sharing in governance of extractive industries

The story of Niger, or how not to have an oil boom while your people starve

There can't be many countries who face famine as their GDP rises by 14%. Yet that is the situation in the West African state of Niger, where the World Food Program, the International Red Cross, Oxfam and other humanitarian agencies launched appeals this week to help some 400,000 people now at risk from severe malnutrition. At the same time as an oil boom kicks in and IMF analysis predicts a rise in government income of 30% in 2012.

How can this happen? And how can something better happen instead?

I'd like to suggest three initiatives which would improve the lives of millions of Nigeriens at risk immediately:

  • That the Nigerien government suspends its capital expenditure program to make funds available for emergency relief.

  • That foreign oil companies producing in Niger's new field, China's CNPC and Algeria's Sonatrach, defer cost recovery claims by enough to allow all necessary emergency supplies to be bought.

  • That the governments of the Sahel region, where up to ten million people are going hungry again this year, create a regional stabilisation fund using petrodollars from new and established industries in Chad, Mauritania and Niger. The World Bank and IMF could provide technical expertise and match funds.

The standard pictures of children at food clinics with distended stomachs, brave women hacking arid earth with hoes, and menless villages have begun to appear on the news. But this “famine fodder”, shot or facilitated by the aid agencies with the best of intentions, is also misleading, and has the unfortunate effect of reinforcing compassion fatigue, the idea of poor old Africa, blighted by Biblical pestilence, stuck in another age. Whereas in fact the money to deal with this crisis exists in the region, somewhere within grasp of the government elected by a people now facing starvation.

We don't know exactly where because although Niger's new constitution in 2010 promised to publish all contracts and revenues from its extractive industries, and although it is judged fully compliant by the Extractive Industries Transparency Initiative, the leading international instrument designed to ensure transparency in management of oil and mining revenues, these figures are not publicly available. But somewhere.

The faint shadow of this money appears inbetween the lines of the latest International Monetary Fund Article IV report, released last December when new IMF director Christine Lagarde included Niger in her first field trip on the job. GDP was predicted to rise by a billion dollars, from just under six billion dollars in 2011 to just under seven billion in 2012. While that might sound these days like an accounting blip in a bank bail-out or Eurozone discussion, it represents a huge influx of cash into a country of 13 million people. Which goes disproportionately to the government, as oil money does. Of the billion dollars extra going into the Nigerien economy this year, government revenues are set to jump from $902 million to $1,229 million, a rise of over 36%.

The aid agency appeals for Niger, altogether, so far amount to less than a tenth of that anticipated rise in government income. Which brings me to the first suggestion. Whatever the government's “ambitious development plans”, surely its first obligation should be to keep its people alive. The oil project in Agadem, the far west of the country, went on stream last year and is now producing 20,000 barrels of oil a day, piped through a line to a refinery in Zender in the middle of the country, generating a market value of about $850 million. China's CNPC is the main operator, a company which although it is state-owned is estimated by Forbes to have earned about $240 billion in 2010 and own assets worth nearly $400 billion. Algeria's Sonatrach is also sizeable, with annual sales comfortably in the billions of dollars. Both companies have regional ambitions across Africa, CNPC to secure ever more energy for CHina's economic miracle and Sonatrach to expand Algeria's industry organically into neighbouring countries.

Now is the time for those companies to step forward and offer to defer whatever revenue streams are necessary to get funds into buying supplies (under the terms of the contract, Agadem and the CNPC run refinery will supply the local market with fuel and then export the rest). It would be obscene for Nigeriens to die of starvation in areas where a pipeline pumped hundreds of millions of dollars worth of oil – their oil according to Niger's constitution – past the queues at the clinics and their devastated villages to a refinery and then out to the world.

Africa is the new frontier of oil. Some dozen countries have developed significant oil industries in recent years. Countries such as Ghana, Uganda, Niger, Mauritania, Tanzania, South Sudan, Mozambique, Liberia, and Kenya are keen to join Nigeria, Angola and Sudan. There is even prospecting in the various breakaway parts of Somalia. But as expert Michael Ross points out in his stunning new book The Oil Curse, there is a danger that the famous features of Resource Curse – corruption, conflict, floods of cash without real human development, Dutch Disease and disempowerment of women could strike hundreds of millions more people than it already has, famously, in places like Nigeria, the Middle East and the former Soviet countries.

Which brings us to the third proposal: a regional petrodollar fund by African producers for human stabilisation. The funds generated by extractive industries on the continent already dwarf development aid six to one – used properly, they could render aid largely unnecessary, a win-win that all parts of the political spectrum in donor countries could support in a highly contended policy area.

It's easy to blame corrupt African dictators but it is far from the whole picture. Best practice and technical assistance in these areas could often best be described as “institutionally autistic”. Economists are busy advising early stage producing governments about a range of technical devices and mechanisms such as (financial) stabilisation funds, revenue smoothing and sovereign wealth funds. Undeterred by the fact these are all tools which depend on political will to enforce and maintain them, these are often technocrats who seek to make the Resource Curse disease fit the particular cure their education and career paths enable them to offer.

The new producers of West Africa have more than enough oil reserves booked and fields in production to set up a stabilisation fund now which could offer rapid response in-region help to the humanitarian crises that keep hitting the Sahel. As well as a mark of serious intent by which to engage the international community.

These are interesting times at the IMF. Lagarde, who on her visit in December peppered her speeches in Niger with local proverbs, said she could not over-emphasize the importance of a little saving. And the Fund has just launched a public consultation on extractive indu... and how they should be harnessed to the development process, an implicit acknowledgement that technical assistance approaches of the past have met with limited success, and that's being generous (and please, let's not continue to be the mad professor complaining about how we've developed perfect methodologies if only these fools could understand).

So let them start here. Let them provide real thought leadership on how not have an oil boom while your people starve.

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Comment by Boubacar Manou on April 5, 2012 at 15:02

Dear Johnny,

Very intreresting article. It looks like the "oil curse already hit Niger" with all the turmoils related to prices of the fuel produced by the Zinder refinery and the famine.A sound solution could be found through the following points:

  1.  In 2007, the government of Niger promulgated a law stating that 15% of fiscal revenues of the mining industry will be invested in the communities neighboring the mining licenses. This is an act that could be generalized to the extractive industry by including the oil industry;
  2. Corporate social Responsibility stategies should take into account emergency cases in host countries such as famines and other natural catstrophes as top priority issues. Moreover, countries could tailor country CSR strategies with top priority work plans that extractive industry companies can consider when palnning their CSR actions.
  3. Feasibility studies should include a social feasibility, by having a closer look to the direct social environment of the extractive project, in order to not have an island of wealth in an ocean of misery.

Best regards.

Manou Boubacar, Former Advisor to the Prime Minister of Niger in Extractive Industry and Energy Policies, President and Country Manager Pan African Uranium

Comment by Evelyn Parra on April 3, 2012 at 11:34

Thanks Johnny,

Certainly, there is no need to change the basis of contracts but to temporarily amend certain conditions if both parties agree that it is for the greater good of both project and communities. I am sure company’s Corporate Social Responsibility department would gladly see in your proposed initiatives a very good opportunity to assist, particularly if there is no significant changes to the overall economic conditions of the agreement.

Comment by Johnny West on April 2, 2012 at 19:34

Hi Evelyn -- I don't know if there are such explicit clauses or not in these contracts -- I doubt it. But the point is the companies would be waiving their own entitlements -- if they offer, is the government going to insist no, they must take the money or the crude? Then the question would simply be if both sides could agree to a rescheduling. Given that there is normally continual negotiation on cost recovery anyway, this would be unlikely to be a problem, especially as presumably we would be dealing in a context of mutually reinforced good will.

Comment by Evelyn Parra on April 1, 2012 at 10:36

Hi Johnny,

Many thanks for sharing your article, very interesting initiatives indeed.

I’m curious, in your second proposal you suggest “That foreign oil companies producing in Niger's new field, China's CNPC and Algeria's Sonatrach, defer cost recovery claims by enough to allow all necessary emergency supplies to be bought.” How could this be achieved? Are there special provisions in these agreements that somehow permit the deferral of cost recoveries by contractors during production phase due to social emergency factors?    

Kind regards, Evelyn


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