Coal mining dispute shifts focus to Chinese company

Mwingi South MP David Musila has called for an investigation into the award of a multi-billion-shilling coal mining tender to a Chinese company following claims that the firm has no capacity to commercially exploit the deposits.

The firm - Fenxi Mining Industry Company - is on course to sign a 21-year concession to extract the vast reserves in the Mui Basin, Kitui County.

“It is the government’s responsibility to do due diligence on any company being awarded this or any other concession,” said Mr Musila in an interview. “The Public Procurement Oversight Authority (PPOA) should be invited to look into the matter,” he added.

Mr Musila, in whose constituency the biggest of four blocks that are estimated to have commercial quantities of coal is located, has said the investigation should determine whether the Chinese firm has the technical and financial muscle to undertake the huge project.

“Coal mining is a lifetime project, whose activities will affect not only the present, but future generations,” said Mr Musila.

He added that the project should only be undertaken after very careful study and assessment of all matters, including environmental, economic and social aspects such as resettlement, compensation and revenue sharing.

The MP’s call follows sustained claims by Mutito MP Kiema Kilonzo that Fenxi Mining Industry Company, which won the tender estimated to be worth Sh3.4 trillion, has no financial and technical capacity to exploit the reserves.

Mr Musila’s call adds to the cloud of uncertainty hanging over the project, more so because he has previously supported the development of the Mui coal mines by the Chinese company.

The project has the potential to transform the economy through provision of cheaper energy.

One of the concerns raised by the project has been the yet-to-be determined compensation and resettlement of more than 15,000 mainly poor households who occupy block C and D, where mining of the coal deposits is set to start.

Despite the potential of the project to improve the economic fortunes of Mui residents, a botched compensation and resettlement could leave up to 30,000 households in destitution. 

Mr Kilonzo, whose Mutito Constituency lies largely in blocks A and B - which are still at the tendering stage - was first to raise the alarm by claiming that Fenxi was a briefcase company fronted by a Kenyan partner. He claimed that this disclosure was not made public during award of the tender.

It subsequently emerged that a Kenyan firm, Great Lakes Corporation (GRC), was the main force behind Fenxi’s win of the coal mining tender.

Mr Kilonzo claims that Great Lakes has a 30 per cent stake in Fenxi. GRC chairman George Kariithi denies this, maintaining that its shareholding in Fenxi would only be determined after the signing of the mining contract.

READ: Man behind Chinese firm in Sh3.4tr Mui coal mines

In a report published following a fact-finding mission to China, Mr Kilonzo also claimed that his delegation, which consisted mainly of Kitui community leaders, had concluded that Fenxi did not have the financial or technical capacity to deliver on the Mui Basin coal project.

The Kilonzo report, published in May, said Fenxi did not show the entourage any mines that it operated either in China or abroad.

“I challenge Mr Nyoike (the Permanent Secretary in the Ministry of Energy) to show proof that due diligence was actually done on Fenxi and explain the role of the shadowy Great Lakes Corporation,” the Mutitu MP said in a recent interview.

However, Mr Patrick Nyoike, dismissed Mr Kilonzo’s claims, arguing that they were motivated by a “personal vendetta” and a determination to stall the project.

“It’s a lie that Fenxi does not have the capacity to mine coal. We’re talking of a company that has existed for more than 50 years, and is among the top Chinese mining firms,” said Mr Nyoike in an interview.

The PS said an inter-ministerial team was sent to China to evaluate the firm’s technical and financial capacity to mine coal.

According to documents provided by Mr Nyoike, the team included Chief Geologist John Omenge, who was head of the delegation, Moses Masibo, the acting Commissioner of Mines and Geology, Joseph Ngugi, a principal economist at the Treasury, Zablon Mabea, the Commissioner of Lands, Wilkister Magangi, the Chief Compliance Officer at the National Environmental Management Authority (Nema) and Cynthia Olotch, a State Counsel.

“The (government) negotiation team is of the opinion that Fenxi has technical capability and ability to raise funds to implement the Mui Basin coal project for the awarded blocks C and D,” said the report titled GOK Negotiation Team China Tour. “This conclusion is based on project size and scale of successful operations of Fenxi visited.”

The tour took place between February 25 and March 4, 2012.

It involved visits to Fenxi’s coal mining sites, a power plant, state officials, a special economic zone and resettlement city developed to accommodate persons displaced by the mining activities.

The report says Fenxi is involved in “major underground and open pit coal mining projects in China and joint venture coal fired power generation.”

While it gave Fenxi a green light with regard to environmental conservation, it warned that the company had “a lot of experience in handling tax matters. It will be necessary for adequate care to be taken in dealing with tax issues for the Mui Basin project.”

The controversy has sharply divided the community and leadership of the Mui Basin between those who support the project and those calling for a fresh tendering and wider involvement of the locals in negotiations for compensation.

There have been claims that the coal mining issue has been politicised as allies Mr Kilonzo, who is eyeing the Kitui County governor seat and presidential aspirant Charity Ngilu have drifted to one side opposed to the project while Vice President Kalonzo Musyoka and Mr Musila, until now, have generally supported the plan.

The matter has also found its way to court, where a group of Nairobi-based Kitui County professionals have obtained orders blocking the signing of the coal mining and benefit sharing contract between the government and Fenxi.

The professionals, acting under the umbrella of the Mui Coal Basin Local Community, have sued the Ministry of Energy, the Attorney General, Fenxi and its associate companies; Jingu Group of China and GLC. The court orders have been extended to October 23 after the government sought more time to file its response.

Reacting to the call for an investigation into the coal mining deal between Fenxi and the government, Mr Omenge said “it would help to prove that due diligence was undertaken” while awarding the Chinese firm the tender. Mr Omenge said Fenxi was the clear winner out of eight firms that put in their bids for the coal mining tender.

Fenxi, according to Mr Omenge, scored above 80 per cent in the technical evaluation for both blocks C and D, while all the other competitors scored below 70 per cent, which was the minimum benchmark.

The two blocks are thought to have more than 400 million metric tonnes of coal reserves valued at Sh3.4 trillion ($40 billion), as per the current market rate estimates.

Documents provided by the Energy PS show that Fenxi would hold 89 per cent shares of the project, while the government would control 11 per cent in a joint venture arrangement.

In addition, the government would be entitled to a 23.6 per cent share of gross revenue generated from block C and 22.1 per cent share from block D revenues.

As part of the conditions for the concession, Fenxi is required to pay Sh294 million ($3.5 million) concession fee for the two blocks.

The Chinese firm is also expected to pay a special exploration licence fee of Sh336 ($4) per square kilometre, environmental impact licence fee of Sh1.9 million, special mining lease fee of Sh3.5 million and a training charge of Sh13.7 million per annum.

The Kilonzo report had also raised queries about the relationship between Fenxi and another Chinese firm, Jingu Group, which was not mentioned in the initial tender documents submitted to the government. Jingu was the main company organizing logistics for local delegations visiting China.

Both Mr Nyoike and Mr Kariithi, who is the main contact person for the Chinese firm in Kenya, said Jingu is an associate company of Fenxi involved in real estate development.

Tender documents provided by the Ministry show Fenxi has a complex web of associate companies, about 30 of which were listed in the initial tender documents. Jingu Group is, however, not included in the list.

“It is normal for a company to introduce an associate firm in projects of this nature even after award of the initial tender,” said Mr Nyoike, adding that the ministry had only communicated with Fenxi in matters relating to the tender.