Balala’s powerplay threat to investors

By Macharia Kamau

Since taking up the post of Cabinet Secretary at the Ministry of Mining, Najib Balala has been on a roll. In the five months he has been in office, Mr Balala has been able to rub players in the mining industry the wrong ways.

Immediately he took office, he revoked a number of their mining licences, increased royalties paid by miners and proposed a new law that has left investors in the least comfortable.

And recently, during a mining business and investments conference, Balala gave a speech that outrightly told off miners that if they are not comfortable with the new royalty rates, which have been gazette, they are free to leave.

Ironically, the approach used by Balala to manage this new docket is certainly old fashioned and worked in the days when ministers were politicians and needed to stay politically correct to win voters’ loyalty.

It’s important that the mining ministry must take decisions competently and constructively. Otherwise, they risk losing the big mining investments, which are vital to developing new reserves for the overall benefit of the economy.

For example, BHP’s departure from Guinea after the country adopted new mining codes in 2011 led to concerns that the country could be scaring off serious industry players whilst opening the door to lower quality investors. Such a scenario is one thing that Kenya can ill afford for its budding mining sector.

At the recent mining conference, tension in the room – even anger – was evident among officials of some of the major mining firms that were represented. In fact, when it came to the session where participants are allowed to pose questions to the guest speakers, none of the major mining firms asked Balala any questions, probably as a sign of protest.

That day, the list of Balala’s enemies in the industry likely grew.

Borrowing heavily from the Mining Bill, the Cabinet Secretary said miners operating in Kenya would have to cede a 10 per cent interest in their local operations to the government, which would be held by the National Mining Corporation.

A further 35 per cent stake would be sold to Kenyan investors. The miners would also pay revised royalties, which are as high as 12 per cent for diamonds, 10 per cent for titanium and niobium and eight per cent for coal of the gross revenues made on mineral sales.

And he made it clear he would not budge and the conditions are not up for discussion. The message was “pay up and cede the 10 per cent stake in your firms, if you do not like it quit”. Balala’s reason for the harsh approach he has adopted is that he has the interest of local communities and generally Kenya at heart.

“When we make our rules, they must be good for Kenya, not other countries. If you find the royalties too high, then too bad for you… for those that have argued that Kenya is overpricing, how do you expect us to benefit?” he remarked.

“I would rather the minerals stay in the ground than have them exploited to benefit the companies and leave our people impoverished,” Balala said, a statement seen as playing to the public gallery rather than winning over investors.

Growth potential

However, as Balala moves to harness this promising new sector that has the potential to change the country’s fortunes, he must be wary of stifling this very sector by his assertive stance. Resource nationalism remains a serious investment risk, which threatens both foreign investors and resource-producing states alike.

With growing attention devoted to the subject, it appears that assertive resource-exporting countries in Africa risk alienating international capital.

In newly resource-rich states like Kenya and older producers alike, some proposals ostensibly aimed at maximising society’s benefits from resource extraction have spooked investors.

At one level, it seems to be a misnomer used to describe just about any assertive stance taken by governments on extractive sector governance.

At another level, it has been used to denote grassroots-level activism, extending in some respect to the labour unrest.

Actions regarded as resource nationalism have thus varied widely, from tax hikes through demand for greater state equity and indigenous participation, to renegotiation of stability clauses in mining contracts. Also, so-called beneficiation strategies — pursued by South Africa, Brazil, Indonesia, Vietnam and others — involve demands for value-added processing before exporting.

With Kenya banking on these new resources to turnaround its fortunes, Balala must trade carefully not to scare away important mining investors who have shown interest in the country.

With the war like approach in handling this important docket, it has become difficult for some companies to send their officials to conferences where the Cabinet Secretary is present.

Case in point is the Mining Business and Investment Conference held at Safari Park where some of the major miners were missing or attended but were ‘invisible’.

There are arguments that Balala’s actions could have well be within the law given the findings of a taskforce formed to probe the licences that found gross irregularities in the issuance process. Also the fact that the period between January and May could be termed as a transition period and in the secretary’s words, no such critical decision should have been made during the months as there were no substantive ministers.

Kenya’s newfound wealth in oil and minerals — though still at its infant stage — is expected to account for five per cent of Kenya’s Gross Domestic Product (GDP) in the medium term. Analysts at Pinebridge last week estimated that both oil and mineral industries had potential to earn Kenya as much as $3.1 billion (Sh269 billion) per year when it peaks — which means it could rival top foreign exchange earners like coffee, horticulture, tea and tourism. Tea raked Sh127 billion in 2012. Tourism earned Sh96 billion and is projected to grow to Sh200 billion in 2017.

Balala’s statement by a country that is yet to get its mining sector off the ground could have been seen as chest thumping, telling off investors that have sunk billions of dollars in the country to take whatever prescription the government has or quit.

The flipside is that it could have been well meaning and out to protect the interests of Kenyans — more so the local communities that are said to be left high and dry in most instances.

The demand for high royalties and for mining firms to cede 10 per cent of their local companies is despite a poor infrastructure in the country that sees companies incur heavy operation costs.

Balala previously served as tourism minister, a docket where players say he did a somewhat good job.

Though the industry may not have recovered fully at the time he left, he still managed to gain some lost ground after the 2008 post-election violence and the global financial crisis that dealt a combined major blow to tourism and saw a reduction in arrivals and earnings.

Adiel Gitari, chairman Kenya Chamber of Mines said Kenya should have a stable and predictable regulatory framework, noting that mining was capital intensive and investors would only invest with confidence when sure that the government does not move the goal post by abrupt changes in the operating environment.

“We would want to see a licensing regime that is transparent. The sanctity of licences that mining firms sign with the government must be respected,” he said during the Mining Investment Business Conference.

“Mining is an expensive affair. For instance, out of 100 explorations only one can proceed to the point of exploitation, which means that for every coin that goes into the ground, chances are likely that you will lose it.”