Kenya’s first mining laws were promulgated in 1940. The Unwrought Mineral Act and the Diamond Industry Protection Act served as the legislative backbone of the industry for more than 70 years, during which the sector seldom accounted for more than 1% of the nation’s GDP. The slow growth of Kenya’s mining industry was in contrast to its East African neighbours Uganda and Tanzania, both of which found success shortly after gaining independence – the exploitation of their mineral resources generating a useful stream of revenue for government coffers.
However, a series of discoveries around 2008 thrust Kenya’s neglected mining industry into sudden prominence. Among the most significant findings were rare earth deposits in Kwale County, estimated to be worth more than KSh5trn ($49bn), along with a major coal discovery in Mui Basin, valued at over KSh3trn ($29.4bn). These developments caused the government to rethink its regulation of the sector with a view to boosting revenue from it and encouraging greater investment.
First Attempt
The Mining Bill of 2013 replaced the 1940 legislation and introduced a number of new institutions to the sector. These new bodies included the National Mining Corporation, the government’s mining investment arm; the National Mineral Certification Laboratory; the Minerals and Metals Commodity Exchange; and the Minerals Sovereign Fund.
Significantly for mining companies and operators, however, was the cancellation of a number of licences and a raft of royalty hikes which were applied to a wide range of resources. The levy on gold went up from an average of 3% to 5%, while coal’s levy was placed at 8%. Other significant rate rises were applied to gemstones, fluorspar, diatomite and mineable CO – which were all set at 5% – and metallic ores such as iron, manganese, chromium and bauxite (8%). The way in which royalties were distributed has also changed. While the national government claimed 75% of the accrued royalties for itself, it made provisions for the regions in a bid to ensure their support for the further development of the industry. Local communities were granted a 5% share of royalties, and counties in which mining projects were undertaken received 20%.
Great Potential
The Ministry of Mining (MoM), today known as the Ministry of Petroleum and Mining, was formed in 2013 with the aim of revamping the sector. This effort included the cancellation of 65 licences issued under unclear circumstances in May 2015. Additional efforts included the creation of a geological data bank and the Mining Cadastre Portal, an online platform enabling stakeholders to engage directly with the MoM. Major infrastructure projects were also initiated, including newly paved roads, port efficiency improvements and construction of the Standard-Gauge Railway project. The nation’s first large-scale mine, the Kwale mineral sands project, began production in late 2013. The MoM reported in 2015 that recent discoveries of rare earth deposits, including ilmenite, rutile and zircon were estimated to be worth $62.4bn, a value sufficient to propel Kenya into the top-five countries globally for the resource. Metallic minerals currently produced in the country include titanium, gold and iron ore, prompting a number of global mining companies to position themselves within the sector.
These include Tata Chemicals Magadi, Africa’s largest soda ash producer and one of Kenya’s primary exporters; Kenya Fluorspar, the second-largest mineral income earner for Kenya; a number of large cement manufacturers, including Bamburi Cement and East African Portland Cement; Acacia Mining, working in the Ndori Greenstone Belt, which has shown considerable potential for gold, copper, lead and zinc; and Fenxi Mining, which, together with a domestic joint-venture partner, is developing two areas in the Mui Basin where 400m tonnes of coal reserves were discovered in 2010, worth an estimated KSh3.4trn ($33.3bn).
Slow Growth
Nevertheless, the promise of the sector has yet to be fully realised. When the new regulatory framework was implemented in 2013, mining and quarrying activity accounted for 0.86% of GDP, according to the National Bureau of Statistics. In 2014 this figure fell to 0.83% and in 2017 it was 0.75%. One explanation for this muted performance is the perception that Kenya is a challenging state in which to establish and operate a mining concession. The Fraser Institute, an independent, non-partisan research and educational organisation, provides one of the most well-regarded measures of any given area’s strengths and weaknesses. This metric takes into account both geological assets and the policy environment – including regulations, taxation, quality of infrastructure and other issues. The country ranked 90th out of 91 jurisdictions in the institute’s Investment Attractiveness Index. The survey estimates that approximately 40% of an investment decision is determined by policy factors, highlighting that the government has considerable influence over the future growth of the industry.
Fresh Approach
The government has laid the groundwork of its response to this challenge, having promulgated the new Mining Act in 2016. The law is applied to all minerals, with the exception of petroleum and hydrocarbon gases, and aims to bring Kenya in line with international best practice. This includes greater transparency, environmental protection and distributing decision-making powers between the MoM and the newly created Mineral Rights Board. This latter body is charged with governing the sector, and has assumed the responsibility of issuing licences and other approvals.
However, while the 2016 Mining Act has been broadly welcomed, some of its provisions have caused concern among stakeholders. From a procedural point of view, the enhanced role of county governments – which are now involved with licensing decisions and the provision of surface rights – has added another layer of complexity to the establishment of new operations. Indeed, the application processes defined by the new law have been described by global professional services company KPMG as having elaborate application procedures.
Another major challenge is that the central issue of royalty payments is only partially addressed by the legislation. The Mining Act defines how the royalties received by the government must be split between the regions and local communities, and establishes rules regarding the timing of payments, but makes no reference to the rates which are to be applied. Instead, this element was covered by accompanying regulations. Similarly, the question of how tax will be applied to any given mining operation requires further clarification. However, in 2017 the government announced it was collaborating with the UK Department for International Development-funded Extractives Hub to formulate a revised royalty schedule. “We want to be attractive, but we also want to get the most out of our resources, based on a win-win spirit,” Dan Kazungu, then-minister of mining, told local press in July 2017. Meanwhile, the National Treasury has begun consultations with the industry as part of its review of the corporate tax rate for mining companies, which currently stands at 30% for domestic firms and 37.5% for foreign operations.
Remaining Competitive
In 2018 the full effect of the 2016 Mining Act had yet to be felt. While the legislation has provided welcome clarity in some areas, such access to land for mining operations, it has left the crucial matters of royalties, fees and taxation to additional regulation. Nevertheless, according to the Extractives Hub study, Kenya’s approach to revenue flows and the government’s share of them falls broadly within norms observed in peer countries. The government will be mindful of the need to stay within this internationally established band to remain competitive and attract investment.
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