Benefit Sharing In The Extractive Industry; Which Benefits? Who Shares? Comparative Analysis And Lessons For Kenya
August 25, 2014
BENEFIT SHARING IN THE EXTRACTIVE INDUSTRY; WHICH BENEFITS? WHO SHARES? COMPARATIVE
ANALYSIS AND LESSONS FOR
Presentation to the Law Society of
Kenya Annual Conference
13th-17th August, 2014
Dr Collins Odote
-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
KENYA’S 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
- 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
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
- 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