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Economy

Lessons from the Gulf : How Kenya can manage its oil resources

An aerial view of Dubai's Marina. The UAE has cut its reliance on the oil by investing in other sectors of the economy. PHOTO | AFP
An aerial view of Dubai's Marina. The UAE has cut its reliance on the oil by investing in other sectors of the economy. PHOTO | AFP  

Kenya will by the end of the year take the first tentative steps to join the league of oil producers, with the recent announcement by the Energy and Petroleum ministry that the delayed small-scale oil exports of 2,000 barrels per day will be started by December.

History has shown that the story of oil exporters in Africa has carried more grief than joy, being a source of strife, conflict and underpinning massive corruption that has seen citizens of most oil-rich African states remain among the poorest on the continent.

There are, therefore, important lessons to be learnt by authorities in how to manage the expected windfall from the black gold, of which the country has proven reserves of nearly one billion barrels.

On the other end, there are examples around the world of how to leverage oil income to create a diversified economy that will continue to thrive at the end of the oil boom.

Looking at the economic model being pursued by the United Arab Emirates (UAE), mainly in the two Emirates of Dubai and Abu Dhabi, offers insight in weaning an economy of dependence on oil revenue.

Norway, western Europe’s biggest oil producer, also offers a good example, with its huge sovereign fund guaranteeing that the windfall from its North Sea oilfields will benefit future generations long after the resource runs out.

Dubai and Abu Dhabi have been able to transform what was a desert backwater a few decades ago into centres of trade, tourism and transport, by investing their oil money in infrastructure.

Dubai, for instance, is spreading its influence far outside the Gulf through trade partnerships with African and Asian countries, taking advantage of a central position with easy access to Asia, Europe and Africa.

It has formed one of the largest chambers of commerce in the world — the 206,000 member Dubai Chambers of Commerce and Industry (DCCI) — through which it is investing in new markets and attracting investors to Dubai.

The State has also constructed the ninth busiest port in the world, the Jebel Ali Port which handled up to 19 million twenty foot containers (TEUs) last year. This port contributes 21 per cent of Dubai’s gross domestic product (GDP).

The port operator, DP World, also runs 78 other ports globally in 40 countries serving 70,000 vessels a year.

Jebel Ali is a key trans-shipment point for goods originating from the Far East destined for African, European countries, and is also supporting the free trades zones set up to attract manufacturers from around the world to make their goods in Dubai.

“Dubai had a lot of oil in the 1960s and 70s, and since then we have been producing less and less.

“The peak of Dubai’s oil was somewhere around 200,000 barrels a day, but today it is at a range of 50-60,000 barrels. “Currently only three per cent of Dubai’s gross domestic product comes from oil,” says Hamad Buamim, president and CEO of the DCCI.

“We invested a lot of our early oil revenue in infrastructure, especially in reclaiming land. An early investment was a man-made creek started in 1950s, providing the State with a port facility that helped set us up to become a centre for trade.”

Kenya has a lot going for her in this regard.

The country is already the centre for trade and financial services in the region, acting as the main gateway to the sea for its landlocked neighbours.

Kenya has already been developing the existing port facilities in Mombasa, and is setting up a new port in Lamu under the Lappset corridor development plan.

Experts say the early oil revenues ought to be used as capital to finance some of these resource intensive ventures, which are currently being paid for using expensive debt.

For a country that requires to spend billions in closing an infrastructure deficit and social programmes, there will be no shortage of needs to finance from these funds.

Standard Bank chief economist Goolam Ballim says it is for this reason that oil and other resources are seductive to a government, to the extent that they can provide enormous receipt revenue and can significantly improve fiscal positions.

He says, however, there are countries that have been resource dependent and have failed to use the early revenues to build their non-resource economy, thus effectively squandering the gift of those resources.

“The international lessons are foremost that commodities are a powerful catalyst to industrialising an economy. If there is an ambition from day one to use oil receipts as a beneficiation opportunity, then it will soon be squandered and seen as income rather than capital for the future,” says Mr Ballim.

“The services sector finds its roots and legs in an industrial base, which in turn can find its roots from the resource based economy.”

One of the most successful economic sectors in Dubai is tourism, which now draws up to 17 million visitors a year from 10 million in 2012.

The State is aiming for 20 million visitors by 2020.

The number of visitors, 90 per cent of whom come for leisure and holiday related activities and 10 per cent for business, is high for a city that has just 2.9 million residents. To do this, it is leveraging on its airport which is one of the world’s biggest with a capacity of about 90 million passengers a year to bring in visitors.

The Dubai Airport has developed into a major air transport hub, which makes it easier for people to visit the city without much hassle.

The city has been increasing its hotel capacity in the past decade, and currently counts 106,000 rooms in 672 establishments, with a further 20,000 in the pipeline by the end of next year.

Kenya also has a thriving tourism sector, albeit with far lower numbers compared to Dubai in spite of boasting a wider variety of attractions and more favourable climate.

The city has also developed as a financial and business hub for the Middle East, with many firms setting up their headquarters or regional offices there in a mix of different economic sectors.

Out of the 206,000 firms registered with the DCCI, 17,500 are African, out of which 52 per cent are in the trade sector, 20.4 per cent in construction, 12.5 per cent in real estate, 6.2 per cent in transport, storage and communication, and two per cent in manufacturing.

Kenya already boasts a fairly diversified economy, partly due to the lack of natural resources compared to other African economies which have fallen under the oil curse. This would give the country a head start in using oil revenue to develop other sectors, when compared to countries which have had oil for decades and did not give themselves a chance to develop non-oil economies.

It is also important for the government to guard against exploitation by oil companies, which in Africa foot most of the early exploration bill and are also increasingly pitching in to help build the necessary infrastructure to commercialise the oil.

This is the trend in East Africa, where French oil giant Total is involved in arranging the financing of the Sh355 billion ($3.55 billion) Uganda Tanzania oil pipeline.

“Kenya can also look at Norway, whose model involves putting in a very robust and independent regulator that manages the relationship between the oil companies, the State and the benefit of citizens,” says Mr Ballim.

“The historical experience in many African countries especially in the latter half of the last century, is that governments pandered to the resources sector, and these sectors, because of the significant rents they gave to the governments, had enormous influence on public policy.”

He says that this cosy relationship needs to be breached, adding that oil ought to be seen as a transient benefit and as nothing more than capital for building an industrial base.

The Norwegian model of managing its oil resources has also seen the country establish the world’s largest sovereign fund, which is now valued at about $1 trillion.

The passive income from the fund’s investments in real estate and stocks helps finance some of Norway’s public expenses while retaining capital for future generations.

Kenya’s Petroleum Bill 2015 does plan a sovereign wealth fund in form of a government-owned investment vehicle, which will take up and invest at least five per cent of the country’s oil revenue.

Kenya’s oil revenue sharing formula is, however, being complicated by disagreement over how much is to be retained by local communities in the oil producing counties.

While the Bill entitles the local community to 10 per cent of the oil revenue, President Uhuru Kenyatta has sought to reduce that to five per cent, taking into account that 20 per cent of the revenue is already earmarked for counties with crude deposits.

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