Two weeks ago, British exploration firm Acacia Mining announced the discovery of gold deposits worth an estimated Sh165 billion in Kakamega County, boosting Kenya’s rising profile as a mineral-rich economy.
The questions then remain, where else do we have which minerals? What quantities and of what value? Where are our royalty structures and who monitors what is exported to ensure we get the rightful royalties?
Most of these questions are crying for answers as Kenya gambles with a sector capable of generating billions of shillings in revenues and saving the country from sinking deeper into debt, unemployment and poverty.
Unreliable data on minerals, an outdated royalty structure and weak controls on exports continue to deny Kenya its rightful share of billions of shillings in revenue from the sector.
The industry, which now contributes a paltry 0.9 per cent to the country’s Gross Domestic Product, has a huge potential deeply buried in the lax regulations and information vacuum that limits its attractiveness to global investors. Locating minerals is thus an expensive and time-consuming task.
The investors however smile all the way to the bank once they locate the minerals and start mining. Why? They have a free hand in declaring what they export . This means they can understate their earnings from exports and in the process mint billions of shillings while the Treasury gets the short end of the stick.
Two weeks ago, British exploration firm Acacia Mining announced the discovery of gold deposits worth an estimated Sh165 billion in Kakamega County, boosting Kenya’s rising profile as a mineral-rich economy.
The questions then remain, where else do we have which minerals? What quantities and of what value? Where are our royalty structures and who monitors what is exported to ensure we get the rightful royalties?
Most of these questions are crying for answers as Kenya gambles with a sector capable of generating billions of shillings in revenues and saving the country from sinking deeper into debt, unemployment and poverty.
Mining Cabinet Secretary Dan Kazungu told the Business Daily that while the country may have been badly exposed previously due to lack of capacity to administer the industry well, efforts are underway to fix any costly loopholes.
“It is true we have been exposed because we have not had adequate resources to properly monitor the royalties and these are chances people may have taken advantage of. We did not even have a policy until recently,” Mr Kazungu said after announcing the licensing of another Chinese firm to mine diatomite in Baringo County.
Revenue management systems “We are soon coming up with an automated revenue management system, which will calculate royalties to minimise that exposure because without proper system then we are exposed. By next quarter, we should be done with that so that we don’t get cheated.”
Indeed Kenya has been cheated for a long time going by the Auditor General’s report for the year to June 2015. The report exposed how two major mining firms in Kenya who export billions worth of minerals annually were left to determine what royalties to pay without audits by the Ministry of Mining. This highlights a glaring loophole through which the country loses revenue.
It is was discovered that the ministry does not properly monitors licence issuance leaving dealers to operate outside their permits and sometimes obtaining them illegally without being detected. This further gives away the country’s mining cash.
Mr Kazungu confirmed that Kenya has since given a Sh40 million tender to a South African firm to develop a system which will help in determining the royalties.
In the two cases revealed by the audit, Carbacid (CO2) Limited which is East Africa’s leading producer of natural, food grade, compressed carbon dioxide, is said to have failed to file reports on its production putting the royalties it paid to government in doubt. The multinational which gave the government Sh1.008 million in 2015 is said to have done so without providing records of how much it extracted from its facility.
“Clause 10 of the signed mining license requires Carbacid Co. Ltd to file progress reports and sales return which form the basis for royalty payments. Carbacid Co. Ltd has to date not complied with the provision. In the circumstance, it has not been possible to confirm the accuracy and completeness of the royalty’s amount received from Carbacid Company Ltd,” the auditor wrote.
In the second case, Base Titanium Limited, which is among Kenya’s biggest foreign mining firms, paid royalties amounting to Sh260.7 million by making declarations based on quantities licensed by the commissioner of mines but with no verification on the actual quantities of export.
“The receipts are based on self-declared export quantities for which the Commissioner of Mines and Geology has issued export permits. There has been no evidence of subsequent verification of the actual exports vis-à-vis declared quantities to validate their accuracy. It is, therefore, not possible to confirm the completeness and validity of royalties’ income as reported under Base Titanium Limited,” the auditor wrote.
The report also faulted the issuance of export permits for mining firms as the licences were sometimes dished out irregularly with export permits worth Sh1.9 billion issued by an unauthorised officer whose employment contract had already expired on 19 April 2014.
Policy gap But even as Kenya struggles to fix its policy gap which now awaits required regulations to implement the recently enacted mining Act, one thing still poses a threat; lack of data.
“We don’t have an overall picture of our geological resources to enable us sell our mining opportunities to the global investment market. The money we had for the mapping was taken away in the Supplementary Budget and we are exploring other ways to get the crucial data base,” said Mr Kazungu.
Treasury took away the Sh3 billion the ministry had been allocated to carry out the long-awaited aerial geophysical survey. The move threw the plan into disarray as a British consultancy, International GeoScience Services Ltd, had already been picked to lead the search for a firm to undertake the exercise.
Treasury then directed the Mining ministry to consider a 2013 Memorandum of Understanding with China’s Geological Exploration Technology Institute, to carry out the survey with a grant from Chinese government.
Although funding was expected from China, the plan failed to take off because of the lack of the Sh7.2 billion the firm needed to complete the exercise.
Now back to the drawing board, the ministry is preparing a delegation comprising MPs, officials from Treasury and the ministry of Mining as well as experts to visit China and do a due diligence on the firm.
The exercise, apart from being expensive, may take longer to conclude compounding the dark clouds hanging on the lucrative industry.
A PwC report released in September 2015 also puts Kenya’s taxation in the sector as the lowest in the region further giving the multinationals a revenue walkover.
No VAT
Kenya charges no VAT on purchase of shares as well as minimal stamp duty while both Uganda and Tanzania charge stamp duty of 1 per cent on a purchase of shares with Uganda further demanding 0.5 per cent stamp duty on company formation, capital raising activities
The multinationals are also allowed to carry forward losses indefinitely based on the licence area. Kenya 5.625 per cent withholding tax on payments to a non-resident subcontractor without a permanent establishment in respect of service fees for mining operations is almost a third the 15 per cent Uganda and Tanzania charge according to the PWC report.
Experts however assert that Kenya’s potential in the industry remain bright as the country is yet to fully develop the sector. Economic analysts Aly-Khan Satchu said the regulatory loopholes remain a concern.
“We are pioneer mining country. The CS Dan Kazungu has brought sanity to the docket and I believe we have a significant mining future ahead of us. We need policy making consistency and we need to hitch our star in firms like Base Titanium who pumped in $310m down in Kwale,”Mr Satchu said.
A report released on the Kenya’s potential mineral resources show that Kenya has below its surface resources worth billions yet to be mapped and quantified. These minerals include soda ash, fluorspar, titanium, niobium and rare earth elements, gold, coal, iron ore, limestone, manganese, diatomite, gemstones, gypsum and natural carbon dioxide.
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