Avoiding the resource curse

The pitfalls of oil
Should Namibia's oil production aspirations materialise, government will have to guard against corruption, revenue mismanagement and the elite pocketing all the benefits more than ever before.
Jo-Maré Duddy
Good governance, effective regulation, accountability and effective policy frameworks will be crucial to safeguard Namibia against the resource curse should the recent oil discoveries prove to be commercially viable and catapult the country into one of the major producers in Africa.
“The discovery of oil in any location – particularly in developing countries – is greeted with great optimism on the one hand and concern on the other,” Simonis Storm (SS) says.
It “creates hope and expectations that the revenue would lead to the development of local communities, but in most cases, this dream has remained illusory”, the analysts comment in its report, “Namibia’s oil resources: lessons from African petrostates”.
Experiences in African petrostates have shown that oil revenues are often used to enrich the political elite which minimised benefits to the broader society, SS warns.
Cirrus Capital, in their initial thoughts on the discovery of a working petroleum system and light oil at the Graff-1 deep-water exploration well offshore Namibia, also stressed that the development of any oil resource would “need to be carefully managed with an appropriate regulatory framework”.
“A state-centric structure would likely be opaque, with examples in countries like Angola and Venezuela of how easily these can be mismanaged,” Cirrus cautioned shortly after the Graff-1 announcement in February.
Some 94 years after the first oil exploration in Namibia, the country made two potentially jackpot discoveries in the Orange Basin earlier this year.
TotalEnergies estimates its Venus well resource could contain about three billion oil barrels in reserves, equal to a month of global demand. This, SS points out, is a conservative estimation. Shell is yet to release an estimate for its Graff-1 well.
SS refers to Wood Mackenzie, who suggested that the recent findings might be Sub-Sahara Africa’s biggest oil discovery to date. The consultancy firm estimates over US$3.5 billion annually in taxes and royalties for the Namibian government. State-owned Namcor, in an interview with Bloomberg, estimated US$5.6 billion in annual oil revenues.
Wood Mackenzie expects Namibia to be the third largest oil producer in the region within a decade, producing 250 000 barrels per day (bpd) in its first phase. To be the third biggest oil producer in Africa, Namibia would have to produce about 2.8 million bpd currently, according to SS.
Out of the top thirty global oil producing countries currently, only five are in Africa - Nigeria, Angola, Algeria, Libya and Egypt.
The analysts point out that currently, it has only been confirmed that Namibia has oil resources.
“However, an appraisal still needs to be done in order to provide accurate estimates of the size of Namibia’s oil resources. Only then can we assess how Namibia’s reserves are positioned in the global context,” SS emphasised.
SS refers to a 2006 report by the World Bank, stating that, in most cases, discoveries of oil have led to the destruction of local communities and anarchy in oil-producing developing countries.
According to the World Bank, countries that depend on oil revenues exhibit higher levels of corruption as resources are typically misappropriated. Resources are not typically spent on crucial services such as education and health, which in turn results in low Human Development Index (HDI) scores.
SS furthermore cites evidence from the United Nations Environmental Programme (UNDP), which suggests that the discovery of oil in developing countries has typically fledged these countries into anarchy and conflict.
“Between 1990 and 2009, 18 plus violent conflicts were sparked by the exploration of natural resources (including oil) in regions such as Angola, Cambodia, Democratic Republic of Congo, Darfur in the Sudan and the Middle East.
“Transnational corporations which exploited resources in developing countries have played significant roles in a number of destructive civil wars in Colombia, Sierra Leone, Angola, the Democratic Republic of Congo, Azerbaijan and Myanmar. This serves as proof of the so-called resource curse thesis,” SS says.
Core elements to avoid the resource curse include preventing rent-seeking and large-scale corruption, research has proven.
“A highly efficient judicial system that prosecutes rent seekers in an expeditious manner, a transparent reporting system that provides each citizen with revenue information, a strong media which serves as a watchdog and employing local citizens (with no discrimination against women) that places salaries directly into peoples’ pockets from oil wealth are all factors which assisted in Norway’s success in avoiding the resource curse with their oil reserves,” SS says.
Norway and Botswana offer valuable lessons on how to avoid the resource curse, according to the analysts. The success of Norway and Botswana lies in their quality governance structures, SS says.
“Empirical evidence shows that natural resources are only a curse if governance structures are weak. Effective institutional mechanisms (e.g. contract law, property rights, transparency, legal/court system, etc.) need to be in place prior to oil revenues being generated in a developing country – such as Namibia – if the country wants to avoid the resource curse.
“Namibia should also learn from the mistakes made in Angola, Nigeria, Equatorial Guinea and others and adapt the institutional models from Botswana or Norway to the Namibian context if we are to avoid the resource curse on our oil resources,” SS says.
Furthermore, contracts signed between the host government and oil companies are “extremely crucial in determining whether oil revenues are managed effectively”.
These are formulated on the basis of the resource country’s relative bargaining strengths which in turn are influenced by geological features, tax incentives, political risks and market contexts such as distance to markets and forecasted commodity prices, SS says.
They point out: “There has been an asymmetry of information in past oil contracts, where oil companies possess better information about an oil discovery’s geological features and how to exploit it, which leads to contracts that are to the detriment of the host government most of the time.”
SS believes that if the current oil market dynamics persist, where demand and supply are out of whack and an oil price super cycle lasts for the short- to medium-term, the Namibian government is placed in a better bargaining position to increase its take of 10% in resource projects to a higher level. This would benefit government finances in the long run.
However, “while demand for oil might last until 2050, Namibia will have to move swiftly if it is to benefit from oil revenues in a decarbonising world”, SS says.
Transnational oil companies are needed, the analysts agree, given that specialised skills are required to operate in this capital-intensive environment that can rarely be supplied by African host countries.
“While transnational companies allowed more transparency and accountability than state-owned oil companies in other countries in the past, appropriate terms and conditions should be bargained for in the contracts signed with them.
“The government should hopefully also learn from mistakes made in past mineral and natural resource contracts as benefits of mined commodities did not largely benefit civil society,” SS says.
Assessing Namibia’s potential to avoid the resource curse, SS looked at a few indicators.
The country is in a better institutional position compared to most African petrostates, they maintain.
“Namibia has the highest governance index score compared to African petrostates. However, the strength of Namibia’s governance system has deteriorated since 2019 according to a Bertelsmann Stiftung Transformation (BTI) index report.”
The country also ranks higher than all African petrostates with regards to economic freedom - such as property rights, movement of labour and capital, financial freedom, as well as freedom of speech - according to the Heritage Index of Economic Freedom
Transparency International shows that Namibia scores better than all African petrostates in terms of corruption.
Lastly, while Namibia’s ease of doing business, as measured by the World Bank, is nowhere close to optimal, it ranks much higher compared to all African petrostates, SS says.
However, despite Namibia ranking favourably compared to African petrostates, local perceptions remain on the skeptical side when considering government’s ability to manage the economy, the analysts point out.
“At the same time, trust in government by the Namibian population has also deteriorated since 2014. About 70% of the Namibian population thinks that government is handling or addressing corruption fairly/very badly according to an Afrobarometer survey released in February 2022.
“These opinion polls indicate that the population might be very skeptical of government managing oil revenues to the benefit of society and future generations,” SS says.
Namibia recently launched a sovereign wealth fund, called the Welwitschia Fund - a move welcomed by SS, “as this is a tool used to achieve greater transparency of oil revenue allocations”.
“Policymakers have already pledged savings from future revenues emanating from oil resources and green hydrogen operations to the Welwitschia Fund, which we view as a positive.”
However, “the population seemingly might not trust government to manage these funds for future generations”, SS says.
While Namibia’s governance, corruption and socioeconomic status ranks more favourably than existing African petrostates, civil society has not kept government accountable in the past and remains fairly passive, SS says. “This is evident given that trust in government wanes and social stability remains intact.”
They continue: “While Namibia maintains relative high levels of freedom of speech in the media, a weak civil society could worsen the institutional mechanisms due to a lack of accountability. If this does not change, the chances of avoiding the resource curse with oil revenues is low to modest.”
Strict laws and penalties should be in place against quasi-criminal conduct, corruption and crimes such as pipeline vandalism, fraud and oil bunkering, SS advises, “as these have proven to be a direct influence on economic growth and collective wealth in oil producing countries”.
Revenue generated from crude oil sales and taxes paid by multinational companies should be channelled toward the provision of quality education, healthcare and infrastructure that will benefit the citizens of the oil producing country, they say.
Job creation and involvement of communities in the safeguarding, maintenance and monitoring of oil pipelines should be incorporated into the social responsibilities of oil companies, SS recommends.
Also: “Adequate and timely compensation must be made to affected communities, with swift remedial activities when oil spills occur.”
SS says the estimated oil revenues might entice government to be more proactive in improving the ease of doing business in Namibia, implement special economic zones, remove policy uncertainty and improve immigration access to skilled foreigners. These structural reforms could come about speedily at the demands of transnational oil companies prior to oil production taking place in Namibia, they believe.
“These structural reforms will not only make it more attractive for oil companies to establish operations in Namibia, but will attract foreign investors in other sectors of the economy, leading to the development and advancement of other industries as well,” SS says.
They analysts maintain that Namibia could avoid the resource curse only if the above-mentioned structural reforms are implemented.
“The economy has not diversified away from primary economic activities over the last 30 years, so what will change when oil revenues are added to the picture? However, structural reforms will allow alternative sectors to increase their shares of employment and the gross domestic product (GDP) over time,” SS says.


Namibian Sun 2022-11-27

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