With oil discovery in Kenya, the country has been making steps towards commercial oil production. One of the key concerns has been whether the country has the capacity to manage the oil revenues and the wealth that comes with it. It is therefore not surprising that you might wonder, does Kenya have a sovereign wealth fund?
Sovereign wealth funds are investment vehicles or instruments, mostly state-owned and use to manage oil or mineral wealth by the oil-producing nations.
Related: What is a Sovereign Wealth Fund?
The upstream oil and gas industry in Kenya is not very new. The first well was drilled in the 1950s and over the years, exploration activities have produced a mix of results.
Does Kenya have a Sovereign Wealth Fund?
Currently, Kenya DOES NOT have an established sovereign wealth fund yet. However, there is a draft sovereign wealth fund bill, 2019 which was released in February, 2019.
This draft bill seeks to form the basis for which when passed into law will lead to the formation of the fund in the country. This sovereign wealth fund in Kenya will help manage the country’s petroleum and mineral revenues.
The proposed wealth fund has three components which are savings, budget stabilization and domestic spending and investment.
This draft sovereign wealth fund bill is actually a BILL for an Act of Parliament to establish the Kenya Sovereign Wealth Fund, to provide institutional arrangements for effective administration and efficient management of minerals and petroleum revenues, and for connected purposes and incidentals thereto.
The Case for a Kenyan Sovereign Wealth Fund.
Kenya is about to join the 80 or so countries in which non-renewable mineral resources play a dominant role. According to World Bank, these countries collectively account for a quarter of world GDP, half of the world’s population, and nearly 70% of those in extreme poverty. Africa is home to about 30% of the world’s mineral reserves, 10% of the world’s oil, and 8% of the world’s natural gas.
The British oil company Tullow Oil plc, and its Canadian partner the Africa Oil Corporation (AOC), announced the first discovery of oil in Kenya in March 2012. According to Tullow oil, current estimates of the volume of recoverable Kenyan oil lie between 750 million and 1 billion barrels.
The bulk of the oil lies in the Turkana region of north-western Kenya. In African terms, where total proven oil reserves in 2014 were 129 billion barrels, Kenya has far less oil than Gabon, Africa’s second smallest reserves, and more than Tunisia which holds the smallest of Africa’s oil reserves.
That is relatively small compared with the 1.7bn barrels confirmed in neighbouring Uganda, but this places Kenya in the middle of an oil and gas field on the east African coast. The South Lokichar Basin is likely to yield more deposits as exploration continues.
In global terms, Turkmenistan and Uzbekistan have proven oil reserves of a similar magnitude to that in Kenya. This is according to a 2015 report by BP
Should Tullow’s estimates materialise they could bring Kenya’s external current account to surplus soon after exploitation starts and Kenya could become self-sufficient in oil production within 3-5 years.
Sovereign Wealth Fund in Kenya
Sovereign wealth fund in Kenya is of great importance and will help in the management of the oil and gas or mineral wealth. The country has started exporting crude oil through the early oil pilot scheme (EOPS).
The establishment of a sovereign wealth fund in Kenya was proposed by the Presidential Task Force on Parastatal Reforms which had been set up by the president of Kenya a few years back.
Because of this, the government of Kenya through the National Treasury drafted the Kenya National Sovereign Wealth Fund Bill. The main objective and aim of this wealth fund is to ensure that there is proper management of proceeds from oil, gas and mineral resources.
This would therefore lay the legal framework for managing the oil and gas wealth. A seed capital of $100 million was injected into the fund.
Draft Kenya Sovereign Wealth Fund Bill
One of the key take away from the draft Kenya sovereign wealth fund bill is understanding the mandate of the fund, and the benefits the fund will bring to the country.
Components of Sovereign Wealth Fund in Kenya
In its current draft form, the wealth fund has three key components;
Future Generation Fund
The sovereign wealth fund in Kenya will seek to address the issues of inter-generational equity. It will make available a pool of savings.
In addition, some level of a back-up for the future generations because these resources are non-renewable.
This would provide a clear way in which to invest the revenues from oil, gas and minerals. This is both for the current and future generations.
This component of the fund will support the funding of the infrastructure in the country. It will provide the financial resources required for huge infrastructural investments. For example, over the next couple of years, Kenya needs $41 billion for infrastructural projects alone.
Sources of Capital for the Wealth Fund in Kenya
This structure is much like the Nigerian Sovereign Investment Authority. The sovereign wealth fund would be capitalised from several sources including natural resource royalties from new coal and oil finds in the north of the country, rather than being a Temasek-style holding company for parastatal companies.
It is expected that the fund will be managed to the highest possible international standards, specifically the Generally Accepted Principles and Practices (the Santiago Principles), with the aim of becoming a member of the IFSWF.
For example, the future generations reserve would be sufficiently protected from redemption to ensure the protection of assets directed for the future generations of Kenya citizens.
All the funds would be audited by the Public Auditor General.
By so doing, the Kenyan sovereign wealth fund would gain international recognition that it was a reliable and trustworthy investment partner and provide assurances to the Kenyan people that their money was being responsibly invested.
It is hoped that the fund’s transparency and disclosure standards would be in line with those of Norway’s Government Pension Fund Global or the New Zealand Superannuation Fund, which would help to promote understanding of the fund’s mandate and trust of both partners and stakeholders.
Benefits of Sovereign Wealth Fund in Kenya
The benefits that a country accrues from having a sovereign wealth fund are many. A good case study would be the Norwegian Government Pension Fund Global, a wealth fund which is often used as a benchmark in the world of SWFs.
Establishment of the sovereign wealth fund for Kenya will have two benefits to the country. These are;
Developing Local Financial Expertise and Skills
Future generation reserve and stabilisation objectives of the sovereign fund will act as a catalyst for developing local financial expertise and skills, leveraging the capabilities of global banks and asset managers.
Developing a Kenyan financial services industry will catalyse the growth of more skilled, better-paid service-sector jobs in the country. One aim is to attract the Kenyan diaspora with the promise of well-paid and skilled jobs.
This is a long-term goal and may take 10 or 20 years to achieve, but that it is essential for the well-being of future generations of Kenyans.
Help Attract Foreign Direct Investment
The infrastructure objective of the wealth fund in Kenya would follow a well-established model of helping to attract foreign direct investment.
Sovereign wealth fund would act as an anchor investor crowding-in financing for major projects from like-minded, long-term investors, such as sovereign wealth funds, from across the African continent and beyond.
The fund would look to develop Kenya’s infrastructure and cross-border infrastructure projects that would benefit both the East African region and the continent more broadly.
In the wake of the Covid-19 pandemic, Africa is becoming a more attractive destination for foreign investment as while it might be perceived as being higher risk, it would provide healthy returns particularly if the involvement of sovereign wealth funds in those investments could help to reduce perceived and actual risks.
In conclusion, it is worth noting that Kenya’s expected non-renewable resource revenues are modest, both in absolute terms and relative to general government revenues.
Based on independent estimates, petroleum revenues are unlikely to exceed 5 percent of fiscal revenues, even at peak production. Mineral revenues totalled USD 16.5 million last year. This is a drop in the bucket in terms of government revenues.
The proposed sovereign wealth fund draft bill in Kenya has addressed the three most important priorities when establishing a sovereign wealth fund.
- First, having a robust law and ensure that the legal and legislative framework is protected and respected by local politicians.
- Second, ensuring that the mandate of the fund is clear and ring-fenced.
- Third, separating the roles as well as responsibilities of the owner and the manager of the fund. This is to ensure that it was managed independent of government interference and on a financial basis as provided in the SWF 2019.
Draft sovereign wealth fund bill in Kenya incorporates many of the key elements in sovereign wealth fund bills that promote effective accountable and transparent management of the oil, gas and mineral resources.
Some of these are clear fund objectives, clear deposit rules, significant public disclosure requirements, competitive and transparent selection of fund managers.