
Resources Revenue Sharing Debate in Kenya
By Caroline Katisya, LL.B (UON), LL.M Energy Law and Policy (University of Dundee), CPS (K)
Background
The first production of oil in Kenya is due to be exported in a few months. This ought to be an occasion of immense pride for Kenyans as the country joins the club of oil producers. It is disconcerting that this milestone has been received with opposition rather than accolades at the local level, with threats of halting the first consignment from reaching the Coast. At the root of the problem is the sharing of resource revenues.
The policy and legislative framework that currently governs the oil and gas sector is the Petroleum (Exploration and Production) Act of 1984. This Act was passed before the promulgation of the Constitution of Kenya 2010[1] and does not comprise revenue sharing provisions between different levels of government or the community. Hence the government in 2012 commenced a process of aligning the legislation with the Constitution. The result of this process was the development of the Petroleum Exploration, Development and Production (PEDP) Bill 2015 with the extensive consultation of various stakeholders. The PEDP Bill initially proposed a formula that applied the derivation method of sharing of revenues which guaranteed preferential treatment to the region that produces the resource. The Bill adopted a revenue sharing formula that allocated 70% to the national government 20% to the county government and 10% to the community. The Bill was passed by both the National Assembly and the Senate, but was later referred back to Parliament with a new proposal that reduced the community share to 5% and capped it at a maximum of a quarter of annual county revenue allocations; and capped the county government share to a maximum of two times the annual revenue allocation from the national government.
Hydrocarbons are a finite resource whose production typically lasts 25 years. Therefore the need for prudent management cannot be gainsaid. This paper will highlight the constitutional underpinnings of natural resource revenue sharing and review a few practices globally.
Key Considerations
1.Constitutional provisions regarding natural resource ownership
Article 245 of the Constitution defines natural resources as renewable and non- renewable physical factors and components such as solar, water, genetic resources, biodiversity, forests, rocks, fossil fuels, mineral and other sources of energy. Natural resources are defined as public land by Article 62 (f), (g), (i) (j) and (k) of the Constitution which are vested in the national government in trust for the people of Kenya.
2.Constitutional provisions regarding natural resource management
That being said it is important to note that ownership of resources, management of resources and sharing of revenue from resources are separate and distinct issues. The management of natural resources is vested in both levels of government. Article 71 of the Constitution requires all natural resource agreements to be ratified by the national Parliament. Schedule 4 of the Constitution provides that the national government has the function of environment and natural resources policy development, conservation and management including energy policy whilst the county government has the role of implementing national government policy in specific areas of natural resources management and conservation. This overlap is best exhibited in the wildlife management sector where wildlife reserves are managed by county governments and the Kenya Wildlife Service manages national parks. The Petroleum Act 1984 and PEDP Bill 2015 centralize the management of hydrocarbons in national institutions and the relevant national Ministry.
3.Hydrocarbon value chain and revenues
To set the context it is important to highlight the various stages of hydrocarbon upstream operations. These start at the exploration stage where seismic surveys of the geological formations are undertaken, development stage where the infrastructure for extraction is constructed and set up and production stage when the hydrocarbons are removed from the wells and treated. Oil Exploration and Production Companies (OEPCs) are specialized companies in hydrocarbon upstream operations. They are contracted by governments which are the resource owners to undertake the upstream operations and may market the hydrocarbons. Tied to this value chain are revenues which are earned from several streams. These are surface fees for the acreage from which the hydrocarbons are derived, signature and other bonuses for the award of the contract and attainment of contractual milestones and training fees which are earned at the early stages of exploration.
Kenya has adopted the production sharing contract model which in addition to the above revenue streams divides the hydrocarbons produced into cost oil and profit oil. Cost oil is employed to reimburse the OEPC for the costs of exploration, development and production. Profit oil is the balance which is split between the OEPC and government under a pre- determined formula. The government in addition earns income tax and where it participates in operations it may earn dividends. The key point to note is that the bulk of the revenues are earned by government after several years of operations.
4.Legal provisions regarding natural resource revenue sharing
The Constitution does not distinguish between natural resource revenues and non- natural resource revenues. Article 202 provides that revenues raised nationally shall be shared equally among the national and county governments. Article 203 defines an indicator based sharing formula of national revenues which takes into account the national interest, public debt, the responsibilities of the two levels of government, poverty levels, development levels, fiscal capacity of counties and other indicators and informs the budgetary allocation of revenues between the counties and national government every year (vertical sharing) and among counties every five years (horizontal sharing) based on population, land mass and other factors. This sharing formula requires that not less than 15%[2] of all revenues collected by the national government are submitted to the counties.
5.Constitutional provisions regarding equitable benefit sharing
The Constitution sets a clear requirement for equitable benefit sharing with communities.
Specifically Article 66 (2) states that Parliament shall enact legislation ensuring that investments in property benefit local communities and their economies.
Article 69 (1) provides that the State shall (a) ensure sustainable exploitation, utilisation, management and conservation of the environment and natural resources, and ensure the equitable sharing of the accruing benefits;
Benefit sharing is a broad concept that includes direct payments, equity participation, CSR activities, investments in social and public amenities such as schools and local content in terms of employment, training or procurement of local goods and services. The principle of equitable benefit sharing has been employed in various statutes. The Community Land Act and in particular Part VII requires consultation and agreement on equitable sharing of the benefits derived from community land. It further proposes benefit sharing agreements based on principles of free prior informed consent, transparency and accountability. the Wildlife Conservation and Management Act 2013 gives a 5% share of benefits from national parks to local communities. The Mining Act of 2016 adopted the 70:20:10 national government: county government: community sharing formula.
Therefore communities based on or adjacent to the producing fields have a right to derive benefits as a form of compensation for the environmental and social impact of extraction and since the resource is derived and produced from their ancestral or traditional lands, failure to provide some form of benefit may cause secessionist tendencies or forced acquisition of the resource as is the experience in the Niger Delta of Nigeria. It is important to bear in mind that Article 63 of the Constitution recognizes and protects community rights to ancestral lands and therefore even though the national government may own and manage the sub- surface minerals, any grievances regarding the deprivation of the surface community land may play out as benefit/revenue sharing demands.
The Commission for Revenue Allocation (CRA) is the primary institution with the constitutional mandate to provide guidelines on the equitable sharing of national resources. Article 216 of the Constitution provides as follows:
(1) The principal function of the Commission on Revenue Allocation is to make recommendations concerning the basis for the equitable sharing of revenue raised by the national government––
(a) between the national and county governments; and
(b) among the county governments.
One may conclude from the above that Kenya has a mixed system that employs both the indicator and derivation methods of resource revenue sharing.
6.International practice
The international practice demonstrates that resource sharing formula vary widely. At one extreme are federal governments such as the United States[3] and Canada which decentralize the resource revenues which are fully owned, collected and managed by the sub- national governments that produce the resource. At the other end of the spectrum are Norway and the UK which centralize all the resources and do not share with the producing areas. In between these extremes are various variations including federal governments such as Nigeria which centralizes the revenues and employs a mixed system that allocates 13% of resource revenues to producing states and an indicator based system shares the rest of the revenues with national government, states and local governments. The Brazil Supreme Court is seized of a dispute between producing and non- producing states over a new revenue sharing formula passed into law that tried to reallocate some of the disproportionately high benefits accruing to Coastal states such as Rio de Janerio from the country’s offshore oil resources to non- producing states.
Recommendations and Conclusion
The government’s responsibility is to balance the various interests and to prudently manage the resource so that it benefits the entire country in an equitable and sustainable manner. The interests include those of the oil exploration and production company usually an international oil company, national government, local government, communities, land owners, non- producing regions that bear the brunt of infrastructure deterioration or environmental impact, current and future generations amongst others.
The issue of sharing of natural resources is a complex one and is at the heart of the devolution debate in Kenya. The community expectations of resources in their regions to uplift their standards of living, improve public services and develop infrastructure are immense. The national government on the other hand requires funds to finance its infrastructure development and has serious concerns regarding the absorption capacity of counties and the risk of resource revenues spurring conflict. The weak governance structures at both levels complicates the situation even further.
The following recommendations are proposed:
- In order to obtain social legitimacy, it is critical for Parliament to follow due process by complying with the public participation requirements and engaging the community and other stakeholders on the proposed amendments to the PEDP Bill. The perception of stealing a match will create mistrust in an area that has for decades felt sidelined and marginalized by the central government.
- Parliament to obtain the advice of the CRA whose mandate is to ensure the equitable sharing of revenues both vertically and horizontally under Article 216 of the Constitution.
- To unlock the impasse it is suggested that a sovereign wealth fund be established and independently managed with defined preferential disbursements to the producing counties.
- The Natural Resources Management department at CRA needs to develop a comprehensive resource revenue sharing policy with clear metrics. This policy will take into account all natural resources revenues in the country, clearly define the objectives of the revenue sharing formula, tie revenue allocation to functions and responsibilities, analyze the absorption capability, review the potential of local tax bases such as property taxes, claw back other allocations to establish equity between the counties, propose a sovereign fund, manage the challenges of the ‘resource curse’ and leakages from lack of transparency and accountability at both the national and county governments levels.
In conclusion, hydrocarbons are a finite resource that can transform Kenya’s economy only if the revenues are prudently managed. The constitutional provisions vest hydrocarbon resources in the national government for the benefit of all Kenyans. Of equal importance are the constitutional safeguards for communities to benefit from investments and resources within their locality. A consultative process of all stakeholders under the guidance of the CRA is the best solution to attaining a sustainable and equitable revenue sharing formula.
Annex 1 ( table to be inserted)

Natural Resource Revenue Sharing, UNDP September 2016
[1] The 2010 Constitution vested the sovereignty of the country in the people of Kenya and established a new set of values and principles of governance; it introduced a devolved system of government and created county governments; it enhanced the basket of rights including a special category for marginalized and minority groups; it reformed the land tenure system including recognizing community land; public finance management principles to enhance decentralization amongst other changes to the governance of the country.
[2] The allocation is estimated at about 30%.
[3] An important distinction in the case of the United States is that mineral ownership is tied to land ownership under the accession system and therefore there is private ownership of minerals and hydrocarbons.