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 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 -  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