to the implementation of the Extractive Industry Transparency Initiative (EITI) as referenced in the draft National Energy Policy.

Specifically, the draft policy underscores the government’s wish to demonstrate its commitment to good governance principles by adopting the EITI treaty.

EITI is an initiative of global coalition of governments, companies and civil society working together to improve openness and accountability of management of revenue from natural resources.

To attain the first step for EITI implementation known as candidate status, Kenya needs to demonstrate its commitment to work with civil society and companies, and appoint a senior official to spearhead the process. Through consultation, a multi-stakeholder group must be established with a mandate to publish costed work plan, containing measurable targets and timetable for implementation.

Transparency principles are substantively anchored in the Bill of Rights of Kenya’s Constitution. Specifically, every Kenyan has the right of access to state information with the state obligated to publish and publicize any important information affecting the nation.

The access to information right is further broadened by consumers’ right to information necessary for them to gain full benefits from goods and services.

Disclosure system

Entrenchment of transparency in the Constitution has laid a solid foundation upon which to build a penetrative and accountable disclosure system. In a nutshell, any Kenya citizen has a locus standi to force the government to disclose information on the extractive sector.

In conclusion, the government must heed the call of its citizens and adopt a transformative and inclusive approach of managing the extractive sector efficiently. 

The approach must encompass principles of good governance with disclosure system as one of the supporting pillars. Patently, the system must be governed by disclosure rules that address the use, accuracy and scope. To enhance credibility of such disclosure system in the eyes of global investors, complete adoption of EITI is highly recommended.

The GDP contribution of the extractive sector will significantly increase in  future. Thus, an efficient management of the sector will be critical for sustainability of the expected economic takeoff.

Prof Kieyah is a Principal Policy Analyst at KIPPRA