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Benefit Sharing In The Extractive Industry; Which Benefits? Who Shares? Comparative Analysis And Lessons For Kenya

BENEFIT SHARING IN THE EXTRACTIVE INDUSTRY; WHICH BENEFITS? WHO SHARES? COMPARATIVE

ANALYSIS  AND LESSONS FOR

KENYA

Presentation to the Law Society of

Kenya Annual Conference

13th-17th August, 2014

Dr Collins Odote

CONTEXT

-Oil & gas plays  critical  role in world’s political & socio-economic development.

-Currently  meet 60% of world’s primary energy needs.

-Top ten producers – US, Russia, Saudi Arabia, Iran, China, Canada, Iran, UAE, Mexico, Kuwait

-Other     notable     producers     Norway, Nigeria, Angola

- Sector      experiencing      tremendous changes e.g.:

—   More     and     more     countries      joining traditional producers

—   Oil  prices  have  moved  to  a permanently high level since 2005

—   Push for alternative fuels   Governance implications

CONTEXT 3: EASTERN AFRICA DISCOVERIES

-  Extractives  comprises energy(oil, gas and coal), minerals and metals.

-   Recent discoveries of commercial viable deposits of oil and gas, points to increased importance of extractives

—   Uganda discovery in 2006, production not yet

—   Tanzania- natural gas

—   Ethiopia- possible exploitable oil in South Omo Bloc

—   Mozambique-recent gas exploration Boom

—   Kenya- Turkana, Marsabit, Lamu, Kwale,Kitui & Nyakach

- In    2010    Africa’s    oil    production represented 14.6% of world’s total production.

-  In  2013  East  Africa  represented the largest  new  discoveries of  oil  in  the     3 world


IMPLICATIONS OF  RECENT DISCOVERIES

— From an oil importer to a “potential oil exporter”

— Movement  from  an  oil  prospecting  to an oil producingcountry & implications

— Two-sides of recent discoveries of extractives and other  mineral resources

◦  Improved socio-economic development

◦ But— “resource curse”  burden, governance, environmental and human rights challenges

- Resource  curse  arises  since  the  oil boom raises expectations &  increases appetite for spending; rent-seeking behavior enhanced, volatile oil prices, increased foreign debt -Other sectors (productive) affected by the oil sector since petrodollars replace more   stable   revenue   streams…thus development  problems  and  increased lack of transparency (Dutch Disease)

STRATEGIES TO AVOID THE RESOURCE CURSE

-  Pursue    high   rates   of   return    from resource  assets.  (invest  in  human capital   and  critical   public infrastructure   &  don’t  invest   beyond the  absorptive   capacity   of  the economy).

-  Diversify the economy

-  Accumulate    surpluses,    avoid    large- scale debt, and control exchange-rate appreciation  (when applicable).

-   Create  a  stabilization  fund  to  cope with commodity-price volatility.

- Promote transparency  and good fiscal practices.

-  Ensure  some distribution  of wealth to affected communities.

-  Avoid corruption  and prevent misuse of funds.

CONCEPTUALIZING  BENEFIT SHARING IN THE EI SECTOR

- Sector has  prospects   for  generating large amount  & value of   resources….. Hence increased expectations

- However,   at  the  start  of  exploration, huge uncertainty about the economic outcomes of extractive industry investments  both by Gvt and Investors

- EI largely discovered  in poor parts of Country.  Local  community  expectation of poverty alleviation

- Largely  a non-renewable resource  with long-time frame for investment

- Key   challenge   is   how   to   convert “Resource Wealth” to “Permanent Wealth.”

- How  to  ensure  that  there  is  fair  and equitable sharing of benefits

WHY BENEFIT SHARING?

- Many    debates    on    rationale    of sharing benefits with local communities

- Some    say    that    resources    are national and should be shared with all and not just local communities

- But question about land rights, lay of pipeline, cost of living, loss of land…environmental impacts…

- Constitution   categorizes   minerals, Oil and other extractives  as Public Land

- Benefit    sharing    arrangements spreading of benefits to “the Public” and catalyzing broad-based growth

- Also helps to reduce conflict around extractives

KENYAS CONSTITUTIONAL UNDERPINNINGS FOR BENEFIT SHARING

- Minerals  and  oil,  part  of the  larger definition  of Land,  classified  as Public land

-  All  land vide, Article vide  Article 61 belongs to the “people of Kenya collectively as a nation, as communities and as individuals”

-  State under a duty to ensure that there is equitable sharing of the benefits that arise from exploitation of natural resources.( Art 69, CoK)

-  State to enact legislation guaranteeing benefits to local communities & their economies from     investments     in property. (Art 66(2)

-  Consequently, Mining Bill, Petroleum Exploration and Production Bill, have to capture benefit sharing

 

OVERRIDING THEMES  & APPROACHES TO BENEFIT SHARING

-  Direct payment to citizens

-  Establishment of funds

-  In-kind benefits

-  Tax payments

-  Employment

-  Investment  in local economy……

-  Local Procurement

-  Sharing royalties

-  Local ownership

-  Indirect social benefits

- Basically, two approaches( monetary versus non-monetary benefits…..)

-  Key issues include:

—   Method  for  benefit  sharing  (in  cash  or Kind)

—   How much ?

—   How the resources are managed with once distributed

—   How do you identify beneficiaries

COMPARATIVE EXPERIENCE 1: NORWAY

-    Held  as best practice  in EI governance  &   resource revenue management

-    First Petroleum Production commenced in 1971

-    Important   is  the  role  of  both  the  executive   and Parliament in petroleum decisions

-    1990, Norway established  a Sovereign  Wealth Fund, called the Government Pension Fund

-  Oil revenues are accumulated through a system of royalties, taxes, and state-owned  production.  Annual contributions to fund much larger than in other countries

-    Funds   aim   is   to   provide   reserve   for   continued expenditure over the long-term

-    Parliament limited annual spend from the fund to not more than 4%.

-    Invests 100% of its holdings out of Norway

-    Fund characterized by a high degree of Transparency

-    Example  of  how  well  managed  funds  can  benefit entire citizenry through budget and savings for future generations without specific earmarking schemes


COMPARATIVE EXPERIENCE 2: ALASKA

-  Prudhoe  Bay,  largest  North  America  oil field found in Alaska state

-  Alaska Permanent fund mooted in 1960s during early stages of exploitation of Prudhoe..

-  Proposal to establish fund was so as to set aside   some   for   future   generations   and remove fund from control of legislature

-  Approximately  on 15% of oil revenue fund goes to APF, rest goes to fund state government budget

-  0.5% of revenue dedicated to Public School Fund

-  APF  Corporation   established   to  manage fund. It    does not however manage expenditure from the fund

- Decisions    about   the   earnings    made annually by state legislature and Governor

-  Citizens  benefit  directly  through  dividend paid to every citizen in the State


COMPARATIVE EXPERIENCE 3: AUSTRALIA

-  Mineral   exploration   involves   aboriginal land rights

- Provides  useful  lessons  for relations  to community land rights in Kenya

-  1976 Land Rights  grants aborigines rights over land in Northern Territories

-  Traditional  aboriginal  owners have rights, under Act, to veto grant of  exploration and mining rights over aboriginal land

-  Aboriginal     Communities     affected     by mining, land   councils  & wider aboriginal communities   all receive share of mining royalty

-  Establishes Aboriginal Benefits Reserve as clearing house for payments, as follows

—   40% to land councils (to cover admin costs)

—   30% land councils to distribute to affected aboriginal comm.

—   30% aboriginal people grant program

-  Payment value to fund varies from year to year…

COMPARATIVE EXPERIENCE  4: BOTSWANA

-  One of the fastest growing economies in the world: attributable  to diamonds, nature of the minerals policies

-   Innovative mineral taxation regime

- Regulatory framework requires government involvement in all mining ventures  through  equity participation  and board representation.

-  Long  established  transparent  procedures, key participant in the Kimberly process.

- Reasonable success with value addition% Economic diversification

- Sustainable  fiscal  policy  that  de-linked expenditures from revenue.

-   The Pula Fund: Saving and Investing Mineral Revenues

—   2 functions: it is a stabilization fund and a savings fund for future generations.

-   Successful  both in accruing assets as well as in preventing government from
interfering

COMPARATIVE EXPERIENCE 5: NIGERIA

-   1st Discovery of Oil in 1957

-   Upstream  oil  and  gas  industry  accounts  for

95%   of   country’s       economy,    with   most reserves in Niger Delta

-   Petroleum  Profit Tax Act, 2007 regulates the Petroleum  Profit  Tax applicable  to the upstream operations in the oil industry.

-    Profit  Tax  covers  rents,  royalties,  margins and  profit  sharing  elements  associated  with oil  mining,  prospecting  and  exploration leases.

-   2010,  Oil and Gas Content  Development Act to enhance the level of participation of Nigerians and Nigerian companies in the country’s oil and gas industry- progressive definition of local content

-   Not  less  than  13%  of  revenue  allocated  to areas from which the revenue derives

-   However, payment done to states from which the revenue  derives.  This has been basis for conflict  with communities  complaining  about funds not reaching or benefitting them

-   Benefit  sharing  one  of  the  reasons  for  the Niger Delta conflict
LESSONS FOR KENYA

- Clarity in legal and policy provisions on benefit sharing  essential

-  Using fiscal regimes to achieve sustainable and equitable exploitation of EI imperative

-  Developing technical capacity on the sector from upstream, midstream, to downstream, & economics of the industry

- Need     for     public     and     stakeholder participation  in  determining  benefit sharing formula

- Need  to  maximize  value  creation  from petroleum activities rather than elements like ownership, expenditure in the local economy or employment.

- There    is    need    for    subscription    to independent international governance standards to serve as a check against abuse of local legislations.

-  Good  legislations  and  regulations  are  not good enough if they cannot be implemented

 

CONCLUSION

- Benefit sharing is necessary

- Critical is the prudent management of the resource for the benefit of all

- Good governance(absence of corruption & transparency) is at the heart of  sustainable management

- Developing clear policy and legislative provisions on benefit sharing( need  to  capture  these  in the ongoing legislative initiatives

- Supporting  county  level  legislation to deal with benefits that go to Counties and local communities

- Clarity on how to identify who is to benefit to avoid capture by elite and solve community design issues

 

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