Mining in Kenya: Legislating an Industry in its Infancy

Kenya’s Ministry of Mines was only created two years ago as a stand-alone ministry.

Meredith Veit

MACIG-Kenya-WEBKenya’s powerful tectonics, which long ago created the extinct volcanoes of Mount Kenya, Elgon, the dormant Kilimanjaro, and the faulting of the Great Rift Valley, have formed the country’s mineral deposits. Characterized by Archean granite, a host of meta-sedimentary and meta-igneous Neoproterozoic rocks, and tertiary to quarternary volcanics, Kenya’s geologic deposits include titanium, niobium, gold, soda ash, fluorspar, gypsum, coal, manganese, rare earth elements, and iron ore. Though the above list of minerals is indeed long, mining in the country is still in its early phases. Aeromagnetic surveys aim to provide a better indication of the quantity of Kenya’s mineral deposits, but these have not yet been completed. Kenya has long been agriculturally focused, with the sector accounting for 30% of GDP in 2014, but has only recently turned its attention to unearthing the value beneath its soil.

As with any young jurisdiction, Kenya faces its challenges. The mining sector is burdened by outdated legislation and a lack of transparency, fogging the clarity of its future and potential success. Kenya dropped 41 spots in the Fraser Institute’s 2014 annual survey of mining and exploration and is now ranked as 120 out of 122 and the least attractive country in Africa. Mining Cabinet Secretary Najib Balala admits that the mining sector has remained “greatly unrealized and unexplored due to a number of factors,” but ultimately he says it will be a major impetus in spurring Kenya’s economic growth. With mining only contributing 1% to the country’s GDP, Balala believes that, “this contribution is expected to rise significantly to 3% by 2017 and 10% by 2030,” as part of the national Vision 2030 development plan.

Many players are hopeful that by overhauling the sector’s regulatory framework, an investor friendly environment can be created. The current framework dates to the 1940s and over the last year, the relevant parties from the private sector, the Kenya Chamber of Mines, and the government have been actively involved in putting together a comprehensive reform bill that is still being considered through the legislative process. “The Mining Bill 2014 was considered by the Senate Committee who made a number of proposed changes—none of which were negative. The Senate then reviewed the revised bill, however, quorum was not met and therefore there was no vote. We are now awaiting approval and enactment of the Bill. The Kenya Chamber of Mines and other big mining players submitted suggested amendments to the bill,” explains Rainbow Field, Director of International Legal Services at Coulson Harney Advocates. The sector is hopeful that the bill will be approved by the end of 2015.

One important amendment that the government did adopt is a royalties sharing scheme that grants 70% of gains to the national government, 20% to the county government, and 10% to the local communities. Balala ensures that this formula will standardize a predictably fair system while allotting local communities the capital to develop their own assets and infrastructure. It is important to note, however, that Kenya is not EITI certified. Without that level of transparency, “it is impossible to know what revenue government receives and to what use it is allocated,” says Joseph Schwarz, General Manager of External Affairs and Development at Base Titanium, an Australian company with the largest mine in Kenya, Kwale Mineral Sands Project.

According to Field, “the new Mining Bill provides clear processes for the transfer and application of licenses, as well as secure transitional provisions favorable to those that already have licenses or leases. Areas of concern include provisions on government free carry interest, local equity participation, and compulsory acquisition.” In regards to compulsory acquisition, the nationalization of assets could be considered a breach of the Constitution as it infringes on basic property rights. At present, the bill reduces Kenya’s competitiveness and grants too much power to the government and Cabinet Secretary. For example, the right of pre-emption clause grants the government the right of first purchase on minerals extracted in Kenya, greatly impacting any existing or potential contractual agreements. In addition, there is no requirement for consultation before the Cabinet Secretary introduces regulations, which does assure investors that regulations will not change again suddenly.
Another point of contention is the proposed increase to royalty rates: 5% for gold; 10% for coal, titanium ores, niobium, and rare-earth elements; and 12% for diamonds. Industrial minerals such as gypsum and limestone are valued at 1%. Critics point to these rate increases to argue that the government is trying to profit from commodities that have yet to be discovered, much less commercialized. Schwarz argues that a “young jurisdiction, with no proven track record and very little exploration is not going to grow if royalties are increased beyond acceptable and competitively benchmarked norms.”
Rather than focusing on maximizing government revenue from a nascent industry, the government could pay better attention to the overall value that mines provide through infrastructure, employment, and skills development. An exemplar of mining’s positive impact is Base Titanium, which employs around 600 people directly and supports a further 2,600 indirectly. “85% of our non-labor goods and services purchases are Kenya sourced, local content,” explains Schwarz, in reference to the company’s Kwale Mineral Sands Project. That adds up to the equivalent of around US $35 million directly deposited into the local economy annually. “That’s just one mining operation. Imagine if we had four or five of these mines,” Simon Wall, External Affairs Manager at Base Titanium, adds.

George Kiarie, Managing Director of Kenjoro Enterprises, a small-scale, fully Kenyan gypsum mine, self-attributes civic and infrastructural development as a core business responsibility. Kenjoro utilizes their machines and resources to build primary and secondary schools for the surrounding communities as well as dig water basins to provide the animals with dependable places to drink. “In the end, communities gladly welcome our presence, and our knowledge of the country and its people is able to help nullify any relational problems before they arise,” explains Kiarie. Base Titanium and Kenjoro are active case studies of the benefits surrounding a long-term S-ROI focus.

Though still trying to find its way, the government is committed to growing its mining industry. According to Balala, “the Mining Bill 2014 is transformational to the mining sector in Kenya. Once enacted into law, the new Mining Act will enable the Ministry to establish a simple, clear, transparent, and predictable legal framework for the management of mineral resources in Kenya, a development that will streamline mining in the country and increase the contribution of mining to gross domestic product, increase employment opportunities and spur economic growth and development in the mining areas. “

When evaluating the opportunities within Kenya’s mining industry, one must bear in mind that a formalized sector is new for the country; the Ministry of Mines itself, for instance, was only created two years ago as a stand-alone ministry. The global mining industry will be watching Kenya closely over the next several months to see how it progresses. While Kenya, and the greater East African region, may be the new frontier for mineral resources, it is surely in need of internal help as well as the confidence of foreign investors.

This article was written as part of research being conducted by GBR for its upcoming Mining in Africa Country Investment Guide (MACIG) 2016. A pre-release report on the Central African Copperbelt was released in May 2015 and can be accessed here. To participate in this report, please contact Sharon Saylor at ssaylor@gbreports.com.

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