How Eastern Africa can avoid the resource curse?
- By Kennedy Opalo
August 13, 2013
Eastern Africa is the new fossil fuel frontier (for more
<
https://mail-attachment.googleusercontent.com/attachment/u/0/?ui=2&ik=ccbab
356f5&view=att&th=13ed1062b7fcb2fc&attid=0.1&disp=inline&realattid=f_hh1tnro
v0&safe=1&zw&saduie=AG9B_P9r-9P4J-05FZ1TmGLRE1UT&sadet=1376244275190&sads=nj
ETKc9TC79-IIBI4Q_dd5DInfs> check out this (pdf) Deloitte report). In the
last few years Kenya, Uganda, Tanzania and Mozambique have discovered large
quantities of commercially viable oil and gas deposits, with the potential
for even more discoveries as more aggressive prospecting continues. There is
reason to be upbeat about the region's economic prospects over the next
three decades, or at least before the oil runs out. But the optimism must be
tempered by an acknowledgement of the dangers that come with the newfound
resource wealth. Of particular concern are issues of governance and sound
economic management.
We are all too aware of the dangers of the resource curse. This is when the
discovery and exploitation of natural resources leads to a deterioration of
governance, descent into autocracy and a fall in living standards.
Associated with the resource curse is the problem of the Dutch disease,
which occurs when natural resource exports (e.g. oil and gas) lead to an
appreciation of the exchange rate, thereby hurting other export sectors and
destroying the ability of a country to diversify its export basket. The new
resource-rich Eastern African states face the risk of having both problems,
and to avoid them they must cooperate.
In many ways Eastern African states are lucky to be late arrivals at the oil
and gas game. Unlike their counterparts in Western and Central Africa,
nearly all of them are now nominal electoral democracies with varying
degrees of institutionalized systems to ensure transparency in the
management of public resources. Across the region, the Big Man syndrome is
on the decline. But challenges remain. Recent accusations of secrecy,
corruption and bribery surrounding government deals with mining companies
suggest that there is a lot of room for improvement as far as the
strengthening of institutions that enforce transparency (such as
parliaments) is concerned. It is on this front that there is opportunity for
regional cooperation to improve transparency and resource management.
While it is easy for governments to ignore weak domestic oversight
institutions and civil society organizations, it is much harder to renege on
international agreements and treaties. A regional approach to setting
standards of transparency and accountability could therefore help ensure
that the ongoing oil and gas bonanza does not give way to sorrow and regret
three decades down the road. In addition, such an approach would facilitate
easier cross-border operations for the oil majors that are currently
operational in multiple countries, not to mention drastically reduce the
political risk of entering the region's energy sector. It would also leave
individual countries in a stronger bargaining position by limiting
opportunities for multinational firms to engage in cross-border regulatory
arbitrage.
The way to implement regional cooperation and oversight would be something
akin to the African Peer Review Mechanism, but with a permanent regional
body and secretariat (perhaps under the East African Community, EAC). Such a
body would be mandated to ensure the harmonization of laws to meet global
standards of transparency and protection of private property rights. The
body would also be mandated to conduct audits of national governments' use
of revenue from resources. The aim of the effort would be to normalize best
practices among states and to institute a global standard for states to
aspire more - more like the way aspirations for membership in the European
Union has been a catalyst for domestic reforms in the former Yugoslavia and
Eastern Europe.
Regional cooperation would also provide political cover to politicians with
regard to economically questionable fuel subsidies. The realities of
democratic government are such that politicians often find themselves forced
to concede to demands for fuel subsidies from voters. But history shows that
more often that not subsidies come at an enormous cost to the economy and
instead of benefitting the poor only benefit middlemen. In addition, as the
case of Nigeria shows, once implemented such policies are never easy to roll
back both due to politics and the power of entrenched interests. Regional
agreements capping any fuel subsidies at reasonable levels would be an
excellent way to tie politicians' hands in a credible manner, while at the
same time providing them with political cover against domestic criticism.
Beyond issues of governance, there is need for cooperation on regional
infrastructure development in order to reap maximum value for investment and
avoid unnecessary wastes and redundancies. Landlocked Uganda and South Sudan
will require massive investments in infrastructure to be able to access
global energy markets. The two countries' oil fields are 1,300 km and 1,720
km from the sea through Kenya, respectively. One would hope that as these
projects are being studied and implemented, there will be consideration for
how to leverage the oil and gas inspired projects to cater to other exports
sectors - such as agriculture, tourism and light manufacturing - as well.
KPMG, the professional services firm, recently reported that transportation
costs eat up as much as 20 per cent of Africa's foreign exchange earnings.
There is clearly a need to ensure that the planned new roads and railways
serve to reduce the cost of exports for all outward oriented sectors in the
region. Embedding other exports sectors (such as agriculture, timber,
domestic transport, etc.) in the process of developing new transportation
infrastructure will minimize the likelihood of their being completely
crowded out by the energy sector.
In isolation, each country's resource sector policy is currently informed by
domestic political economy considerations and regional geo-politics. There
is an emerging sense of securitization of resources, with each country
trying to ensure that the exploitation of its resources does not depend too
much on its neighbours. Because of the relatively small size of the
different countries' economies, the risk of ending up with economically
inefficient but expensive pipelines, roads and railways is real. South Sudan
is currently deciding whether to build a pipeline through Kenya (most
likely), through Ethiopia, or stick with the current export route for its
oil through Sudan (least preferred due to testy relations). For national
security and sovereignty reasons, Uganda is planning on a 30,000-barrel per
day refinery in Hoima, despite warnings from industry players that the
refinery may not be viable in the long run. Some have argued for the
expansion of East Africa's sole refinery in Mombasa to capture gains from
economies of scale, an option that Uganda feels puts its energy security too
much in Kenya's hands.
In the meantime, Kenya and Tanzania are locked in competition over who will
emerge as the "gateway to Eastern Africa," with plans to construct
mega-ports in Lamu and Tanga (Mwambani), respectively. While competition is
healthy and therefore welcome, this is an area where there is more need for
coordination than there is for competition among Eastern African
governments. The costs involved are enormous, hence the need for cooperation
to avoid any unnecessary redundancies and ensure that the ports realize
sufficient returns to justify the investment. Kenya's planned Lamu Port
South Susan Ethiopia Transport Corridor (LAPSSET) project will cost US $24.7
billion. Tanzania's Mwambani Port and Railway Corridor (Mwaporc) project
will cost US $32 billion.
Chapter 15 of the EAC treaty has specific mandates for cooperation in
infrastructure development. As far as transport infrastructure goes, so far
cooperation has mostly been around Articles 90 (Roads), 91 (Railways) and 92
(Civil Aviation and Air Transport). There is a need to deepen cooperation in
the implementation of Article 93 (Maritime Transport and Ports) that, among
other things, mandates the establishment of a common regional maritime
transport policy and a "harmonious traffic organization system for the
optimal use of maritime transport services."
The contribution of inefficient ports to transportation costs in the
regional cannot be ignored. Presently, the EAC's surface transportation
costs, associated with logistics, are the highest of any region in the
world. According to the African Development Bank's State of Infrastructure
in East Africa report, these costs are mainly due to administrative and
customs delays at ports and delays at borders and on roads. Regional
cooperation can help accelerate the process of reforming EAC's ports, a
process that so far has been stifled (at least in Kenya) by domestic
political constituencies opposed to the liberalization of the management of
ports. The move by the East African Legislative Assembly to pass bills
establishing one-stop border posts (OSBPs) and harmonized maximum vehicle
loads regulations is therefore a step in the right direction.
Going back to the issue of governance, more integrated regional cooperation
in the planning and implementation of infrastructure development projects
has the potential to insulate the projects from domestic politics and
patronage networks that often limit transparency in the tendering process.
Presently, Uganda is in the middle of a row with four different Chinese
construction firms over confusion in the tendering process for a new rail
link to South Sudan and port on Lake Victoria. The four firms signed
different memoranda with different government departments in what appears to
be at best a massive lapse in coordination of government activities or at
worst a case of competition for rents by over-ambitious tenderpreneurs.
This does not inspire confidence in the future of the project. A possible
remedy to these kinds of problems is to have a permanent and independent
committee for regional infrastructure to oversee all projects that involve
cross-border infrastructure development.
In conclusion, I would like to reiterate that Eastern Africa is lucky to
have discovered oil and gas in the age of democracy, transparency and good
governance. This will serve to ensure that the different states do not
descend into the outright kleptocracy that defined Africa's resource sector
under the likes of Abacha and Mobutu in an earlier time. That said, a lot
remains to be done to ensure that the region's resources will be exploited
to the benefit of its people. In this regard there is a lot to be gained
from binding regional agreements and treaties to ensure transparency and
sound economic management of public resources. Solely relying on weak
domestic institutions and civil society organizations will not work.
Received on Tue Aug 13 2013 - 14:52:05 EDT