Kenya has started laying the legal framework for managing the revenues expected from recently discovered oil, with the proposed establishment of a $115 million wealth fund.

The Treasury has drafted the Kenya National Sovereign Wealth Fund (KNSWF) Bill, that aims to ensure proceeds from oil, gas and mining activities do not destabilise the economy.

The fund would build a portfolio of investments in Kenya and abroad, with a special-purpose investment vehicle consisting of a stabilisation fund, a future generations fund and an infrastructure and development fund.

According to the draft Bill, which is being discussed by relevant ministries and stakeholders, the stabilisation fund will facilitate levelling of current spending in a sustainable way, insulating the national budget and economy from the impact of volatility in revenues, including mineral and petroleum revenues.

The plan is to set up the fund before 2018 when Tullow Oil Plc and Africa Oil Corporation are scheduled to start commercial production of an estimated 600 million barrels of crude oil discovered in South Lokichar basin in northwestern Kenya.

READ: Kenya plans wealth fund before oil cash

“The thinking is that revenue from sale of resources needs a special arrangement for management and use. The reason for establishing a Sovereign Wealth Fund is sound, but it is unclear if this can guarantee income for future generations,” said Patrick Obath, managing consultant of Eduardo and Associates, a petroleum consultancy.

Kenya joins Tanzania and Liberia in the quest to establish a fund to prudently manage revenue from oil, gas and other minerals to avoid the “resource curse”. This will add to the $3.5 trillion in assets already held globally by natural resource funds.

READ: Sovereign wealth funds are key to proper management of resources

“Whether Kenya follows the path of the extractive industry becoming a source of conflict or greater prosperity and expansion of the economy depends on measures the country takes,” said Dr Collins Odote of the University of Nairobi.

A positive step is to develop robust laws, policies and credible institutions that would enable Kenya to realise the benefits from oil and minerals, he suggested.

Norway maintains the largest sovereign fund, estimated to be over $884 billion, and owns one per cent of the world’s entire stocks. Only four per cent of the annual surplus is invested in public projects.

“Kenya will face the challenge of striking a balance between pressing social needs and investing for the future. A clear mechanism is needed for the Sovereign Wealth Fund to make a return on investment,” said Mr Obath.

GlobalData, a consultancy firm based in London, estimates that Kenya’s block 10BB and 13T, owned by Tullow jointly with Africa Corporation, would generate $10 billion in revenues over a 30-year production period.

However, the amount would be shared between oil companies, national and county governments and local communities. The allocation criteria is intended to address equity and alleviate poverty in a country where about 45 per cent of the population live in abject poverty.

Analysts, however, say the success of the wealth fund would largely depend on whether its management is unshackled by politics, a key cause of failure of such initiatives in other countries.

READ: Is East Africa ready for sovereign wealth fund?

The draft proposes the fund be directed by a council comprising seven public servants and the president.

“Membership will have no politician. It will constitute public officials bound by constitutional values and principles of public service,” said Kenya Institute for Public Policy Research and Analysis (KIPPRA) principal policy analyst professor Joseph Kieyah.

The seed capital of Ksh10 billion ($114.9 million) would be drawn from annual budget estimates with a board of trustees managing the resources. Members of the board or the council found culpable of criminal liability and conflict of interest would be fined Ksh1 million or $11,494.25.

“The board shall, through an open, competitive and transparent process recruit and appoint such number of investment fund managers as may be necessary for proper discharge of its functions,” reads section 27 (1) of Bill. The board would prepare and publish annual reports with a balance sheet showing all assets and liabilities.

A study released by the Revenue Watch Institute -Natural Resource Charter (RWI-NRC) and the Vale Columbia Center shows that many natural resource funds are not meeting their policy objectives.

In Azerbaijan, Kazakhstan and Trinidad and Tobago, self-described budget stabilisation funds have failed to mitigate expenditure volatility caused by swings in oil prices.

A study in 2013 on 29 international SWF that had 2,662 transactions from 1984 to 2007, found politicians dominated the boards and were susceptible to political manipulation. Nepotism and rent seeking were likely to take place.

“We are unique in Kenya in that we are setting up our sovereign wealth fund prior to the phase of exploitation of natural resources,” Central Bank chairman Mbui Wagacha said in April.