2015/16 Yearbook Environment

Mining

The Constitution vests the ownership of the country’s mineral resources in the hands of the State on behalf of the people of Kenya. The milestone Vision 2030 views the mining sector as one of the key contributors to Kenya’s move to join the family of newly-industrialised nations in 15 years.

But it wasn’t until Kenya discovered vast resources of oil that the country woke to reality that mining can be a key player in the country’s in economic development.

For years, minerals contributed just one per cent to Kenya’s national revenue – solidly eclipsed by agriculture, tourism and Information, Communication and Technology (ICT). The Government is convinced mining can challenge the big three by contributing up to 10 per cent of the Gross Domestic Product (GDP).

Already, there’s widespread optimism among Kenyans that mining can indeed change the country’s fortunes for the better. The Government has created a fully-fledged Ministry of Mining, having realised that the sector has the potential to significantly contribute to national and local growth. Previously, mining activities in the country were handled by the Ministry of Environment and Natural Resources through the Mines and Geology Department.

The Ministry of Mining reports that Kenya has 13 large scale mining companies, five of them foreign-owed. The number is set to increase following recent developments in the sector, where authorities have now digitalised the process of mapping the country’s potential, and hastened the process of licensing and exploration.

Indeed, last March, the ministry announced plans to embark on a Kshs7 billion exploration drive to spur mining. As part of this initiative, authorities were set to launch the first state of the art mineral certification laboratory in the East Africa region to provide critical mineral analytical services.

According to the Kenya Mining Investment Handbook 2015, the country is vastly under explored for minerals and its mining sector is currently dominated by non-metallic commodities. Kenya is the third largest producer of soda ash in the world and the seventh producer of fluorspar. Metallic minerals currently sourced in the country include titanium, gold and iron ore.

Export statistics for Kenya indicate a constantly growing sector.

In February 2014, for instance, Kenya exported 25,000 tons of titanium ore but it is expected that with increased development, the country can contribute substantially to annual global supply. With further exploration and uptake of mineral rights, it is estimated that Kenya will have the capacity to position itself as a regional mining sector hub for Eastern Africa.

“Kenya … recently made announcements of having world class deposits of rare earth elements in the coastal region of the country. The recent discoveries are estimated to be worth Kshs6.24 trillion and will propel Kenya to the list of top five countries with rare earth deposits in the world. In addition, the country has the world’s top six deposits for Niobium. Commercial deposits of coal have been discovered in the north-eastern region of the country and are currently under review for potential uses and production,” says the Kenya Mining Investment Handbook 2015.

By the close of last year, authorities had gazetted 46 oil exploration blocks in various parts of the country. Reports indicated that Kenya has 400 million tonnes of coal reserves with estimated value of Kshs4 trillion, 200 million tonnes of mineral sand at the Coast, and 140 million tonnes of ore reserves, and 140 million tons of titanium.

The titanium project in Kwale is expected to produce 80,000 tons of rutile per year, or 14 per cent of the world’s supply, 330,000 tons of ilmenite and 40,000 tons of zircon once fully operational.

Further reports indicate that western Kenya has substantial potential for gold as well as copper, lead and zinc.

Kenya’s treasure trove includes soda ash, fluorspar, titanium, niobium and rare earth elements, gold, coal, iron ore, limestone, manganese, diatomite, gemstones, gypsum and natural carbon dioxide.

Kenya’s natural resource wealth is yet to be exploited and there could be significant opportunity for growth, according to the Kenya Mining Investment Handbook 2015.

Among challenges facing the sector include huge financial outlays for exploration and production of oil, gas, and other mineral resources; the need to attract capital for exploration and production activities; limited technical capacity and shortage of specialised local manpower in mining, petroleum, geology, geophysics and reservoir and production engineering; and inadequate development of infrastructure, as well as a weak legal and regulatory framework.

Experts point out several risks if discoveries in the extractive sector are not handled well. They include:

  • The danger of Kenya having the ‘oil curse’ and the ‘Dutch disease’.
  • Inadequate legislation that does not reflect Kenya’s priorities.
  • Incoherent and overlapping policies that do not harness the benefits that accrue from the extractive sector (ES).
  • Social unrest related to misinformation on the benefits of oil, gas and mining.
  • Misallocation of oil and gas revenues, such that communities and more specifically women, do not benefit.
  • Illicit financial flows emanating from the ES operations.
  • Lack of transparency and accountability mechanisms resulting in government negotiations with companies rather than direct bidding.

Interventions

The Ministry identified three critical areas of intervention: A robust legal framework that is stable, logical and equitable (which resulted in the Mining Bill, already forwarded to Parliament); transparent and efficient processes; and equitable sharing of Kenya’s mineral potential between our communities, the people of Kenya and investors.

The ministry launched its strategic plan – the first since Independence – and the Kenya Mining Investment Handbook of 2015, which is the first guidebook for investors and those with an interest in the mining sector of Kenya.

Mining is an energy-consuming activity, and it’s because of this that the Government has embarked on reducing the cost of energy in the country and is on track to deliver 5,000MW of electricity power output to the national grid by 2017. About 514.9 megawatts of electricity has been added to the national grid in the last two years, to make available a total of 2,125 megawatts.

In his State of the Nation Address in the National Assembly in March, President Uhuru Kenyatta said the greater supply of electricity had translated into an average reduction in consumer bills by 25 per cent in the period between August 2014 and February 2015. Costs of electricity to industry had also fallen, making Kenya more competitive location for manufacturing.

Potential investors and manufacturers see the drop in energy bill as incentive for further investment.

Once complete, the Standard Gauge Railway (SGR) will be another milestone impetus to mining. Easy transport of raw materials and finished products is key to the development of the mining industry.

The new railway, expected to dramatically cut cargo transport costs by a further 60 per cent once complete, is an addition to the substantial expansion and modernisation of the Mombasa Port. The port expansion and modernisation has led to a reduction in freight time by 75 per cent.

The Lamu Port-Southern Sudan-Ethiopia Transport Corridor (LAPSSET) project whose construction started three years ago will open up northern Kenya to investments in the mining sector.

Activities

The Ministry of Mining has had a very active year, which started off by the launch of the Quality Management system-ISO 9001:2008 in January 2015. It has planned several activities and events over the next two years, including:

  • Conducting a national airborne geo-physical survey, mineral exploration and evaluation;
  • Creating special Mineral Processing Economic Zones;
  • Establishing an internationally accredited Mineral Certification Laboratory, Mineral Audit Agency, Mineral and Metal Commodity Exchange, Regional Geological Survey and Research Centre, Mineral Sovereign Fund, National Mining Corporation, National Seismological Network;
  • Undertaking geo-hazard mapping and monitoring;
  • Facilitating commercial production of Kwale mineral sands project (titanium);
  • Developing a single fiscal regime for mining, and a National Mining Policy, Legal, Regulatory and Institutional Framework; and
  • Participating in the Extractive Industry Transparency Initiative.

INSTITUTIONAL

The Mining Act (Cap. 306) is the key institutional, legal, and regulatory framework for mining. This significant legislative plank provides that minerals are vested in government under the administration of the concerned Cabinet Secretary, Principal Secretary and Commissioner of Mines and Geology.

The mandate of the Ministry includes: Mineral exploration and mining policy and management; inventory and mapping of mineral resources; mining and minerals development; policies on the management of quarrying and mining of rocks and industrial minerals; management of health conditions and health and safety in mines; policy around extractive industry; resources survey and remote sensing; and maintenance of geological data (research, collection, collation, analysis).

Other concerned institutions include the Ministry of Environment, Water and Natural Resources, the Ministry of Lands, Housing, and Urban Development, the National Land Commission, NEMA, The National Treasury, the Kenya Revenue Authority, the Kenya Investment Authority and the county governments.

The Kenya Chamber of Mines was formed 15 years ago, to represent the interests of Kenya’s miners, exploration companies, and mineral traders. The Chamber also seeks to associate these interests with national and local community interests, and to involve other stakeholders to ensure that these interests do not cause harm to the environment and the communities.

The Chamber endeavours to be the leading mineral industry representative and lobbying body in the country, the preferred interlocutor for the Government, communities and other stakeholders with respect to mineral related issues, and a driving force towards the development of the industry.

The Environment and Land Court was established to arbitrate in disputes involving land, environment and utilisation of natural resources.

Specifically, this court hears and determines disputes relating to environment and land, including environmental planning and protection, trade, climate issues, land use planning, title, tenure, boundaries, rates, rents, valuations, mining, minerals and other natural resources; compulsory acquisition of land; land administration and management; public, private and community land and contracts, choices in action or other instruments granting any enforceable interests in land.

LEGISLATION

The sector is governed by several laws, among them the Constitution, the Mining Act, the Petroleum (Exploration and Production) Act, the Income Tax Act, the Environmental Management and Coordination Act (EMCA), the Land Act and the Public Finance Management Act.

More laws are in the pipeline. Already, the Petroleum (Exploration and Production) Bill, the Mining Bill, the Sovereign Wealth Fund Bill and the Finance Bill have been drafted and await debate in Parliament.

But the Mining Act is the main law that controls and manages all mineral exploration, exploitation and trading activities in the country. It was promulgated in 1940, and has since been reviewed twice, in 1972 and 1987 to bring it up to date with changes in the global mining industry.

Bills

Whereas the Mining Act may have served the country well, this piece of legislation is unquestionably obsolete. The raft of mineral discoveries and the increased interest in exploration countrywide has made it apparent that the country restructures the relevant legislative regime in tandem with the changing times.

It’s for this reason that authorities have drafted the Mining Bill expected to be debated by the National Assembly by the close of the year. If passed, the envisaged mining law will consolidate all hitherto pieces of legislation relating to mining and introduce an entirely new licensing and taxation regime. The proposed law seeks to give the Government a 10 per cent stake in new projects.

The Mining Bill generally applies to all minerals, apart from petroleum, hydrocarbon gases and groundwater. On the other hand, the Energy Bill seeks to consolidate the hitherto disparate legislations in the energy sector – oil, gas and nuclear.

For authorities, both the envisioned laws – the Mining Bill and Energy Bill – are critical for posterity, even more coming at a time when the pace of oil exploration has peaked since the discovery of oil in Turkana a couple of years ago.

The Natural Resources Bill as proposed by the Senate seeks to ensure counties benefit from the natural wealth in their respective regions. Importantly, it proposes the establishment of the National Natural Resources Commission, county and community natural resources committees to supervise the utilisation of natural resources at the national, county and community levels.

Policy

At the policy level, the extractive sector is covered in the second Medium Term Plan (MTP) of Kenya’s Vision 2030 – which is classified as priority number seven sector.

Other subsidiary blueprints include the Draft National Minerals and Mining Policy, and the Draft National Energy Policy and the Mining Strategic Plan 2013-2017.

The sector is now mid-stream in enacting this strategic plan, which lays the framework for which the sector operates in the period in question – formulating and implementing laws and policies; carrying out geological surveys, exploration and deposit evaluation; promote commercialisation of mining; promote use of ICT within the sector; and mobilise resources.

The new blueprint, Mining Strategic Plan 2013-2017, comes on the heels of its previous Strategic Plan 2008-2012 that identified challenges faced by the sector. They included conflicting interests among stakeholders, inefficient productivity (owing to obsolete technologies), lack of proper coordination, bureaucratic systems, laws and policies and inadequate budget allocations.

LICENSING

Several foreign firms and local ones are involved in mining in many parts of the country. Dozens of others were licensed to prospect this year.

Base (K) Titanium Limited, the Kenyan subsidiary of Base Resources Limited is developing the Kwale Mineral Sands Project, Africa Queens Kenya Gold is a Canadian company licensed to explore 1,700 sq.km for gold and other metals, China’s Fenxi Mining Group has rights to develop coal blocks in Kitui County, to mention a few.

Despite the global interest in Kenyan mining sectors, conflicts have arisen among some players. In May, the Ministry of Mining cancelled 65 expired mining licenses.

But Cortec Mining Kenya (CMK) and its parent company in the UK, Cortec (Pty) Ltd and Stirling Capital Limited filed an application at the International Centre for Settlement of Investment Disputes (ICSID), in Washington. It seeks to compel Kenya under international investment laws to compensate it for cancelling its license.

Cortec had in 2013 announced the discovery of rare earths and niobium whose value it estimated Kshs6.1 trillion.

TAXATION

Effective January 1, 2015, a new tax regime for mining came into being. The new legislation aimed at streamlining the fiscal policy of the extractive industry has been expanded to cover not only the taxation of petroleum companies, but also companies in mining.

Importantly, the new regime draws a distinction between local (resident) and foreign contractors (non-resident). Sub-contractors without a PE (permanent establishment in Kenya) are subject to withholding tax while those with a PE are taxed on business profits.

The plank of the new regime:

  • Payments made to non-residents are subject to subject to a 5.6 per cent withholding tax; those with PE are subject to 37.5 per cent tax on adjusted profits.
  • Any expenditure on social is tax deductible, subject to approval by the Treasury Cabinet Secretary
  • Taxes paid form part of the Government’s share in production sharing contract
  • The payment of interest, royalties and management fees by a branch of a petroleum company to its head office is no longer tax deductible

As stated earlier, the mining industry is set to change the fortunes of the country, and that’s why it is a priority sector in the crucial Vision 2030.

In May 2015, President Uhuru Kenyatta urged African countries to develop policies that will enable the continent to reap maximum benefits from its wealth. “For far too long we have allowed our resource to be exploited to benefit other people, time has come to change that narrative,” he told a delegation of the Southern and Eastern African Mineral Centre (SEAMIC).  The region, he said, must ensure that it is not short-changed by multi-national corporations.

“The discovery of minerals should herald a brighter future for us – jobs for our youth and improved living standards for our people – but not civil strife and poverty.”