Kenya needs to float an Energy Bond

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The exit of Essar Energy from East Africa’s only and oldest refinery has opened the debate on what to do with the facility. To close the facility or bring in yet another ‘strategic investor’ to upgrade and operate seems to be the dilemma the Energy and Treasury officials are facing.
Closing the refinery would be very reckless, especially with the soon-to-be-available crude from the region and the country. The refinery will be the single most important oil infrastructure to enable the country harness the full benefits of oil windfall for the common mwananchi. Everything else from pipelines to port will primarily benefit oil companies ship out the crude to refineries abroad.
The only viable option for the refinery, like I have opined before, is a total overhaul geared towards development of a modern, large capacity (at least 200,000bpd) refinery capable of supporting a large petro-chemical industry. There should also be a LPG unit and significant reserve tanks that can hold a minimum of 6months country reserves.
So the question now is: where will the money come from?
First of all, dealing with the Kenyan energy needs demand that we focus beyond fossil fuels, though it is understandable that currently hydrocarbons are all the fashion in East Africa. Discovery of oil and gas in East Africa will not solve our energy problems. We have an obligation to develop a complete mix of energy sources to meet an ever rising energy demand now and in the future. A lot of money and a long term vision are required.
I hold the view that no ‘strategic investor’ will be able to raise the money needed in light of the bigger country energy demand picture. The much such an investor will do is continue with the inefficiency at the KPRL as he looks for funds to upgrade; all this while some connected Energy and Treasury officials skim hefty kickbacks from the deal. A strategic investor will fall far short f our energy expectations as a country.
The only sustainable way for the country to solve the energy problem is to float a long term Energy Bond.
In my estimation, such a bond should seek to raise about $5bln. The money will be channeled into the following key aspects:
1. Developing a significant oil infrastructure that is capable of handling and servicing crude from the entire region. Key among these must be a modern refinery with significant oil reserve facilities. Part of this money should also be invested in a petro-chemical industry to supply local pharmaceutical companies, fertilizer manufacture and others. All obsolete units must be removed and new technology put in place. At the least, the new refinery should be able to refine 200,000bpd. While this figure sounds huge when compared to current 32,000bpd capacity or Uganda’s soon-to-be constructed 60,000bpd, a capacity of 200,000 is essentially what Kenya’s local demand will be by 2025. This figure is drawn from the fact that current demand is about 80,000bpd and is rising at an annual rate of 7%. To power economic growth envisioned in Kenya Vision 2030 demands nothing less of our refinery. Finally, there should be maximum utilization of KPRL’s 300 acre land, including allowing space for strategic PPP and private enterprises to set up shop. The economics of building a refinery are clear; it is a profitable investment. Just to give an example, a feasibility report by Forster Wheeler Consultants on behalf of Uganda govt showed that a 60,000bpd refinery in that country would have a an Investment Rate of Return of 33 per cent.
2. Development of geothermal power. Kenya’s Vision 2030 strategy places priority on low-carbon development including renewable energy source development – with geothermal playing a critical role. It is estimated that geothermal power potential in Kenya could contribute over 5,000MW. The Menengai zone alone has the potential of 1,600MW which is the current total national grid capacity. The main challenge with exploiting this resource is the high risks involved in exploration, which means most financiers shy away from exploration stage and only come in at development stage. The money raised from the Energy Bond should allow the govt to undertake this risk, finance more exploration drilling and thereby open up the sector for other sources of funding to develop and distribute the power.
3. Development of other renewable sources of energy. These include wind power. Already, the country is in the process of developing the largest wind energy plant in Africa, the 300MW Lake Turkana Wind Power Ltd. There are numerous places in the country where wind can be harnessed. In addition, the govt needs to encourage County-based mini-power production plants especially hydro-electricity in riverine regions. Attention also needs to be focused on bio-fuels. All these will provide energy to the counties while stimulating much needed economic growth in the peripheries. Incentives should also be given to solar energy development in the country. This shift should wean the country from the current increasing trend of relying on environmentally unfriendly fossil fuels for up to 38% of total energy output, according to 2011 statistics. Despite the oil boom, GoK and Kenyans in general must remember that fossil fuels not only pollute the environment but are ultimately finite. It is time to invest heavily in renewables.
Raising money through an Energy bond will avail the billions locked up in the economy and from private investors and this money will bring a sustainable turnaround in the energy sector as opposed to short term prescriptions.
Finally, the ownership of these country energy investments must ultimately be handed over to Kenyans through listing at the securities market. Government should not continue holding such significant investments forever. They must go to the people.

DISADVANTAGES OF OIL SUBSIDIES AND THE ALTERNATIVE FOR KENYA

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I have previously been asked to explain my opposition to government subsidies on fuel. This time I lay out an alternative that would be both sustainable and see more open competition that will translate into lower fuel prices for the consumer.

But first, what are subsidies?

Subsidy means benefit given by the government to individuals or businesses whether in form of cash, tax reduction or by reducing the cost of goods and services. The purpose of subsidy is to help individuals and businesses purchase/acquire essential goods and services that they may not be able to afford, under normal circumstances.

In our Kenyan case, since the oil market is liberalized, the only option if for govt to deny itself valuable taxes from this lucrative sector in the hope that oil marketers will transfer those benefits to consumers.

Subsidies mean lower prices, which mean increased consumption. Why, because economists tell us that every time consumers realize that prices have dropped, they increase their consumption rates and these are not necessarily in activities leading to economic growth. High fuel consumption translates into more pollution. More importantly, the incentive to invest and develop alternative and hopefully renewable energy sources will certainly decrease and then our economy becomes addicted to oil. Oil could become so cheap that we’re no longer interested in expanding our other energy sources like geothermal, HEP, wind etc. Ultimately, we’ll have made oil into a centre piece of our economy; anything happens to it and market instability sets in.

History shows that eventually the cost of subsidies become too great for the government to sustain which leads to their lifting; or they get compensated for by higher taxation elsewhere. The lifting of subsidies is currently causing unrest in Nigeria, Sudan, Egypt and it is feared other African economies are headed in this unfortunate direction.

Finally, there is an argument that when government subsidizes firms, it reduces incentives of firms to cut costs and be more efficient.

SUBSIDISE agriculture and other sectors that will bring real social benefits to citizens.

ALTERNATIVE TO SUBSIDIZING OIL

The goal here is to demonstrate how we can bring down fuel prices in light of the oil boom (from both local and regional sources) without tinkering with markets through govt subsidies.

What is the one thing that oil boom will avail? Crude oil, plenty of it. And cheaper too. Cheaper in light of the fact that the country will largely eliminate high transport and attendant costs (insurance, demurrage etc) that contribute to high fuel prices.

Also, having multiple sources means that the country can negotiate for discounted rates especially from our neighbor Uganda and perhaps South Sudan. We still do not have a figure of Kenya’s total estimated oil reserves, exploration is ongoing.

However, having plenty of cheap crude does not help UNLESS we have one important thing in this country: a fully functional, modern refinery with the capacity to meet local demand of our fuel needs. The refinery must also have the capacity to refine light distillates in large volumes since these are the most used fuels in our economy. In addition, an LPG unit must be built to take advantage of the available gas from oil fields throughout the region. The refinery must increase its storage capacity to hold oil reserves that can last at least six months to hedge our economy against fluctuating global crude prices.

Let me put it this way; without a refinery, the benefits of having all this oil will almost be zero. We’ll be exporting our crude and importing refined through the currently existing OTS arrangements.

The benefits conferred on the country by a modern refinery are immense.

1) We’ll reduce the consumer price significantly without distorting the market or asking the government to deny itself precious taxes.

2) A refinery will create an important petro-chemical industry that besides fuel will also avail raw material for fertilizers manufacture and pharmaceuticals etc. We can all agree that our farmers could really use cheap fertilizer to increase their output and deal with food insecurity.

3) Employment opportunities for workers in the refinery and related industries. Currently, KPRL alone has over 500 workers and it is operating way below its 30,000bpd capacity. Imagine if we raise that to 200,000bpd which will be Kenya’s domestic demand by 2025. (Current demand is 80,000bpd, growing at 7% PA)

The Kenya government needs to invest money in the refinery. My advice would be for govt to raise money from the public and NOT from some private investor. Let Kenyans own a piece of the oil infrastructure. There are billions of shillings in people’s pockets. One way these can be unlocked is through and IPO.

I am not an economist but I’m sure raising funds for construction of such a valuable facility should not be difficult; especially seeing that even in its dilapidated and inefficient state KPRL was able to get a loan facility from Standard Chartered to the tune of KSh. 30bln!

Having the refinery also act as a merchant is a brilliant idea. This means that it can directly sell refined products to marketers. I dare say that with a modern and efficient refinery, the government doesn’t have to continue enforcing the rule that requires OMCs to buy 40% of their fuel products from the refinery.

Kenya Govt Should Resist Introduction of Fuel Subsidies

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As we in the East Africa consider how we shall ‘enjoy’ our oil windfall, I would take it upon myself to caution our government and the others in the region not to take the route of subsidizing fuel pump prices to please the masses. Here is why:
A subsidy is a cost on the government. It doesn’t make sense for the govt to deny itself such a huge chunk of revenue in a relatively stable economy like Kenya’s or Uganda’s. Zambia alone was spending $200million PA on fuel subsidies alone. Nigeria spent $8bln on fuel subsidies per year.
Subsidies are not sustainable in low GDP economies. Look at Sudan & Nigeria current unrests after govts there lifted unsustainable subsidies on fuel. Zambia has also lifted subsidies on fuel and maize. The fact is, our economies cannot sustain subsidies and our govts should resist this temptation esp after noting that we have survived this long without them.

Subsidies breed corruption esp in economies like ours where institutions of economic transparency are weak and prone to interference. I’m sure Ephraim can attest to the rot in the capital markets. Nigeria subsidies were misused by corrupt govt officials who would divert local refined fuel for export, taking advantage of loopholes to enrich themselves.
I expect the prices to come down due to market forces: high supply of crude & refined will bring down prices. Of course oil cartels will manipulate this, which is why we will need our govts to step up and properly play their regulatory role. Surely prices of around 100bob per liter of either petrol or diesel and about 50/lt of kerosene would not be too bad.
Govt should use a good fraction of the revenue to invest in renewable. After all, fossil fuels are finite. In 20-30 yrs we’ll have depleted current reserves and we’ll be looking for new energy sources for a population that will have more than doubled the current figure!

How Kenya, Somalia and allies can win the war against Al Shabaab this time around.

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Al Shabaab fighters in a parade

Kenya army’s excursion into Somalia in pursuit of the Harakat al-Shabaab al-Mujahideen (or simply Al Shabaab) militia has entered into its second week. According to Kenya army, the extremists have suffered significant losses and are said to be in retreat. This, of course, is good news. But we can ensure that gains made in the coming days are more sustainable by implementing the following measures:

  • Prioritize winning the battle of the mind: Winning the hearts and support of the Somali people in the entire Horn of Africa is much more important than wiping out the militia’s strongholds. This is the only way the Somali people will not see Kenya as a foreign force violating their sovereignty and occupying their land with the help of the west. Currently, this is the rhetoric the Shabaab are using to whip up patriotic emotions and further radicalize the moderates like they have successfully done in the past. Kenya and her allies must now engage diplomats to launch a concise and sustained media campaign in the Greater Somalia region. We must define this war’s narrative, craft it into acceptable rhetoric and use Somali’s local media to win the hearts and minds of all peace-loving Somali people. There is need to explain to the Somali people why Kenya and her allies are not just pursuing her interests, but are acting in the interest of peace for the Somali nation. It would be nice if Kenya’s minister for Foreign Affairs Moses Wetangula accompanied by other Somali leaders gives interviews to Radio Shabelle in Mogadishu, for example. We must also engage the help of respected religious leaders in Kenya and Somalia to assure Somalis that it is not their religion under attack here.
  • After chasing the Shabaab out of town, what next? The international community and regional governments should launch massive state-building programs in liberated areas to scale up the capacity of Somalia’s TFG. Aid for state-building & development from partners like the US and EU must start flowing immediately. A vacuum will only lead to the rise of opportunistic elements like the clan war lords and even the Shabaab to fill the gap, taking us back to square one. Reconstruction must begin immediately with institutions for provision of security (coupled with lifting of arms embargo on Somalia) and economic development. Aid agencies must start shifting from purely humanitarian assistance to aid for development, in large amounts! A strong government in Somalia will be able to deal with extremism, piracy and address the current fractionalization of the country into the existing tiny unviable ‘mini states’. As we do this, we must ensure that all programs and projects bear the Somali government’s stamp so that the citizens begin to have confidence in their government’s capacity to govern.
  • Redefining and/or extending AMISOM mandate: In light of the recent security developments, there is need to draw a new plan for AMISOM. The proposed increase in size from current 9000 to at least 15000 should be implemented now. Areas of operation need to be extended to include strategic the towns of Baidoa, Kismayu and Afmadow. It is the high time Djibouti and Senegal sent their troops as promised. Kenya and Uganda should lead this effort at Addis to draw up a new, broader mandate for AMISOM.

In conclusion, swift, effective action is critical. Because war is a bad thing; even a seemingly just war like this one has its downside. Therefore, it must take as short a duration as possible. There are costs in terms of lives and money (better spent in developing our economy etc). Through better coordination amongst all the allies and timely logistical support, this operation should ideally be complete in under five months.

Taking the War to Al Shabaab is Right, But….

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First of all, I’m not a huge fan of military adventures, especially unconventional ones featuring a stable state with a lot to lose going against armed groups from basket case states which have nothing to lose.

Kenya army at a past parade

However, I must say that I support the Kenya government’s decision to take the war to Al Shabaab at the Somalia-Kenya border, and if need be to pursue them into Somalia. In fact, this was long overdue. Al Shabaab has made daring attacks and breached our territorial integrity numerous times in the recent past, you wonder if it had to take abductions and killings of foreign nationals for the government to act.

But we need to ask ourselves several questions:

  1. What is our exit strategy? Borrowing from the Colin Powell doctrine, we need to have a clear exit strategy. How long are we going to be engaged? At what point do we declare our mission over, battle won and bring back home our boys?    It is very easy for a state to bring out the guns to war, but no one wants to take them back to their bases without a clear victory; it’s very bad for a country’s image and any govt’s ratings! How long is Prof Saitoti and Yusuf Hajji prepared to keep our forces there? The key thing is to avoid an endless and costly entanglement like the US finds itself in in Iraq and Afghanistan.
  2. All about money: Make no mistake; military incursions cost money, tons of it. So we should all expect a spike in our Defence allocations pretty soon. And of course these will be highly secretive so we’ll never know exactly how the money is being used. Since Kenya is not like Ethiopia which gets billions in military aid from the west, it means the Kenyan taxpayer will foot this bill. Just when we were making the turn from reduced GDP growth in the face of an economic downturn… So there goes Uhuru’s austerity measures to bring down government expenditure! We need to demand a quick and decisive end to this campaign.
  3. Regional support: A unilateral action can never end the Al Shabaab threat, as the Ethiopians will tell you. Coordination with other actors in the Somali conflict is paramount. How is Kenya’s campaign complementing the ongoing AMISOM’s role? How about the US and its allies who have been carrying out covert attacks on militant targets? Kenya should not try to play the hero here. Working with others will mean lower costs and spreading the attendant risks.
  4. To close the border or not: Granted, there are bad elements streaming into the country. But I do not support closing the border to thousands of refugees fleeing the war and famine in Somalia. It is inhuman and against Article 31 and 33(1) on the UN Convention on Refugees. What is needed is better processing of incoming refugees coupled with greater international efforts to assist the refugees. The UNHCR must lead and do. The international community needs to channel more funds towards this because the stability and security of Kenya holds the key to a stable Horn.
  5. Risk of reprisals: There is obviously the risk of reprisals from the militants, and these could come in form of suicide attacks in Kenya like we saw in Mogadishu last month. But something tells me this risk may not be that high; Kenya hosts numerous Somali refugees some of whom are suspected to be sympathizers/financiers of Al Shabaab who have also invested in the country. It would be counter-productive to bite the hand that feeds you. However, this threat can be addressed by more vigilant policing. The Kenya Police Service is the most lax force I ever saw in East Africa!
  6. The real Somali problem. Let’s all remember that all these military actions are just dealing with symptoms, not causes. In fact, it is classic George Bush-Dick Cheney School of Thought; let’s pummel the extremists to smithereens and bring glorious democracy to all. There is one small problem: the extremists will begin to paint our mission as ‘desecration of their holy land’s territorial integrity by Christian nations’ and thereby whip up patriotic sympathies from moderate Somalis. This is a rhetoric that Islamists world over have used with great success, managing to recruit adherents in the face of sustained US-led military incursions. Let’s remember that majority of Somalis are actually moderate Muslims whose only reason of supporting the extremists is lack of viable alternative government. Which takes us back to the unpopular need to shore up the TFG and TFIs, with a good dose of pragmatism.
  7. Do not under-estimate Al Shabaab: There are those in the Kenya government who think that Al Shabaab is some rag tag outfit only armed with AK 47s. Wrong. Al Shabaab is a quasi-government with sophisticated weaponry, thanks to military support from Eritrea (until a UN and AU arms embargo in 2010). They have excellent taxation policies in Kismayo port and until recently, Mogadishu. Also, a UN investigation unearthed a lucrative charcoal export business which brings the militants an estimated $15 million every year. They collect more revenue than the UN-backed TFG. What makes them more lethal is the fact that their fighters are well-adapted to guerilla warfare. They are willing to die for their cause; we certainly want our soldiers to come back home in one piece!

This must not be seen by policy makers in Nairobi and Addis Ababa as the silver bullet that eradicates the Shabaab threat. It should be taken as one part of a holistic regional approach that will take years before we can say that the threat is reasonably neutralized.

Godspeed Kenya Defense Forces! And resist the temptation of embarking on a ‘Liberate Somalia’ mission while there. In fact, go no more than 100km. Only Somalis can do that.
And remember, any campaign that lasts more than 5months is OCCUPATION.

China in Sudan…

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(work in progress…)
A critical look at why China could play a leading role in mediating peace between the two Sudans even as it pursues its own economic interests.

Premise: That China has arguably the biggest economic leverage over the two states..

Nationbuilding in South Sudan: Lessons from Somaliland

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Of all the numerous congratulatory messages that poured in from world capitals, one stood out. This was from Hargeysa, the capital of Somaliland ; that ‘republic’ that the world just refuses to recognize. It might have been an opportune moment for the Somalilanders to remind the world of their unique situation and continuing consternation at the international community’s apathy to their cause despite making major strides at statehood, peace and democratic governance.

Somaliland Pres Ahmed Mohamed

As President SalvaKiir and his government get down to business, it would be very important for South Sudan to pay attention to Hargeysa, the only African government  that offers practical lessons for the nascent government’s most arduous task; nation- and state-building in the 21st century.

LESSON 1: Security is the foundation. Providing and guaranteeing security to all citizens and in particular businesses is paramount if any economic growth is to take place. And once businesses are making money, it automatically unlocks avenues for taxation. Somaliland realized a lucrative transit business by traders to and from Ethiopia through the Port of Berbera. The only problem with this cash cow was rampant insecurity from banditry. As long as the port and the road to it were secure, transporters could keep plying their trade and the government would collect the much-needed money to extend its control through service delivery throughout its territory. When government provides security, this acts as a compensation for civilians to give up arms. According to a 2007 Small Arms estimate, two in three civilians have a gun. As things stand, civilian disarmament is facing major challenges.


LESSON 2: Foreign aid (for development or reconstruction) is not necessarily an asset.
In fact, the lack of foreign aid for Somaliland led the authorities there to form open and accountable systems of government. The government of Somaliland knows very well that unless they account for the revenues they collect from use or Port Berbera and taxes they impose on the citizens who, through their clan leaders (the Guurti) in turn agree to maintain security in their domains, they do not have any recourse. Government would consequently go bankrupt. It is common knowledge that where governments know they can survive through means other than the taxation of citizenry as seen in countries perceived to be in good donor books (like Ethiopia), there is little or no incentive for state accountability and transparency. Such authorities also tend to be autocratic. South Sudan should focus on creating an enabling environment for local manufacturing to take root and thrive. These will offer an attractive source of revenue and also provide jobs. Relying largely on oil, in my view, will be the real ‘Resource Curse’, as Paul Collier demonstrates.

LESSON 3: Do not destroy traditional governance structures.Building on the existing traditional structures of authority is much more cost-effective and less time consuming than trying to adopt totally euro-centric models from the grassroots to the top. South Sudan can learn a lot from Somaliland’s bicameral parliament where both elected representatives and national council of elders (Guurti) share power. The Guurti has played a key role in extending security within and amongst clans; something the central government lacks the capacity to. In South Sudan, traditional chiefs played a vital role in more or less the same way as in South Sudan. However, it seems like there is a deliberate effort to do away with them and adopt a modern Eurocentric governance structure. What Salva Kiir and his government needs to understand that while this is good in the long term, the new state lacks the required human

Pres Salva Kiir, ROSS

resource to run such a system in the short term. The most critical state organs bearing the brunt of this inadequacy is the judiciary and rule of law. If the traditional role of chiefs and elders is revitalized, they can play a key stop gap role to enforce law and order and mete out justice. South Sudan has to be creative in actualizing this hybrid system that is already informally in place in several areas I personally visited.

LESSON 4: Resource redistribution. Equal redistribution of benefits accrued from state resources as well as from cooperation between the citizens and the government. There is need to set up a political system that ensures freedom and accountability. In Somaliland, the central government has to ensure that revenue from taxation of traders is equally shared throughout the country especially to education institutions. South Sudan will have to ensure the same when it comes to oil revenues. A form of ‘equalization fund’ should be put in place to bring development in adversely underdeveloped places like east of the new country (Pibor, Akobo, Pochalla counties in Jonglei State) so that they are not left behind. Decentralization of resources will be critical in stemming public discord.

LESSON 5: Do not marginalize the Diaspora. If there is a constituency that has provided invaluable support to Somaliland, it is its huge diaspora spread out in Europe and North America. They have also helped to push for their motherland’s agenda in the international scene through lobbying. As South Sudan begins its task of state-building, they will need bright people with a flair for thinking global and acting local. Australia, US and UK boast large numbers of South Sudanese communities, most of them in colleges and private sectors of their adopted countries. As I noted in my earlier blog, the current composition of government officials is heavily skewed in favor of former war generals and ex-SPLA top brass. The thinking is that those in the diaspora ‘abandoned’ their people during the war and therefore shouldn’t return to claim leadership positions now that there is peace. A radical paradigm shift is required. Pres Kiir and his government must view the South Sudanese Diaspora as a huge asset and partner in reconstruction of the new country and as such, put in place to enhance this cooperation.

In conclusion, it is my personal observation that the AU needs to seriously put in place a procedure to allow Somaliland sovereignty. After all, theirs is a cause with reasonable historical justification for sovereignty.

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