Oil, poverty and good governance

Africa is one of the most resource-rich regions of the world but despite this natural wealth,  82% of people live in extreme poverty in Africa according to a World Bank report. Around 640 million people currently live without electricity in Africa – 210 million of which are in fragile and conflict-affected countries (World Bank Region overview). With public debt levels soaring and the impact of the pandemic being felt across the economy and society, the continent’s growth is fragile.

Oil not only has economic value; it has profound influence over power relations and governance in oil-rich countries.  Africa’s oil boom come at a time when foreign aid to Africa from industrialized countries is being cut and shifting towards improving trading relationships to alleviate poverty.  It is therefore vital that Africa make the best use of its oil.

How can Africa’s oil boom contribute to alleviating poverty and what policy changes are needed?

Firstly, government institutions and international/national oil companies need to be transparent in their revenues and how these are being spent. Multinational oil companies should be clear in what they pay, and governments need to reveal what they spend. Oil companies can also support governments through the development of transparent operating conditions and solid regulatory and reporting systems. For example, BP is a founding member of EITI (Extractive Industries Transparency Initiative) which aims to promote the open and accountable management of oil, gas and mineral resources, disclosing information from the extraction chain right through to how revenues make their way to the government.

Large oil exporters like Nigeria, Angola and Cameroon have found it difficult to convert oil wealth into broad based poverty reduction. COVID-19 has exacerbated the situation.  For example, Nigeria – Africa’s largest economy has had to review its oil benchmark downward in the 2020 spending plan to $25 per barrel from $57 per barrel, cutting the planned crude production of 2.18 million to 1.94 million barrels per day to meet the current realities (Reuters). With rising inflation in a country of nearly 200 million people, more Nigerians are unable to afford food, according to the information from Nigeria’s data agency.

In African energy-exporting countries, oil exports can account for more than 90% of revenues and the bulk of fiscal revenues (Deloitte insight study). Growth based on oil does not translate into the whole economy. Countries must diversify their economies and not be over reliant on oil. Wrangling control for oil has been a source of conflict and in some cases civil war in Africa.

Good governance—meaning the norms, institutions, and processes for power and responsibility related to how resources are shared—is critical to overcoming some of these challenges. This can only be achieved through a foundation of the best principles: legitimacy, accountability, transparency, and inclusiveness and will require strong leadership.  African governments need to be primarily responsible for managing Africa’s oil wealth in a transparent, fair, and accountable way. Other players like foreign oil companies, IMF and the World Bank will also need to be a catalyst to support changes, mitigate risk and reshape legal frameworks and the investment environment. One example of a project which demonstrated international collaboration and investment to improve sustainable long-term growth opportunities was the Chad-Cameroon Petroleum Development and Pipeline Project. The over 1,000-km long infrastructure was funded by the World Bank and a consortium of oil firms including Exxon-Mobil, Petronas, and Chevron-Texaco. In 2014, Chevron-Texaco sold its stake in the project to the Chadian government.

By distributing the benefits of oil production, Africa can move towards a more stable and sustainable continent. Encouraging policy reform to ensure petrodollars are well managed will be vital. While Africa’s oil boom cannot address the poverty challenge alone, the industry can take steps to offer greater transparency, environmental protection and support for the local economy to drive efforts.

This could range from disclosing or partial disclosure of commercial contracts (without harming their commercial interests), setting up industry standards to ensure environmental protection to working with local and international civil society organisations to eliminate corruption and promote good practice. Lastly companies should use local contractors where applicable. GPB Global Resources and its affiliates for instance consequently employ around 1,000 people in countries including Ethiopia and Niger. These local talent pools have in turn offered a huge amount to the company in cultural knowledge, language skills and economic growth.  Companies should also explore and engage in the building and upgrading infrastructure in partnership with local governments or businesses as minority equity partners where applicable. These steps can induce long-lasting effects on local economies and bring transformative change.

The approach of oil companies to CSR is particularly important in Africa given the huge proportion of investment and economic activity they account for on the continent. Large oil and gas corporations have undertaken social welfare activities as per their individual CSR portfolios and invested in infrastructure, health, agriculture, education, water, and roads. These revenues and cash injections need to be well managed to avoid corruption and crony capitalism.

The pandemic is expected to cost Africa up to $79 billion in lost economic output this year alone with the additional risk of millions of job losses. As we look to the future, there are high hopes for the positive impact The African Continental Free Trade Area (AfCFTA) will have. AfCFTA – expected to operate from the start of 2021 will bring together 1.3 billion people across 55 countries with combined gross domestic product of $3.4 trillion. World Bank researchers estimated the trade deal would lift 30 million Africans out of extreme poverty and 68 million from moderate poverty by 2035.

COVID-19 will continue to test African countries on multiple fronts and although painful, economic devastation and low demand for oil is not permanent. Now is the time to refocus on recovery and find ways to lift people out of poverty and advance economic growth. Stay tuned for our last blog on our Africa series which will explore the future of oil in a post COVID-19 world.

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