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Four Policy Actions to Improve Local Governance of the Oil and Gas Sector

Patricia I. Vasquez

Abstract

Increasing natural resource revenues at the sub-national government level does not necessarily guarantee that they will be well spent. This article uses examples from Latin America and East Africa to discuss four actions that can contribute to a more equitable and efficient use of oil and gas resources at the local level. It also analyses the challenges in implementing them. Ultimately, the author argues that an efficient and equitable use of hydrocarbons resources at the sub-national level is largely related to the political and economic interactions between the federal and local governments.

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1. Introduction

1Oil and gas operations can contribute to improving the livelihoods of communities living in producing areas by promoting the sustainable development of the often-marginalized regions where the resources are typically located. Local developmental impacts of hydrocarbons developments can be realized in various ways: in the form of revenue transfers from the central government; and through what Hirschman called backward linkages (Hirshman, 1958) with the local economy by generating local employment, transferring knowledge, and outsourcing inputs locally. Moreover, in recent decades there has been a trend towards different forms of decentralization of executive and fiscal powers to the governments of producing regions, which are thought to be better informed about local needs and in a better position to attend to these quickly and efficiently. Sub-national governments are thought to be entitled to funds in compensation for the social, environmental and infrastructure costs of hosting oil and gas operations in their territories (Ross, 2012). Increasingly, local governments from producing regions have been demanding from the central government a bigger role in influencing oil revenue spending decisions, and a larger stake in the revenues themselves (Cust and Poelhekke, 2015).

2An expanding body of research in recent years gave so far mixed results on the local impact of natural resource developments in general, and oil and gas in particular. Some studies found a positive relationship with some indicators, such as education, but a neutral impact on others, like poverty –did not lessen nor exacerbate poverty indicators  (Ticci and Escobal, 2015). Others concluded that in the case of mining, it provides positive backward linkages to the local economy (Lippert, 2014) that may actually be more beneficial than if the government was responsible for spending the windfall revenues (Aragon and Rud, 2013). But fiscal decentralization has been also linked to reduced democracy in Argentina and Brazil (Gervasoni, 2010; Brollo et al., 2013), and there is evidence of natural resource extraction exacerbating inequalities between producing and non-producing regions (Loayza et al., 2013), and generating negative growth when governance is weak (Libman, 2013). Some scholars concluded that whether oil revenues have a negative or a positive development impact in the producing regions depends on the methodology used to measure it (van der Ploeg and Poelhekke, 2015). Ultimately, the sub-national distribution of oil and gas revenues is largely dependent on the degree of political and economic interactions between the federal and local governments (Anderson and Browne, 2011; Arellano-Yanguas and Mejía-Acosta, 2014; Vasquez, 2016).

3This paper discusses four actions at the local level that can contribute to a more equitable and efficient use of oil and gas revenues in producing regions and the challenges encountered in implementing them in East Africa and Latin America. The first action discusses the integration of hydrocarbons revenues into the development planning of the oil region using examples from Kenya, Uganda, Peru, Colombia and Argentina. Linked to that, the second action stresses the need for consultation and transparency, while the third and fourth actions discuss attempts and challenges in Kenya, Uganda and Argentina of making local content and corporate social responsibility (CSR) become catalysts of local development in producing regions. The Author builds her arguments on various research works, including a detailed comparative analysis of fifty-five oil and gas projects in Peru, Ecuador and Colombia between 1992-2010. She also draws from extensive fieldwork in Peru, Colombia, Ecuador, Argentina, Uganda, and Kenya between 2000-2016 and from in-depth literature review.

2. Action I. Integrating oil and gas revenues into the local development agenda

2.1. Why is local development planning important?

4The adoption of some form of decentralization of natural resource revenues from the central government to the producing regions became common in the developing world in recent years (Ross et al., 2012).  Decentralization proponents argue that making local governments responsible for the allocation of goods and services results in a more efficient form of government because it is assumed that sub-national authorities are in a better position to quickly respond to the needs of the local population (Oates, 1972; The World Bank, 1988). The hope is that when government is closer to the people, popular participation will be enhanced (Blair, 2000). Regular, competitive, and fair local elections supported by mechanisms such as opinion surveys and public meetings contribute to making local officials accountable by encouraging them to make decentralization policies work for their constituencies (Blair, 2000). Decentralization is also seen as an effective tool for reducing the size of the national government’s discretionary oil windfall (Ross, 2012).

  • 1  The PROSOL was established by Law No.3741 from September 14, 2007.

5There are different models for transferring oil revenues to sub-national jurisdictions, including: direct central government allocations for particular ends, such as regional investment funds or investment grants destined to specific development projects (Arellano-Yanguas and Mejía-Acosta, 2014). In this centrally managed model, which was adopted by Ecuador in the 2000 decade, the central government holds more influence on how oil revenues will be distributed in local jurisdictions (Garman et al., 2001). Other models with a higher degree of decentralization include transfers determined by a formula established by law, which factors in characteristics of the sub-national jurisdiction such as population, poverty levels, and pre-existing inequalities, among others (Arellano-Yanguas and Mejía-Acosta, 2014). Such was the transfer system adopted by Kenya through the process of devolution that started in 2013, which requires that the producing county develop its own institutional framework and management system to administer its own resources (World Bank, 2012). A third model used for distributing oil revenues to producing areas is through locally levied taxes on the oil industry, a highly decentralized model used by Argentina (Vasquez, 2016). In practice, countries mix and match more than one transfer methodology. There are also examples around the world of relatively successful direct cash transfers to local communities, such as the Alaska Permanent Fund created in 1976 (Barma et al., 2012) and in Mongolia, the Human Development Fund established in 2009 (UNDP, 2011). In Bolivia, the gas-rich department of Tarija adopted by law the PROSOL (Programa Solidario Comunal Departamental) in 2007, which set up annual cash transfers to local farming and indigenous communities1. The PROSOL is aimed at using natural gas royalty revenues to fund productive initiatives prioritized by local communities. Lack of clarity about who should benefit from the PROSOL and delays in the cash transfers resulted in local discontent (La Razon Digital, 2016).

6Multi stakeholder engagement early on and decentralization can contribute to improving development results but only in the presence of certain variables (Mansuri and Rao, 2013) Decentralization is most effective when implemented in a context of sub-national governments that are transparent, efficient, and relatively democratic (Ross, 2012). Typically, the governments of the isolated and often marginalized producing regions where oil and gas reserves are located lack these characteristics and as mentioned earlier are rather limited in their institutional structures and human resources. The difficulties they encounter in executing their budgets and in investing oil revenues in sustainable, long term growth and reduction of poverty has been associated with increased social dissatisfaction and conflict in Peru (Ponce and McClintock, 2014). According to some estimates, Peru lost USD 21.5 million of potential mining investments between 2010-2014 due to conflicts and bureaucratic inefficiencies in the producing regions (Bonilla et al., 2015).

  • 2   Section 126 of the Public Financial Management Act (PFMA) 2012 called for the development of coun (...)

7But even with some limitations, well structured, participatory local development planning can provide an excellent road map for the allocation of locally produced revenues generated by the development of oil or gas. In Kenya, devolution introduced mechanisms for county governments to design their own budgets and to list their annual development agendas in a five-year County Integrated Development Program (CIDP). In Turkana county, where Kenya’s oil exploration works are the most advanced, the local Assembly approved the first CIDP in 2014, which stipulated strategic development priorities to be funded in the medium term (Kenya, 2013a).2 In Peru, where sub-national governments receive more than 50 per cent of natural resource revenues accumulated by the State (Arellano-Yanguas and Mejía-Acosta, 2014), producing regions are responsible for their own development planning. Locally designed development projects are presented for approval to the National System of Public Investment (SNIP), where they are analyzed according to a set of pre-established criteria and requirements. The evaluation and approval of investment projects by the SNIP has been gradually decentralized, and since 2007 is almost entirely done by regional and local governments.

8The existence of participatory planning, with local development priorities defined prior to the generation of oil or gas revenues can have at least three positive outcomes: it can contribute to avoiding possible mishandling of the windfall revenues by increasing the accountability of local authorities and facilitating monitoring of how funds are being invested; it helps to build a feeling of ownership of the oil and gas project among the local population by giving local communities a more tangible experience of how the resources are being invested; and it improves coordination between recurrent expenditures and investments realized with oil revenues, versus those originated from central or regional governments or the private sector. This in turn can help to mitigate possible future conflicts resulting from the mismanagement and use of hydrocarbons revenues.

2.2. Challenges of integrating oil revenues with local development plans

  • 3  Law 27506 of 2001, known as Canon Law, established the distribution of natural resource revenues a (...)

9Transferring natural resource revenues to local levels of government does not necessarily ensure they will be well spent. Much research has been done on the inefficiencies of hydrocarbons resource distribution and the capture of oil or gas revenues by local elites (Collier, 2010; Karl, 1997; Ross, 2012). In Peru, the transfer of oil and natural gas revenues from the central to local and regional governments was introduced by the Canon Law in 2002, when the country was becoming an established natural gas producer and exporter.3 Transfers to the regions increased significantly and rapidly. In 2010 Canon transfers to producing states went up by 65.2 per cent in just six months –January-June–, compared to the same period in 2009 (Peru, 2013).

10Likewise, in Colombia, roughly 10 to 50 per cent of total extractive revenues are shared with sub-national governments since decentralization was introduced by the 1991 Constitution (Arellano-Yanguas and Mejía-Acosta, 2014). Yet increased departmental revenues did not necessarily lead to reduced poverty or improved public services and social programs (Viñuela, Kaiser and Chowdhurie-Aziz, 2014). In both countries, failure to translate hydrocarbons revenues into benefits for the local population resulted in popular discontent in producing regions.

11An analysis of cases in Peru and Colombia between 1992-2010, and more recently in Uganda, Kenya and Argentina, identified three recurring obstacles to an efficient allocation of oil and gas resources in producing regions: 1) lack of local institutional and technical capacity to manage the windfall revenues; 2) corrupt or clientelistic behavior; and 3) arbitrary and politicized decision-making over revenue allocation on the part of local authorities, supported by reduced accountability (Vasquez, 2013; 2014; 2016). During the initial phases of decentralization, local authorities are expected to suddenly assume governing responsibilities that had until then been in the sphere of the central government. At the beginning of the process, sub-national levels of governments typically lack the necessary training and human capacity needed to take up the new decentralized responsibilities, particularly the adoption and implementation of well-designed local development planning. They are nonetheless suddenly confronted with generalized scrutiny of their performance and with tight deadlines to meet their new duties. In Peru, governments in hydrocarbons producing areas were initially overwhelmed by the amount of the revenue transfers and the sophisticated requirements and criteria they were expected to assimilate in order to evaluate and execute development projects in their territories (Vasquez, 2014). The task was so vast that sometimes municipalities were slow in utilizing their budgetary allocations, and in some cases they were disqualified from receiving additional revenue transfers due to their inability to manage the funds (Grupo Propuesta Ciudadana, 2007). The central government gave them little in the form of technical or institutional support to help them overcome their rigidities.

  • 4  See Public Finance Management Act 2012:  Section 107-2[b]

12Faced with the pressure to perform and in light of poor accountability mechanisms local authorities have sometimes been tempted to circumvent official project approval processes and make arbitrary decisions that in some cases brought them personal political benefits. Arbitrary behavior in producing regions may sometimes reproduce non-transparent practices evidenced at the national level, in what some authors have explained as a new form of resource curse that transfers inefficiencies from central to local governments (Arellano-Yanguas, 2008; 2011a; 2011b). Nigeria is a classic example of fiscal decentralization associated with oil revenue corruption at sub-national government levels (Watts, 2009; Idemudia, 2012). In Kenya, devolution stipulates that counties must allocate a minimum 30 per cent of their budgets to development expenditure4 (Kenya, 2012a). During the first six months of the implementation of devolution –during Fiscal Year 2013/2014– oil-rich Turkana county spent roughly only 24 per cent on development, while almost 60 per cent of the disbursements went into a shady general category called Operations and Maintenance  (O&M), and more than 90 per cent of its annual budget financed domestic and foreign travel during the first half of FY2013/14. They had a shortfall of revenues during the first year of devolution that prompted the County  Assembly to  demand  an  investigation  by  the  Controller  of  Budget  Office  on  irregular  use  of  budget  funds (Kenya, 2013b).

  • 5  The US Dodd-Frank Wall Street Reform Act and the European Union Transparency Directive require tha (...)

13Our research in Peru, Ecuador, Colombia, Kenya, Uganda and Argentina showed two clear conclusions   CITATION Vas13 \t  \l 1033    (Vasquez, 2013; 2014; 2016)  . One is that unless local development planning is supported by the transfer of capacities to the local government levels chances are the new oil or gas revenues will be sub-optimally managed. The second conclusion is that clientelistic or politically arbitrary behavior in producing regions may undermine development planning and render it a mere theoretical process. According to our research, the adoption of checks and balances, including an active civil society and community participation can help to mitigate some of these problems. Also important is the role of companies and of international legal systems in promoting revenue transparency.5 Our case studies showed that ultimately, it takes political commitment to translate all these efforts into efficient local management of oil and gas revenues.

3. Action II. Adopting mechanisms for ensuring effective consultation and transparency in relation to the use of extractive industry revenues

3.1. The need for transparency and consultation in producing regions.

14Public participation, increased transparency, and consultation in decision-making around the development of oil and gas help to generate a sense of commitment and ownership among stakeholders, which in turn strengthens accountability and the overall sustainability of the project (Acosta, 2010). Transparency contributes to ensuring the behavior of stakeholders is accountable to others, a key element of ensuring an effective and sustainable governance of the oil and gas industry (RWI, 2013). There is evidence that transparency can help to reduce corruption and increase the benefits derived from the oil and gas sector (Kolstad and Wiig, 2009), while also contributing to improving security and stability for investments (Hamilton, 2005) and reducing conflict among stakeholders (Bebbington, 2010). At the same tine, transparency alone is not sufficient for reducing corruption, and other elements need to be present to make it effective, such as institutional and human capacity to process the information gathered and the ability to punish corrupt officials (Kolstad and Wiig, 2009). Transparency is necessary for making government officials accountable for the management of the oil and gas sectors.

15Citizens living in hydrocarbons-producing regions typically remain ignorant of the extent of oil or gas revenues the government receives. In most cases, contracts with oil companies are not made available to the general public, and there is a tendency for the hydrocarbons sector to be managed with relatively low transparency. In this context, it becomes more difficult to hold authorities accountable for the oil revenues they spend (Ross, 2012), and the government has an incentive to keep the amount of oil revenues it collects secret in order to avoid public scrutiny and increase its spending discretion (Collier, 2010).

16In non-oil regions, sub-national governments generally can only spend as much as they collect in taxes without running budgetary deficits, and citizens may hold them accountable. If the sub-national government wants to spend more, it needs to increase taxes but this may cause opposition because citizens are usually reluctant to pay more without a clear understanding on how the increased tax will benefit them. By contrast, in hydrocarbons producing regions, when oil and gas rents exceed tax collection, local authorities may be tempted to rely more on oil revenues than on tax collection for their spending, in order to avoid taxpayer accountability while enjoying spending discretion) (Ross, 2012). Some authors place oil rents on the same category as windfall fiscal transfers because in both cases sub-national governments collect rents and enjoy the political benefits of spending without the costs of taxing (Gervasoni, 2010), which may lead to corruption and political maneuvering (Brollo et al., 2013). This scheme can be popular among local politicians seeking reelection because it allows them to spend freely without the accountability linked to relying on taxation. Oil extraction has been linked to less democracy (Ross, 2012) and also to conflict (Ross, 2004).

17Several global voluntary initiatives are aimed at improving natural resource governance and the accountability of public officials, such as the Extractive Industries Transparency Initiative (EITI). The rationale behind these initiatives is that more transparency and knowledge about oil or gas revenues will empower citizens and institutions to hold authorities accountable. The use of the EITI at the sub-national level has so far had mixed results. Some of the constraints to an effective EITI sub-national implementation include: low administrative capacity; limited local financial resources for implementing the costly EITI framework; limitations in accounting for informal or unaccounted-for revenues, such as those generated by artisanal mining; and sometimes lack of political will to fully commit to the EITI principles (Aguilar et al., 2011). According to Aguilar et.al, there is no one single model for applying the EITI in producing districts because each context is different, but some generalized conclusions could be made: A sub national EITI could be instrumental for improving the influence of local communities and the civil society on local development benefits from oil and gas; it could also contribute to improving mutual trust between local communities and the central government (Aguilar et al., 2011).

18Initiatives like the EITI promote civil society participation, inclusiveness, transparency and accountability as key elements of good natural resource governance, in order to avoid the pitfalls of windfall oil and gas revenues. As mentioned earlier, there are great incentives for governments or companies to prefer to maintain the secrecy of oil and gas contractual agreements with private operators (Collier, 2010). Like with local development planning, ensuring transparency and consultation throughout the life cycle of an oil project calls for a political commitment on the part of the local and national government.

3.2. Challenges for the adoption of transparency and consultation in oil projects.

19Gathering the facts about oil revenues collected by the government is a major challenge for incorporating effective transparency and consultation in oil developments because as explained above, authorities and companies may benefit from secrecy (Ross, 2012). Besides secrecy, two other common challenges that often get in the way of effective transparency and consultation in oil developments are: 1) The extent of representation of participating community leaders, and 2) The quality of the process of consultation in relation to investment programs. On the first issue, participatory mechanisms for designing local development agendas to be funded with oil and gas revenues often have limitations, at least at the beginning of the process, in relation to the quality and level of representation of the stakeholders involved. Scholars have cautioned about the limitations of participatory approaches that may lean too much on community leaders with strong voices, and inhibit other, less vocal actors, from freely expressing their opinions (Humphreys et al., 2006). But even if not perfect, community participation helps to improve the legitimacy of development programs and to create a sense of ownership among the local population.

  • 6  See Fourth Schedule of Kenya’s 2010 Constitution.
  • 7 See for example: Public Finance Management Act-Section 207; County Governments Act-Section 115; Urb (...)
  • 8  See County Government Act 2012, Section 87 and Section 91.
  • 9  See Turkana County Public Participation Bill 2014 in the Turkana County Gazette Supplement, No.9 ( (...)

20In Kenya, the challenges of community representation came up in Turkana, following the introduction of devolution in 2013. Since the discovery of oil reserves was announced in 2012 in the historically marginalized Northwestern county of Turkana, the local government together with donor agencies started a process of increased transparency and consultation around the nascent industry. In addition to a constitutional mandate6 and specific legislation introducing the concepts of participation and participatory budgeting,7 the Turkana County Government Act 2012 calls for timely access to information and modalities for effective citizen participation8, and the 2014 Public Participation Act provides for public engagement in the legislative process, as required by the Constitution9. Prior to devolution, funding of sub-national governments, such as Turkana, was done with minimum citizen participation (World Bank Group, 2013).

  • 10  Author meetings in Turkana.

21Since the start up of devolution and the discovery of oil, the public in Turkana has probably engaged in more participatory forums than ever before. This is a good first step in preparation for the arrival of oil revenues, expected at the earliest at around 2019,  (Ochieng, 2016). In 2015, citizen representatives from every ward in Turkana attended consultation meetings for discussing the FY 2014/2015 county budget and submitted proposals for development priorities. However, the extent to which the local community was well represented during the consultation meetings has been questioned, particularly with regards to the District Advisory Committees (DACs), which include among its members representatives from the County Assembly, and are normally summoned in an ad-hoc manner to discuss specific development needs for the community. DACs are generally seen by the local population as politically biased and still associated with a less transparent administration prior to devolution, even though their membership was refreshed with the arrival of decentralization10. In 2014, Turkana DACs and Tullow Oil discussed investments of Ksh50 million (roughly USD 600,000) for secondary school scholarships; heath center improvements; a water project; and the installation of solar panels in a secondary school (Lutta, 2014). DACs members had previously discussed the distribution of local employment in relation to contracting and/or recruiting staff for oil projects, a controversial issue in Turkana. DACs have been repeatedly accused of political patronage, so much so that Tullow Oil decided to distance itself from DACs and publicize tenders and employment opportunities directly among the local population (Cordaid, 2015).

22On the issue of consultation, Latin American countries that are signatories to the ILO Convention 169 have gone a long way in adopting consultation mechanisms with Indigenous Populations, as required by the legally binding international norm. Peru is perhaps the most advanced in adopting full implementation of the consultation process with Indigenous Peoples affected by extractive processes. In 2011, Peru passed the Consultation Law, in line with the ILO 169 Convention (Peru, 2011). The Convention calls for free, prior and informed consent (FPIC) with Indigenous and Tribal Peoples through a process of consultation with them prior to developments that may affect their livelihoods (ILO, 1989).

23Applying FPCI has not been easy, as seen in Peru, where the consultation process has been eclipsed by at least three controversial issues. First, the extent of the consultation process is not always clearly stated. In Peru, local communities expect to have the final decision over industrial projects in their territories, although in defining the mechanism for consultation the ILO Convention 169 as well as other international documents --such as the non-binding UN Declaration on the Rights of Indigenous People-- are ambiguous about whether they imply granting communities veto power over an extractive project (Rodriguez Garavito et al., 2010; McGee, 2009). Instead, the convention encourages consent but does not stipulate the obligation to obtain it as a prerequisite for implementing a particular project in a specific territory. The vague wording of article 6.1(a) of the ILO Convention 169, which calls for the consultation process to be carried out “through appropriate procedures,” leaves room for different interpretations. The fuzzy language reflects a reluctance among signatory countries to concede self-government and territorial rights to minorities (Rodriguez Garavito and Rodriguez Diaz, 2015). Second, our research found that a recurrent dilemma with consultation processes linked to hydrocarbons projects is that they tend to highlight old, unresolved grievances that are not always directly related to the oil or gas project under debate, but are the result of years of marginalization and limited government presence. Third, the timing of the process of consultation, usually following the signing of the oil or gas license, elicits much controversy in producing regions around the world because local communities feel it is too late for their views to be taken into consideration (Walter and Urkidi, 2015).

24In Latin America, the challenges faced by traditional consultation processes gave way to new, more creative forms of participation in the past decades that in turn contributed to increasing local participation and citizen empowerment. This resulted in new forms of community consultations organized by local communities such as citizen referendums that were often about extractive industry projects in their territories (Walter and Urkidi, 2015).

4. Action III. Ensure that mechanisms are in place in the producing area for local communities to better benefit from oil and gas projects.

4.1. Local content and Corporate Social Responsibility (CSR) as catalysts of local development

25In addition to distributing oil and gas revenues through effective local development planning, as discussed in Section I, two other mechanisms that can contribute to ensuring that hydrocarbons benefits reach the local population include: a) the maximization of policies requiring local content; and b) the implementation of well planned Corporate Social Responsibility (CSR) policies. The two often complement each other.

26The World Bank defines local content as “the extent to which the output of the extractive industry sector generates further benefits to the economy beyond the direct contribution to its value-added, through its links to other sectors” (Tordo et al., 2013, xi). For the purpose of this paper, we define local content as the advantage given to local businesses and local employment in procurement processes for the oil or gas industries; the preference given to local hiring where possible; and the development of mechanisms for improving local skills as needed. Thus, the contribution of hydrocarbons developments through local content policies goes beyond short-term direct revenue generation from production and incorporates longer-term benefits such as the provision of skills training to the local work force. In this context, the oil and gas industry seeks to become a catalyst for new local economic activities that generate employment through forward and backward linkages along the oil and gas value chain.

27Oil companies have increasingly moved away from vertical integration towards outsourcing, and this creates an enormous opportunity for producing regions to take advantage of local content, particularly because operators may prefer to get inputs closer to their operations in order to reduce costs and inventories (Morris and Fessehaie, 2014). There is evidence of extractive companies in general becoming increasingly motivated by the mutual gains offered by the adoption of local content policies (Esteves and Barchaly, 2011). In the past, companies included local content within their corporate social responsibility agenda, but more and more governments of producing countries are demanding compliance with local content requirements (Tordo et al., 2013). In Brazil, 70 per cent of goods and services used by oil companies came from local sources in the year 2000 (UNCTAD, 2007, 141).

  • 11  Author interviews with local residents in Turkana.

28In order to maximize their effectiveness, local content policies should be aligned with local development plans and policies (Tordo et al., 2013)  (Estevez et al., 2013). They should be carefully designed to encourage and require that exploration and production companies favor local firms for goods and service procurement (Ovadia, 2016). In so doing, attention should be placed in avoiding manipulation of local content requirements by local elites looking to accumulate wealth, provoking local discontent in the process (Ovadia, 2015). In Turkana county, violent demonstrations forced Tullow Oil to interrupt operations in 2013. The demonstrations were to protest Tullow’s sub-contracting trucking services from outside the county (Daily Nation, 2013). Local residents believed the demonstrations to have been incited by Turkana politicians with interests in the trucking industry11.

29Prior to the adoption of local content policies, a socio economic impact assessment (SEIA) can provide a comprehensive diagnostic of capacities, interests and availability of local suppliers (Esteves and Barchaly, 2011). Similarly, another tool --used by the World Bank-- the Strategic Environmental and Social Assessment (SESA), can give a comprehensive diagnostics of vulnerable populations in producing areas, with baseline data on poverty, skills levels, and education. This data is useful to determine the type of vocational skills training programs linked to the oil industry that the local population could benefit from. These tools contribute to sustainable economic growth in the area where the oil or gas project is developed by: generating awareness of environmental and social issues; improving transparency in relation to hydrocarbons developments; increasing trust among local stakeholders; and giving a voice to some stakeholders who might have been sidelined in the past (Loayza and Albarracin-Jordan, 2010). These tools are also functional for preparing the field for participatory development planning.

30Corporate Social Responsibility (CSR) if well managed should be seen as a partnership between the oil corporation and local communities to elicit long term sustainable social development in the producing area. Critiques of CSR abound, with some authors arguing that it is merely corporate rhetoric to disguise a capitalist culture of dependency and power, where local communities remain powerless players bearing the costs of their actions (Rajak, 2011). Some scholars question the capacity of oil companies to deliver development and argue that the option of achieving development goals through CSR is intrinsically flawed (Frynas, 2005).

31CSR can best contribute to long-term sustainable development and economic growth when applied within the framework of local development plans designed with the participation of local stakeholders such as communities, government officials, and civil society. CSR initiatives fail to perform when they are not an integral part of a larger development plan for the producing area (Frynas, 2005). In the absence of participatory development planning, companies have a tendency to prioritize short-term, welfare types of benefits –a school, a hospital, a soccer stadium— that may be a welcome improvement for the community but may not reflect local priorities (Vasquez, 2014). Such social and investment decisions result primarily from bilateral negotiations between companies and community leaders. In that context, given the limited government presence that characterizes the remote areas where the oil or gas resources are located, companies typically become providers of basic services that are traditionally within the realm of the state (Enns and Bersaglio, 2015). In Turkana, where frequent droughts are common and have intensified in recent years, Tullow Oil became one of the main providers of much-needed drinking water to local populations (Vidija, 2014).

32When the local development agenda is defined through bilateral company-community negotiations it becomes a function of the power relations between the two players and is not conducive to long-term sustainable growth (Vasquez, 2014). Leaving social development planning in the hands of the oil company without prior agreed upon goals may result in paternalistic relationships, and it may conceal the governance limitations of the host government to take a developmental role itself (Frynas, 2010). This type of liaison risks creating dependency on the company and it is short-lived because it expands only throughout the duration of the concession.

33The tendency in recent years has been for CSR initiatives to move away from a policy of ‘handouts’into development partnerships with governments, civil society organizations, and donors (Utting and Ives, 2006). In Uganda, the discovery of oil and gas reserves in the northwestern Albertine Graben region was announced in 2006. Soon after the announcement, the government set out to design policies aimed at improving the skills of Ugandans and facilitating their employment in the oil sector, and it did so in collaboration with companies and other stakeholders (Uganda, 2011). The Irish NGO Traidlinks created the Hoima Enterprise Center in the oil-rich Albertine Graben region with the support of Tullow Oil, to provide technical skills to local businesses and help farmers improve their food standards and market access (Baranga, 2012). Also, French oil company Total set up a scholarship program for Ugandans to undertake postgraduate studies in France on petroleum economics and management, in line with the government goal of helping its country nationals to take advantage of opportunities in the oil industry.

34In general, there are still many challenges to creating effective, long-lasting linkages between CSR and community development planning.

4.2. Challenges for ensuring that local communities benefit from oil revenues.

35One challenge with local content policies is that the use of this tool to stimulate economic development and alleviate growth has so far had mixed results in petroleum rich countries and needs to be perfected (Tordo et al., 2013). Backward linkages are thought to work during the initial phase of building the extractive facility, but they diminish afterwards because local labor skills and services do not meet the higher standards demanded by the industry (Bebbington, 2012). Forward linkages that would involve product processing are rare in the producing region and usually take place in areas closer to export facilities (Bebbington, 2012).

36For local content to be a driving force for the emergence of a local supply chain for the hydrocarbons industry host governments must be committed to adopting proactive policies and setting up efficient supporting institutions to improve domestic capacities, particularly through education (UNCTAD, 2007). Local content should be understood as part of a broader category of policy interventions and should be consistent with broader economic development policies in order to be successful (Tordo et al., 2013). Unfortunately, that is not always the case and it could be partly due to lack of true government commitment. In Uganda, the state-owned Ugandan Petroleum Institute Kigumba (UPIK) that offers training in the oil industry has been mired in controversy for years, fueled by questionable academic results and a tug of war between its director –who is supported by the president of the country-- and the federal ministry of education, for control of the institution (All Africa, 2015). A World Bank USD 10 million loan to improve the Institute facilities was part of a larger project, the Albertine Region Sustainable Development Project that was suspended at the end of 2015 due to delays. More work needs to be done to further develop local content practices that have a direct benefit for communities living in producing regions.

37In the case of CSR, when applied outside of local development planning it is typically not channeled to yield the most effective development results (Frynas, 2005). Oil companies are not development agencies so their contribution to social projects is limited by their expertise and their degree of commitment to local development, which typically depends on issues such as: whether it makes strategic or business sense to incorporate CSR; if the company has a corporate history towards the adoption of CSR; and the amount of scrutiny by shareholders, among others (Utting and Ives, 2006).  Frynas goes further and suggests that the profit maximizing motives of oil companies are often incompatible with good development practices (Frynas, 2005).

  • 12  Author first hand attendance.

38In Turkana, Tullow Oil took up the role of a historically absent state in the provision of water and other services. The company meets periodically with local rural communities in gatherings known locally as barazas. Traditionally, these barazas were supposed to serve as a sort of social development planning mechanism where locals made demands for service delivery and public goods from the government12. With the arrival of Tullow Oil, the company has taken up the responsibility of responding to community demands, which usually focus on fresh drinking water facilities and local hiring. The baraza approach to community consultation is useful in areas like Turkana where rural communities are spread out throughout vast territories and it would be difficult to gather them all in one place. Tullow organizes barazas to consult with communities living in the area where the company has its operations and in response to the needs of those particular peoples. Thus, Tullow may fund a drinking water facility for meeting the needs of the particular community living in that particular area, while those living a few miles away will have to continue their struggle in demand of their right to water. With prior social development planning in place, Tullow’s water initiative could fall within a comprehensive program of public works, including water supply that would be contemplated by the development program set to benefit the Turkana population as a whole, and not just a few communities. Without such planning, Tullow’s response to individual communities’ demands are isolated and scattered and may cause friction with those communities not benefiting from the company’s philanthropic actions (Enns and Bersaglio, 2015).

39To conclude, local content and CSR initiatives in hydrocarbons operations could contribute to equitable resource revenue distribution in producing areas. As mentioned earlier, for these two tools to be effective, they must be integrated in the social development planning of the producing areas. Unfortunately, development planning is often absent or poorly designed in the remote locations where oil and gas reserves are found, and local content and CSR become isolated attempts at meeting specific local needs in exchange for getting communities’ approval of the hydrocarbons project. In recent years, governments have tried to make local content requirements more stringent and more research is needed to identify good practices and lessons learned from these experiences. In the end, integrating hydrocarbons investments into participatory local development planning to promote local content and CSR contributes to: legitimizing oil operations among the local population; reducing the risk of conflict, and improving the quality of the projects.

5. Action IV. Avoid enclave economies through integration of the producing area to the larger national economy

5.1.  Initiatives for enhancing regional economies around extractive projects

40The existence of enclave economies would effectively neutralize efforts such as those described in this paper to ensure efficient allocation of oil and gas revenues and participatory development planning in producing area. Phelps defines an economic enclave as:

”…a physically, administratively, or legally bounded territory whose geography or morphology is intimately related to the following economic characteristics: dependence on one or a few large firms; high specialization in one activity; and weak integration into the local economy, which is used primarily to access some local factors of production(Phelps et al. 2015, 119-146).

41The hydrocarbons industry is not labor intensive. The main contribution of the oil and gas industry to the local economy and the population at large is through the efficient investment of revenue flows and through productive linkages with the local economy. When the oil industry is strongly connected to the local economy or if the local government can tax resource revenues, then the wealth generated by the extractive industry can contribute to increasing local employment and wages and regional revenues (Ross et al., 2012). The hydrocarbons industry is self-contained: oil companies bring their own equipment, personnel, and technology to carry out their operations. It is this self-sufficiency that enables them to develop oil and gas in the remote, isolated and sometimes inhospitable areas where the reserves are typically located, where infrastructure is usually weak, and industrial, technological, or human capacity scarce. The self-contained nature of their work may prevent productive linkages with the local economy, unless specific actions are taken to create those local connections (Ferguson, 2005).

42Oil installations in producing areas typically consist of a series of trailers or prefabricated units, often disconnected with the local community. Barbed wire protection and armed guards tend to emphasize the sense of separation from the local community, as do comfort items: television, satellite phones, power and water purification units, and cooks specializing on the foreign foods of the country of origin of the oil workers. Some authors argue that international oil corporations operating in some of these remote locations around the world are often easily connected with their head office in their home country but they are paradoxically walled off (sometimes literally) from local communities (Ferguson, 2005). The lack of linkages with the local economy limits the chances for producing regions to enjoy sustainable long-term economic development generated by the oil or gas developments. This often leads to conflict when local communities fail to enjoy economic opportunities linked to the development of oil or gas in their territory (Humphreys et.al., 2006)But in recent decades, outsourcing in producing regions has become more common and local governments are better positioned to demand that oil corporations foster local linkages (Hansen, 2014).

  • 13  Initial projections for start up of oil production in Kenya and Uganda were as early as 2017. But (...)
  • 14  Details about the World Bank Albertine Region Sustainable Development Project can be found at: htt (...)

43Governments, donors, and international financial institutions are increasingly committed to encouraging mechanisms and infrastructure developments to enhance forward and backward linkages between the oil and gas industry and local economies in the oil areas. Kenya and Uganda, where oil production is expected to start soon 13 offer good example of this engagement. In Uganda’s Albertine region, the central government set out to design value chain analyses of the oil sector early on, to identify opportunities for local content and to determine the capacities and constraints of local suppliers to fully take advantage of upcoming oil developments. In addition, a World Bank-funded five-year project –the Albertine Region Sustainable Development Project14-- was launched in 2014 to upgrade rural roads in the oil region, in order to facilitate access to markets for small local producers. The project is also aimed at: providing urban planning support to towns under pressure due to the arrival of oil operations to the area; improving the capacity of local authorities to manage the impacts of rapid growth; and modernizing the curricula and facilities of regional technical colleges set out to improve local skills (The World Bank, 2015). In Kenya, the government sponsored the ambitious USD 25.5 billion LAPSSET (Lamu Port, South Sudan, Ethiopia Transport and Economic Development Corridor) project designed to improve regional transport connections and enhance local economies on the way. LAPSSET called for several regional infrastructure projects, including an oil pipeline that was originally planned to link oil from South Sudan (and possibly Ugandan land-locked crude reservoirs) with the Kenyan port of Lamu, located on the Indian Ocean Manda Bay (Vasquez, 2013). LAPSSET included the development of three resort cities in Kenya (Isiolo, Lamu and Turkana), along with construction of a 1,710 kilometer railway line and an 880 km highway to connect South Sudan, Ethiopia and Kenya. The feasibility of LAPSSET as originally designed was put to question due to its high costs, and after plans for a second –shorter-- pipeline route that would go to the Tanzanian seaside town of Tanga were made public by Uganda in 2016 (Senelwa, 2016).

44Oil companies are also increasingly establishing backward linkages in the areas where they operate irrespective of skills. In Turkana, Tullow Oil and its subcontractors sourced out most of their workforce (62 per cent) among the Turkana-based population in 2014. Half of the workforce hired locally were unskilled (62 per cent) and semi-skilled (93 per cent) workers (see table 1).

Table 1 - Tullow Oil Employment Summary for September, 2014

Table 1 - Tullow Oil Employment Summary for September, 2014

Source: Compiled by the author with data obtained during interviews with Tullow Oil in Turkana.

  • 15  Author meetings with government and IADB officials in Neuquen and Buenos Aires.
  • 16  Technically recoverable resources are those that present oil and natural gas volumes that could be (...)

45In Argentina, the Inter American Development Bank (IADB) is leading the urban development of what is known as “The Shale Capital”, in reference to the expansion of Añelo, the urban area closest to recently found shale oil and gas reserves in the Patagonian province of Neuquen (BID, 2014). The goal is to promote the sustainable expansion of Añelo, with a special focus on the promotion of the regional economy and on the potential job multiplying effect of an expanding shale hydrocarbons industry15. Argentina ranks third among countries holding non-conventional natural gas reserves and fourth among those that have stocks of shale oil, according to the EIA (EIA, 2013).16

46Añelo is the closest urban area to the huge Vaca Muerta shale reserves that Argentina started to explore in 2013. As a consequence of the shale boom, Añelo already grew from 2,500 inhabitants in 2010 to 13,700 in 2015, and is projected to have 22,800 people in 2025 (BID, 2014).

5.2. Challenges of implementing policies that contribute to preventing enclave economies

47There are several challenges associated with developing growth poles in oil areas. Vertical and horizontal coordination between various government ministries at the national and local level is needed to establishing the linkages but can be difficult to obtain, and may be sometimes charged with political maneuvering. Parliamentary approval of the World Bank Albertine region project for example, was delayed for more than a year due to disagreements between government agencies about details of its implementation. In the end, the World Bank suspended funding of the project in 2016 (Mwesigwa, 2016). Another challenge is access to financing, which in the case of large-scale investments such as LAPSSET require large upfront financing and public-private partnerships that can be complex and not always easily available. Investors are risk averse and may require additional guarantees of the potential profitability of the project and of the economic returns of each of its components. Since the first announcement of LAPSSET in 2012, the project has not moved much beyond preliminary work for expanding the Lamu port that started in July 2015. Gathering funds for the ambitious USD 25.5 billion project has been one of the main obstacles. Additionally, the on-going conflict in South Sudan and security concerns in Kenya and neighboring Somalia added a risk premium to the project.

6. Conclusion

48The development of natural resources such as oil and gas can greatly contribute to the sustainable development of the producing region. Yet, often hydrocarbons revenues fail to significantly enhance the livelihoods of communities living in the oil or gas regions. This paper explores four actions that can contribute to improve the management of hydrocarbons revenues at the local level and the challenges in applying them. It draws from experiences in Latin America and East Africa. The first two actions stress the importance of integrating oil and gas revenues into the development agenda of the producing region and of enhancing participation and consultation with local communities. The third and fourth actions discuss how oil resources can best contribute to the local economy through linkages that create opportunities for the local population --including a more strategic use of local content and corporate social responsibility (CSR) policies—and by avoiding enclave economies. Integrating the local economy into the broader national economy is also often a challenge that needs to be addressed. Ultimately, the efficient distribution of oil and gas revenues at the sub-national levels is largely influenced by political dynamics and connections between local and national political actors.

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Notes

1  The PROSOL was established by Law No.3741 from September 14, 2007.

2   Section 126 of the Public Financial Management Act (PFMA) 2012 called for the development of county-level CIDPs.

3  Law 27506 of 2001, known as Canon Law, established the distribution of natural resource revenues among regional and local governments. Supreme Decree 005-2002-EF, passed in 2002, developed six different types of Canon to be charged according to the various natural resource-based economic activities: mining, gas, oil, hydroelectric power, forestry and fishing.

4  See Public Finance Management Act 2012:  Section 107-2[b]

5  The US Dodd-Frank Wall Street Reform Act and the European Union Transparency Directive require that oil, mining and gas companies listed in the US and the EU respectively to make public their payments to foreign governments.

6  See Fourth Schedule of Kenya’s 2010 Constitution.

See Article 10(2) of Kenya’s 2010 Constitution, which states that public participation is a national value and a principle of governance.

7 See for example: Public Finance Management Act-Section 207; County Governments Act-Section 115; Urban Areas and Cities Act-Section 22.

8  See County Government Act 2012, Section 87 and Section 91.

9  See Turkana County Public Participation Bill 2014 in the Turkana County Gazette Supplement, No.9 (Bills N0.6). Special Issue. October 30th, 2014.

See 2010 Constitution of Kenya, Articles 118 and 174 (c ).

10  Author meetings in Turkana.

11  Author interviews with local residents in Turkana.

12  Author first hand attendance.

13  Initial projections for start up of oil production in Kenya and Uganda were as early as 2017. But the drop in the price of oil and uncertainty about the route for transporting the landlocked oil to the coast for export has delayed the process. Now, 2020 is he new earliest possible date under contemplation for starting oil production in the region (Manson, 2015).

14  Details about the World Bank Albertine Region Sustainable Development Project can be found at: http://www.worldbank.org/projects/P145101/uganda-albertine-region-sustainable-development-project?lang=en  (accessed on 15 November 2016).

15  Author meetings with government and IADB officials in Neuquen and Buenos Aires.

16  Technically recoverable resources are those that present oil and natural gas volumes that could be produced with existing technology, regardless of prices and costs. Economically recoverable resources are those that can be produced profitably under current market conditions and this depends on three factors: costs of drilling and completing wells; the amount of oil and natural gas produced from an average well over its lifetime; and the price receive for the oil and gas production (EIA, 2015).

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List of illustrations

Title Table 1 - Tullow Oil Employment Summary for September, 2014
Caption Source: Compiled by the author with data obtained during interviews with Tullow Oil in Turkana.
URL http://poldev.revues.org/docannexe/image/2227/img-1.png
File image/png, 94k
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Cite this article

Electronic reference

Patricia I. Vasquez, « Four Policy Actions to Improve Local Governance of the Oil and Gas Sector », International Development Policy | Revue internationale de politique de développement [Online], 7.1 | 2016, Online since 29 November 2016, connection on 21 November 2017. URL : http://poldev.revues.org/2227 ; DOI : 10.4000/poldev.2227

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About the author

Patricia I. Vasquez

Patricia I. Vasquez is a Research Associate at the Graduate Institute’s Centre on Conflict, Development and Peacebuilding and an independent researcher on issues related to conflicts and extractive industries, with a focus on Latin America and East Africa. She is now based in Kenya, where she has been studying the development of the newly found oil and gas reserves in East Africa (Kenya, Uganda and Somalia), mainly for the World Bank and UNEP.Prior to that, she was a Jennings Randolph senior fellow at the U.S. Institute of Peace, where she worked on her recently published book 'Oil Sparks in the Amazon: Local Conflicts, Indigenous Populations, and Natural Resources' (University of Georgia Press).

By this author

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Copyright

Creative Commons License
International Development Policy is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

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