Kenya’s New Government and Imperatives for Extractives Governance Reform
After a long electoral period, Kenya now has a new Parliament and Cabinet Secretaries nominated in January 2018. Institutionally, the ministries responsible for mining and petroleum have now been merged into one. One of the backdrops of the electoral period and what possibly remains as a key challenge for the new government is managing the emerging oil and gas sector. Since the discovery of commercially recoverable oil resources in 2012, Kenya has inched closer to selling its first barrel of oil on the international market with full field development oil production expected to begin in 2021 and an early oil pilot scheme (EOPS) kicking off in 2018. These oil resources hold the promise of significant revenues and an opportunity to strengthen economic growth and broad based social development. To ensure that the country gets optimal benefits from its petroleum resource endowment, the government needs to see through a set of reforms.
The governance framework that allows for the successful management of the extractive sector is unlikely to develop once windfall revenues from the sector begin to be realised. It is therefore important to address issues relating to the legal and policy architecture, community rights, revenue management and transparency and accountability before the petro-dollars start trickling in.
1. Legal Reform
The last Parliament had begun the process of addressing the legal and regulatory framework for managing the oil and gas industries in Kenya. One of the main pieces of legislation that was being looked at is the Petroleum Exploration, Development and Production Bill. This Bill was not enacted as the President did not assent to it. It was subsequently re-tabled in Parliament in November 2017 only to be withdrawn a month later an unclear basis. One of the main contentious issues in the Bill is the revenue sharing arrangements between national government and the county governments. The Turkana county government has been pushing for a 30 percent share of oil revenues, while the government has been advocating for 20 percent if this does not exceed their annual budget allocation from national government. The national government has been proposing that the host community’s share is pegged at 5 percent of revenue, while the county government has been proposing 10 percent.
The main reasons around these disputes lie in national government arguing that the counties do not have the absorptive capacity to manage such funds and considerations that the resources, while presently having been discovered in Turkana, are essentially a national resource. Meanwhile, local counties and the local community argue that while this is a national resource, they deserve more of the share as they are likely to be disproportionately impacted in terms of land rights and other social disruptions. instead of the 10 percent stipulated in an earlier amended draft.
The new government will need to push through, to completion, the promulgation of this Bill through a consultative process that ensures that any potential conflicts are staved off before they manifest. Other proposals by civil society in terms of strengthening provisions around transparency and accountability; access to information, environmental regulation and alignment and public participation will also need to be addressed. Addressing the legal and policy framework around petroleum is particularly important as this represents the normative framework around which resources will be exploited. The Early Oil Pilot Scheme (EOPS) and the final investment decision should be contingent on clarity around the legal regime.
2. Community Rights
Kenya has a relatively strong legal framework relating to communities’ rights to land. These include the Communal Lands Act; the Land Act, the constitution and bodies such as the National Lands Commission. There is a need to ensure that the relevant statutes are applied in practice with respect to large scale land based investments on community land. The government has also committed to the United Nations Guiding Principles on Business and Human Rights (UNGPs) and under this framework the State has a duty to protect the rights of communities. Communities in the oil and gas exploration regions of Kenya are likely to lose their land and or suffer involuntary displacement. There is, therefore, a need to ensure that compensation and resettlement processes are judiciously applied. It is important for the new government to work to ensure that principles for Free Prior and Informed Consent (FPIC) are integrated in land-related regulations.
Articles 40 and 63 within the constitution provide for the protection of the rights to property and rights around communal land respectively. Specifically, the law provides that no person shall be arbitrarily deprived of their property and that where land is compulsorily prompt payment, in full, of just compensation shall be paid. Section 36 of the Community Land Act provides that an agreement relating to investment in community land shall be made after a free, open and consultative process. With this strong legal framework- it is incumbent on the new government to ensure that the law is implemented and that this is done proactively.
3. Contract Disclosure
A huge area for reform for the incoming government is contract transparency in the extractives. The Production Sharing Agreements (PSAs) and other contracts that the government has signed with mining, oil and gas companies should be publicly disclosed. This builds citizen confidence in the institutions overseeing the governance of the sector and assists in managing expectations. It is also important to note that juridically, mining, oil and gas resources are owned by the citizens and are managed in trust by the government. Citizens, therefore, have a right to information regarding how their resources are managed. Contract transparency is now the accepted standard and best practice globally. Article 35 of the Kenyan constitution expressly states that the State should publish and publicise any information affecting the nation. Without PSAs, Kenyans cannot know the contractual terms agreed to with companies with respect to fiscal terms, local content, employment and social investments.
4. Transparency and Accountability
In 2015, the Kenyan government made a commitment to ensuring transparency in decision making and financial flows in the extractive industries including making this information available. Then, the government publicly pledged to adopt and implement a progressive and transparency policy and legislative framework for extractives activities including transparency in licensing procedures and publication of contracts.
Addressing corruption risks in the extractives sector requires that government make transparency and accountability the default. The government should follow through on its commitment of signing up to the Extractive Industries Transparency Initiative (EITI) to ensure that, in addition to contract disclosure, there is disclosure around revenues. Secrecy often gives rise to misinformation and distrust among different stakeholders. The EITI is important in ensuring that discrepancies in revenues are identified and, perhaps equally importantly, builds a platform for engagement between government, the private sector and civil society. The new Cabinet Secretary responsible for Petroleum and Mining along with the legislative assembly should ensure that these commitments are followed through on.
5. Revenue Management
The government should make deliberate efforts to build up tax administration capacity. Extractive resources and rents derived thereof are finite. Therefore, the window of opportunity within which a country can benefit from its petroleum resources does not remain open in perpetuity. The incoming government should be seized with the need to ensure that Kenya gets its full and fair share of rents from its resources. The extractive sector fiscal design includes looking at the institutional capacities to collect what is due to the country. The incoming government should, therefore, understand capacity constraints and should equip and support all institutions involved in Public Finance Management, particularly the Kenya Revenue Authority and responsible government departments, to collect all taxes and fees due to the State.
Prudent revenue management also includes putting in place strong transfer pricing legislation, exploring the possibilities of ring-fencing extractives revenues and addressing revenue sharing between national and county (sub-national) government.
Kenya still can judiciously manage its mining, oil and gas wealth well. The government has shown indications that there is sufficient knowledge on what needs to be done. It will be vitally important for the incoming government to follow through on reforms in a manner that is consistent with the ethos of public participation and transparency and accountability.
 Countries such as Ghana, DRC, Guinea and Tanzania have made contract disclosure a legal requirement https://resourcegovernance.org/blog/how-many-governments-are-disclosing-oil-gas-and-mining-licenses-and-contracts