Our mining policy and laws need more work

By Cliff Otega

Kenya was the venue for the Eastern Africa at the Mining Business & Investment Conference in October. Hosted by the Kenya Chamber of Mines and the Ministry of Mining, it was an indication that Kenya is open for business.

A key takeaway from the conference was Tanzania’s Deputy Minister for Energy and Minerals Stephen Masele urging Kenya to embrace the concept of a mining strategic triangle, in which investors, Government and local communities work together in a partnership to maximise benefits from the industry.

He also urged the Kenya Government to avoid unilateral decisions as the sector develops. October also saw the release of the interim report of the Mohamed Nyaoga-led licence review task force. One snippet in the report  is important.  The task force, in its introduction, states:  “It is important to note the current Bill in Parliament is not anchored on any policy framework...”

Since the Mining Bill referred to will be used to regulate the industry, does a policy framework matter? If it does, how would we go about developing one? Evidence from other mining nations indicates that frameworks are very important.

Tanzania released its second policy in 2009 and Zambia just released an updated policy. Tanzania credits its 1997 policy with increasing mineral exports from just $26 million to US$1 billion in 10 years.  Zambia also credits its 1995 policy with attracting investment of $5 billion by 2011. Rwanda’s, while yet to be realised, sets very clear goals and targets over the medium term.

Every country’s industry is different, but all countries with mineral endowments aim for mining to make its maximum contribution to sustainable development. In fact, these words are contained in the 2010 policy framework published by the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF).  Thankfully, Kenya is a member.

The IGF framework lists six key areas to be addressed: legal and policy environment, financial benefit maximisation, socio-economic benefit maximization, environmental management, post-mining transition and artisanal and small scale mining. While these areas are equally important, I will focus on the first two given Kenya’s state of play. We are yet to determine our geological potential through exploration. Therefore, it would seem that attracting exploration investment capital should be at the forefront of the mining policy.

The hard truth is that there is little scope for immediate financial return from exploration. Exploration has, perhaps, the highest risk in this sector. The success rate hovers at about one significant (or economic) discovery for every 1,000 potential targets explored. Of course, a successful find, particularly in a frontier country like Kenya, also provides invaluable marketing opportunities. The ripple effect of this can far outweigh any short-term revenue measures. The lesson here is that exploration builds mines and mines build an industry. The more mines the greater the benefit to the Government and people of Kenya.

All successful mining policies have as their bedrock a commitment to provide an internationally competitive, predictable and stable fiscal regime. In practice, this means benchmarking tax rates, incentives, royalties and various fees against regional, continental and international peers.  All things being equal, a country with a royalty rate of 10 per cent is less attractive to an investor than one with five per cent. Additionally, a policy of gradual changes is always more beneficial than sudden dramatic swings in policy. 

The largest benefit is obtained from operational mines, not just through taxes and royalties, but through the millions of dollars spent directly in the local economy. This is the true benefit a mining operation brings to a local economy. It is this spending that creates indirect jobs, builds a service industry, and fully integrates the mining sector into the wider economy.

The real challenge for a mining policy is to achieve a balance between optimising revenue while permitting investors an adequate rate of investment return. There is no silver bullet in striking this balance.

The writer is a Nairobi-based mining consultant with over 10 years’ experience in the global mining industry.