Deloitte is very well established globally. How does the company serve East Africa’s mining industry?
Deloitte East Africa has its headquarters in Nairobi, Kenya, but also has offices in Mombasa, Tanzania, Uganda, Ethiopia, Rwanda and Burundi. We draw on our wide global network to serve extractive players, including the upstream petroleum and mining companies. We are dominant in the extractive space in East Africa and serve most of the licensed companies and their subcontractors.
In Kenya, we have had recent discussions with the Cabinet Secretary for Mining, who is very passionate and enthusiastic about the industry, and has proposed to formulate a six pack model – a one stop depository of all policies relating to country’s mining sector. We have emphasized to him the necessity of having in place a comprehensive and holistic mineral fiscal policy as part of his six pack initiative that will inform the evolution of the country’s mining taxation and fiscal regime going forward. We await to see how this will be implemented.
How much potential does Kenya’s mining industry have?
Kenya is touted to have great potential though the country’s geology is yet to be fully explored. To affirm this potential, the Kenyan government is embarking on a country-wide airborne survey. Whilst geology is key, the supplementary legal, fiscal and taxation regime is equally important. Kenya recently passed a new Mining Act, which has been hailed as progressive and modern, but we will further examine its relevance to propel the sector forward as it gets implemented.
Kenya also has an edge in terms of its human capital, which is hard-working and entrepreneurial. There is great focus on getting locals involved in the mining sector as well as improving the conditions under which artisanal miners operate, though more effort is still required. The fiscal and tax regime can certainly play a key role in this regard to encourage local entrepreneurs to get involved in the mining sector, especially in exploration which is vital for the development of the mining sector.
What are some of the challenges that still need to be addressed to support the growth of the mining industry?
It is only more recently that greater emphasis has been put on the mining sector to optimize its benefits to the Kenyan economy. Sometimes, the key sector stakeholders have had a short-term outlook which can impede the development of the sector given its long term profile. There is also a need to boost exploration activities because the discoveries made today will be tomorrow’s productive mines.
A few years ago, a capital gains tax was introduced on the transfer of mining licenses to supposedly tax “windfalls” arising in the sector. The initial law was very punitive although was subsequently revised. The transfer of mining licenses fosters mineral sector growth and development, and it is therefore essential to place less onerous restrictions. Looking at the new mining law, the Cabinet Secretary now cannot unreasonably withhold consent for the license transfers, which is sending the right message.
How can the government address some of these challenges going forward?
A lot more needs to be done to encourage local entrepreneurs and individuals to partake in the mining sector. There is now a requirement under the new Mining Act for mining companies that have made discoveries to list at least 20% of their shareholding on the Nairobi Stock Exchange. Discovery is however the reward of tedious exploration activities where investment, especially by the locals, seems to be lagging behind.
The tax and fiscal regimes can create an incentive if individuals are able to offset the potential tax losses in unsuccessful exploration activities against other business incomes as is the case in some of mineral rich countries. This would encourage individuals to take up the risky venture of mineral exploration.
There are also some aspects of the fiscal regime that are punitive to foreign shareholders who provide interest free loans to their investment vehicles in Kenya to fund their exploration activities. This needs to be rethought as exploration stage activities are largely funded by the shareholders either via equity or debt.
The general overriding question the government should ask in formulating the fiscal and taxation policy in respect to the mining sector is whether the regime taxes profits or investment. If the tax imposed claws back on the funds available for investment, this is inconsistent with the government aspiration of attracting foreign direct investment.
What role will Deloitte play in the development of Kenya’s mining sector?
We will continue to serve all companies and stakeholders involved in the extractive sector. We commit to continue improving our abilities and capacity to provide the most value adding services in the emerging extractive industry in East Africa.
The future of the mining sector in Kenya is bright if we are to go by the messages communicated by the government stakeholders. Investment attractiveness is all about perception; therefore, if the government is seen to be enthusiastic and proactive in creating a favorable environment for mineral exploration and development, we are likely to see a lot of future investment in the sector. We hope the government will walk the talk.