12 November 2013

East Africa: Controversies, Challenges and Concessions - Kenya's Faltering Bid to Be East Africa's Next Resource Hub


Kenyans are abuzz with hope that its newly-discovered resources will enrich the country, but is Kenya prepared to make the most of its natural wealth?

Kenya, a long time outlier in a continent known for its mining and oil, is now facing the prospect of a natural resources boom itself. And Kenyans are abuzz with hope that the country can harness its newfound mineral wealth to propel East Africa's largest economy even further.

"Kenya has loads of oil, and you've got oil companies who are very eager to seize the opportunity," says Aly-Khan Satchu, a Kenyan financial markets and commodities trader who specialises in oil. "It's going to convert the eastern seaboard of Africa into an energy and geopolitical hot spot."

British Tullow Oil, for example, is preparing to extract an estimated 250 million barrels of crude from the country's northern desert, which would be worth around $27 billion based on current oil prices.

Meanwhile, mining companies have also been rushing to explore new discoveries across Kenya in recent years.

Australian company Base Titanium, for instance, will begin exporting mineral sands from its Kwale mine in south-eastern Kenya this year; the company estimates the project will generate $300 million in revenue for the Kenyan state over the 13-year life of the mine and will more than double the value of Kenya's total mineral exports.

And in Kenya's south, the Chinese firm Fenxi Mining Group hopes to extract an estimated 400 million tons of coal reserves worth a potential $40 billion.

But while these discoveries could provide a significant source of revenue for Kenya, disorganisation within Kenya's mining ministry, and controversy surrounding one Canadian company in particular, raise concerns that Kenya may be unprepared to regulate and benefit from its forthcoming resource surge.

Stirring trouble

Amidst Kenya's rush to approve new mines, Mining Cabinet Secretary Najib Balala this August suspended 43 mining contracts he says a lower-ranking commissioner may have authorised without the proper documentation and licenses.

One of those cancelled was that of Cortec Mining Kenya Ltd, a subsidiary of the Canadian company Pacific Wildcat Resources, which had hoped to mine niobium, a mineral used to make coltan for mobile phones and other electronics. The day after the contract's suspension, the firm saw its stock decrease by 59%, and Pacific is now embroiled in several controversies.

Kenyan officials have accused Pacific of exaggerating and misreporting the amount of niobium it found in order to attract shareholders.

The company had stated in a July press release that its tests indicated a remarkably high 7% concentration of niobium in more than 11 million tons of ore. It also claimed the company's Mrima Hill site in south-eastern Kenya was "the world's highest grade undeveloped rare earth deposit outside of China."

The company's stock quickly surged, however just days after the initial statement, Pacific retracted it, announcing instead that they had discovered a much larger 49 million tons quantity of ore, but that it contained a lower 4.4% concentration. The company's spokeswoman did not respond to emails and phone calls seeking comment and clarification.

"If these guys go ahead and report anything they want and the government doesn't say anything, it doesn't reflect well on the government," says Martin Nyakinye, a government geologist who worked for eight years in the region where Pacific's subsidiary wishes to mine. "It raises questions about regulation - is the government in control? It's very damaging for the reputation of Kenya as an investment destination for mining."

And Kenya's image took a further blow when Pacific's Kenyan subsidiary, Cortec, wrote a letter to Kenya's Ethics and Anti-Corruption Commission accusing Balala of soliciting a Sh80 million ($900,000) bribe, a charge the mining cabinet secretary denies.

George Boden, an East Africa campaigner for the NGO Global Witness, points out that African governments often make the mistake of treating all companies as equals in the context of a mining boom. But the Cortec case, he suggests, demonstrates that the failure to vet companies can be dangerous.

"The risk is that if you don't select your companies really carefully you end up with companies that don't have the financial backing or the experience to exploit the resources so there's maximum value to the state," he says.

These failures can impact negatively on the whole industry.

"There are many companies that have done very honest investigation," says Nyakinye. "They are reporting as required, but their licenses cannot be renewed now because Cortec messed up."

Keeping up with the neighbours

When the Kenyan government announced the suspension of 43 mining licences this August, it also said that it would be raising royalties on minerals in order to help maximise revenue for the state.

Earlier this year, the mining ministry also stated that it would be creating a state-owned mining company that can enter into joint ventures with private companies to profit directly from Kenya's resources.

Kenya's leaders hope these reforms will allow them to follow the lead of other countries in the region whose economies have long benefited from the extraction of natural resources.

Due south in Tanzania, mining companies mine and sell more than $2 billion worth of gold each year. To the north in the Sudans, there are an estimated 5 billion barrels of oil reserves, worth $532 billion at current prices. While a few hundred miles west, the Democratic Republic of Congo produces half of the world's cobalt, along with high-grade copper and other lucrative minerals.

However, one of the main challenges still facing Kenya's future as a natural resource exporter is how little is currently known about what's actually buried underneath the nation's soil.

"I just came from Zambia where the mineral resources are far more than ours, not to mention Congo," says Nyakinye. "But it's difficult to gauge because Kenya is underexplored. We still don't know a lot about what we have."

Standing alongside Davis Chirchir, Kenya's Cabinet Secretary in the Ministry of Energy and Petroleum, at a Nairobi development conference in September, IMF Advisor Philip Daniel also urged caution, saying Kenya's government should continue to research its own mineral potential before approving new contracts.

"This is a good time to develop mineral resources, but patience is needed," he said. "The stronger the geological knowledge is, the more competitive the benefits are over time."

Benefiting Kenyans?

But even if more mineral reserves are discovered and confirmed, it remains to be seen whether mines and drilling will create substantial employment at good wages for Kenyans or improve standards of living for Kenyans as a whole.

The country is for the first time facing the possibility of joining its neighbours as another major destination for natural resources, but Kenyans should not be fooled into thinking the money will start to flow immediately.

In fact, it may take years for Kenya to see any tangible benefits. Seven years after Tullow Oil discovered a much larger petroleum reserve in neighbouring Uganda, for example, it has yet to commercially export a single drop.

Meanwhile even Base Titanium, which is set to begin production this year, will pay only half the standard corporate tax and a lower-than-normal royalty on the mineral sands it unearths due to a special concession with Kenya's government.

Such special deals could also reduce the country's revenue from its future oil sales, and last month Nigeria's petroleum minister alleged that Kenya had already offered significant oil concessions to Nigerian investors.

Accountability watchdogs also warn of the risks that emerge as African economies become more dependent upon commodities such as gold, copper, and oil, whose prices can plummet as fast as they can surge, bringing state revenue down with them.

"Despite years of significant oil revenues, the central African countries have some of the lowest human development indicators in the world," says a 2012 report by the World Bank. "The tragedy is that these countries have not been able to use their oil revenues to significantly improve the welfare of their poor citizens."

Kenya's leaders would be wise to learn from their own missteps and those of their continental counterparts in flaunting their nation's newfound minerals, and proceed more cautiously when it comes to oil.

Jacob Kushner is a freelance journalist currently based in Nairobi. He reports on international peacekeeping, foreign aid and development, offshore tax havens, and Chinese mining and other investments in Africa. See more on his blog at http://jacobkushner.com and follow him on twitter @JacobKushner.

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