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UNCTAD African Oil and Gas Conference Focus on Governance is Spot On

Villagers stand near jerrycans containing crude oil collected at the shore of the Atlantic ocean near Orobiri village in Nigeria

Last week, the United Nations Conference on Trade and Development (UNCTAD) held a conference on African oil and gas, with this year’s theme being good governance. The 16th African Oil, Gas and Minerals Trade and Finance Conference and Exhibition provides an opportunity for dialogue among the various stakeholders of extractive industries. This year’s conference focus on governance is even more critical as it will help to stimulate debate on issues of accountability and transparency.  And, with the new oil and gas discoveries in East Africa, this is the opportune time to discuss governance.  Since African extractive industries are often shrouded in secrecy and lack clear revenue management and accountability mechanisms, good governance is essential for African countries to properly harness their natural resources for development.

A focus on the governance of natural resources is even more pressing at this time when Africa is fast emerging as the new frontier for mineral resource exploration and production. In the last two decades alone, African oil reserves and known gas deposits are estimated to have grown by 25 percent and 100 percent respectively. Africa is now a major player and important global partner in oil exploration, production and resource extraction.  Indeed, recent estimates by the World Bank [1] predict that “by 2020 only four or five African countries will not be involved in mineral exploitation.”

The discovery of abundant mineral resources has raised expectations that Africa will have abundant financial means to undertake the much-needed investments in infrastructure and human capital in order to accelerate growth and reduce poverty. These expectations are understandable given that Africa suffers huge deficits in infrastructure and human capital development.  Plugging these deficits would certainly improve development outcomes in Africa.

It is therefore clear that rents from extractive industries could be used to spur growth and development, except for one intriguing phenomenon: Global evidence seems to suggest that resource abundant countries tend to grow much more slowly and attain less-than-expected socio-economic outcomes than the non-resource-dependent countries at comparable levels of development. This is also true for Africa.  With the exception of Botswana, many resource-abundant countries have tended to realize less than desired social economic outcomes.  The observation that resource dependence weakens government effectiveness, thus resulting in lower growth, is commonly referred to as the resource curse.

Of course it is how revenues from the natural resources shape government decisions that determine if resource wealth turns into a curse or blessing. Quite often the need to finance basic government expenditure as well as rent-seeking behavior by individuals and various interest groups puts pressure on many developing-country governments to spend mineral revenues rather than re-invest in productivity-enhancing ways. This pressure often results in less efficient resource allocation and a concentration of resources in the hands of the usually politically connected few. In addition, it exacerbates income inequality and usually breeds conflict as various interest groups scramble for a share of the resource.  Ultimately, this may lower the long-run growth prospects of a country. To make matters worse, it may not always be in the interest of the international oil companies engaged in the extractive industries to conform to industry best practices that would ensure maximum resource extraction while maintaining acceptable environmental safety standards.

Solutions to these challenges require concerted efforts by all stakeholders. It is therefore important that various stakeholders engage in structured and meaningful dialogue to try and find solutions to challenges that are usually associated with the management of extractive industries.

In a recent paper, my colleague Lawrence Bategeka and I examine ways through which Uganda can leverage recently discovered oil resources to accelerate growth and maintain intergeneration equity. We argued that the resource curse exists primarily because of deficiencies in institutional quality, governance, accountability and transparency in the way oil business is handled and natural resource revenues are appropriated.

For example, low-quality institutions encourage non-productive policy choices by allowing politicians to plunder and engage in inefficient transfers of resources for purposes of buying votes and tightening their grip on power.

We further argue that it is possible to achieve growth and equity across generations with a legal regime that guarantees the rule of law; strong independent institutions; transparency in government operations and effective communication; prudent public financial management; and responsible environmental management practices. 

However, for this success to be achieved, governments have, first and foremost, to ensure efficiency in oil extraction by providing entrepreneurs with an incentive system that enhances investment in the oil and gas value chain. Second, the country’s public financial management system needs to be strengthened to ensure that all revenue leakages are blocked. In addition, all expenditures should be made in line with the strategic development needs of the country. Third, the institutional capacity of all entities associated with the management of the oil and gas chain should be enhanced.

It is therefore prudent to say that with a strong institutional set up and governance structures, coupled with the right policy choices, African countries can indeed leverage on the abundant natural resources to accelerate growth and eradicate poverty.

[1] The African Pulse, Volume 7, 2013

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