Kenya: AG Reverses 35% Local Ownership Requirement for Base Resources
Tuesday, 15 January 2013
Attorney General Githu Muigai has overruled a gazette notice by Environment and Mineral Resources Minister Ali Chirau Mwakwere that ordered Australian Base Resources, investors in the Kwale titanium mining projects to cede 35% of the venture to local ownership. The AG clarified, unsurprisingly, that the regulation can only be applied to licenses that came into force after the regulation was gazetted, and cannot be retroactively applied to Base Resources special mining license acquired in 2010.

Mwakwere had pulled the 35% local ownership rule from the pending mining bill and gazetted it separately. Kenya’s currently mining legislation still dates from pre-independence years, and the revised and updated mining bill is still pending. This piecemeal approach was not ideal to start with: Investors want a coherent legal and regulatory framework – already a challenge in Kenya at the moment as the country still needs to complete the transition to the new constitution, write or finalise subsidiary legislation, and establish the devolved county governments that will also interact with mining investors. Attempting to retroactively impose the regulations on existing investors was clearly a red flag.

Mwakwere’s approach also overlooked the lack of local capacity: In interviews, Base Resources had said that at the inception of their investment, there had simply been no local investor able to raise sufficient financing. To ensure a transparent and equitable approach to bringing in local equity participation, the company plans to list on the Nairobi Securities Exchange (NSE). However, it will only be able to do so after fulfilling the NSE’s requirements on several years of consecutive profitable operations.

Perspectives
Despite the AG’s decision, Base Resources face another setback: At the end of December 2012, Mwakwere revoked the company’s licenses for Vipingo, Mamuburi and Sokoke in the eastern Kilifi region citing non-performance. Base Resources acquired the licenses with the purchase of the Tiomin assets in 2010. Again, Base Resources say they see no legal basis for Mwakwere’s action.

The Kwale mining venture has suffered multiple delays, and the Kenyan government’s recent actions did little to inspire investor confidence. Despite growing investor interest, Kenya will remain a challenging environment for mining investments for a number of reasons:
  • Kenya’s sector legislation is outdated.
  • The transition to a new constitution with related changes in other legislation means a lack of clarity.
  • The establishment of devolved county governments will create new counterparts that mining firms need to work with. County governments can also raise revenues, so corporate may face multiple demands for licensing fees etc. There are concerns that corruption will equally be devolved to county level.
  • There are risks arising from land and local community issues, exacerbated by Kenya’s entrenched corruption. Especially in marginal areas, mining firms are also exposed to security risks.
At the moment, oil exploration and mining fall under different laws and in different ministries, but this may also change once the number of ministries is streamlined under the next parliament. However, it must have equally been a concern to oil investors how the government addressed local ownership requirement in other extractive industries.

 



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