East Africa is the new fossil fuel frontier. 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 new found 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.
No comments:
Post a Comment