MUGWE: The G-to-G fuel framework is a wicked problem

A story is told about a tollbooth keeper on a mountain road. He is the only man who knows the road, its bends, its potholes, and gradient. He charges travellers to pass through this road.

One day a traveller asked him, how do you know there will always be travellers passing through your road? The tollbooth keeper smiled and said, because I am also the one who closes all the alternative routes. 

This is Kenya today concerning fuel.

The question of whether Petroleum PS Mohamed Liban, EPRA Director General Daniel Kiptoo, and KPC Managing Director Joe Sang are guilty of the economic crimes for which they were arrested is for the courts to decide.

Instead, lets interrogate the system that made the fuel scandal not merely possible, but structurally inevitable because we have been here before, and unless we change the architecture rather than the occupants, we are simply kicking the can down the road.

In public policy, there is a concept called a ‘wicked problem’. It is one for which a solution attempting to cure a problem causes a new problem that was either unanticipated, or unavoidable given the constraints of the original problem.

The problem that is being solved is often entangled with competing interests and institutional failures such that every attempted solution generates new unanticipated problems of their own.

It cannot be solved. It can only be managed because every strategy carries its own pathology. The wickedness is in the structure, not in the foresight of the policymakers.

Kenya’s fuel sector has been a textbook wicked problem since the 1990s. For nearly two decades, we ran the Open Tender System (OTS), which was competitive, market-based, and theoretically transparent.

Each month, oil marketing companies aggregated their requirements, the Ministry called a tender, and the lowest bidder won the import contract. The logic was sound. The outcome was not.

The OTS had three chronic pathologies. First, it concentrated market power in three large oil marketing companies (OMCs).

They could hoard stock, speculate on replacement costs and during shortages prioritise the transit market to neighbouring countries because these buyers paid cash in foreign currency, while the Kenyan market was tied up in the government’s stabilisation fund arrears.

Second, under the OTS, the winning bidder had to pay the international supplier in US Dollars within roughly five business days of the vessel docking. Hence, the OMS always had to have ready foreign exchange to pay for the fuel.

By late 2021 and early 2022, the Central Bank's institutional forbearance on the shilling reached its limit. OMCs needed roughly $500 million monthly, but the banks couldn't provide it. This caused a shortage that led to long queues at the petrol stations.

Third, the OTC gave Kenya no sovereign guarantee, credit facility, or buffer against the price spikes that a commodity market increasingly dominated by geopolitics could deliver without notice.

When the Russia-Ukraine war began in early 2022, Kenya had no institutional infrastructure to absorb the shock. The country was buying fuel at the peak of the commodity spike with a weakening shilling and zero sovereign buffer.

To solve these problems, in 2023 the Government to Government (GtoG) framework was introduced as a direct, rational, and in many respects successful response to the OTC failures.

By locking in supply from Saudi Aramco, ADNOC, and Emirates National Oil Company under a sovereign guarantee with a 180-day credit facility, it removed the OMC hoarding incentive. It also eliminated the forex vulnerability, and gave Kenya the price stability it had not had in years.

Fuel became available, prices predictable and there were no queues. The problem was solved. Or was it?

And then as wicked problems do, the G2G framework produced its own pathology. Regulatory capture.

This is the process by which agencies created to act in the public interest progressively come to advance the commercial or political interests of the actors they were designed to regulate.

It thrives when only the people inside the regulatory architecture understand its mechanisms better than anyone outside it. It thrives when their incentives for personal gain align with the structural opportunities the architecture creates, and where there is no independent verification layer to interrupt the alignment.

The G2G framework, by design, concentrated procurement authority in a small number of agency heads. The Principal Secretary controlled policy and authorisation. The EPRA Director-General controlled regulation and quality certification. The KPC Managing Director controlled the fuel pipeline.

Three men, three offices, had total control of the supply chain from data reporting to distribution. Though separate, they are not fully and functionally insulated from each other.

The IMF had already observed that the G2G distorted market competition by nominating only three OMCs on a liquidity basis and giving five major banks outsized influence over dollar allocation.

These were the efficiency features that made G2G work. They were also the chokepoint features that made regulatory capture possible.

Begs the question. What then should Kenya do? Can we emulate Japan, South Korea, and the European Union?

In October 1973, the Arab oil embargo cut fuel to Japan with no warning and no alternative. Japan imported 90 per cent of its oil from Arab states and had zero strategic reserves.

The economy contracted. Inflation spiked to more than twenty per cent. Factories slowed. The people experienced material scarcity for the first time since the postwar reconstruction.

They called it the sekiyu shokku, the oil shock, and it exposed how vulnerable the country was. South Korea, in the middle of its industrial sprint and entirely dependent on Middle Eastern oil, faced a direct threat to the solvency of its development project.

Both countries drew identical lessons about the weakness of their institutional design. Japan passed the Petroleum Stockpiling Law in 1975. South Korea established the Korea National Oil Corporation (KNOC) in 1979.

Both built their strategic reserve infrastructure not out of abundance but out of trauma, and the design principle they embedded in that infrastructure is the one Kenya ought to adopt. And that is the separation of functions.

Japan today holds approximately 600 million barrels, which is equivalent to more than 90 days of imports managed through the Japan Oil, Gas and Metals National Corporation (JOGMEC), a semi-public institution separate from the Ministry responsible for energy policy.

The agency that manages the reserve is separate from the sector regulator, and the regulator is separate from the agency that procures the fuel, which in turn is also separate from the agency that operates the pipeline. Each function is separately institutionalised, separately audited, and separately accountable.

South Korea holds more than 160 days of import cover through KNOC, with stock data published publicly, verified independently, and reported to a Ministry that has no procurement function of its own.

In 1968, the European Union passed a directive requiring all member states to hold strategic reserves through institutions that are structurally separated from their procurement chains. Germany's Erdölbevorratungsverband is a mandatory stockholding entity funded by industry levy, governed independently, and audited annually against publicly disclosed data. It has no role in procurement, cannot declare an emergency, nor authorise a waiver.

The vulnerability that the MV Paloma tanker exploited is precisely the one that Japan, South Korea and EU eliminated. When the people who report how much fuel you have are the same people who buy the fuel, regulate the buyers, and authorise exceptions to procurement rules, manufacturing a shortage becomes as easy as ABC.

G2G was the least bad available response to a wicked problem. However, it did not eliminate the underlying pathology. It relocated it to the MV Paloma. The OTS's pathology lived in the market-hoarding OMCs with oligopolistic power.

The G2G's pathology lives in the state captured chokepoint of concentrated authority where those who stabilise supply also made the emergency procurement window exploitable. Kenya moved the corruption risk from the private sector into the public sector.

I submit that Kenya must as a matter of urgency implement three structural reforms. The first is creation of an independent National Petroleum Stockholding Agency. This institution should be modelled on Germany's Erdölbevorratungsverband with a single statutory function. To hold, verify, publish, and audit Kenya's strategic petroleum reserves.

It should be funded by an industry levy, governed by a board with no operational procurement role, and prohibited by statute from having any involvement in procurement authorisation, quality certification, or pipeline operations.

Its stock data should be published in real time on a public dashboard, verified by the Auditor-General, and submitted monthly to Parliament.

The second reform is a mandatory 90-days strategic reserve. Kenya currently holds 15 to 21 days. Kenya being an IEA association country is not obligated to adhere to the 90-day reserve requirement.

However, the standard exists. The argument against building reserves is always the capital investment required to purchase and store 90 days of fuel.  

The counter-argument was exposed in the MV Paloma scandal which cost Kenya Sh4.8 billion on a single shipment, and the second cargo would have brought the total to Sh8 billion.

A 90-day reserve, fully built, removes the supply anxiety that makes manufactured emergencies credible. You cannot panic a population into accepting substandard fuel at inflated prices if they know the country has three months of supply sitting in verified, independently audited storage. The reserve is not just a physical buffer. It is a corruption deterrent.

The third reform is a transparent competitive procurement window for the shortfall that the G2G may not cover. This gap should be converted into a transparent open tender with published price data, bidder identities, quality certification, and a mandatory comparison against the prevailing G2G rate.

Finally, my unsolicited advice is to President William Ruto. You have trodden where your predecessors feared to tread. Here is one more opportunity, and this time the political cost is lower because the fuel scandal has done the work of exposing the vulnerability for you.

Do not let this moment become merely an accountability story. Three men have resigned. Three others will be appointed. If the architecture does not change, the outcome will not change. Only the names on the door. The arc is not accidental. It is the business model.

Instead, implement the three structural reforms with the separation of functions. Japan did it in 1975. South Korea in 1979. EU in 1968. Don’t innovate. Just emulate.

The solution is not to find more honest tollbooth keepers. It is to build the bypass road, publish the map, and put the fuel stock data where every Kenyan can see it.