What Kenya needs to do to earn high dividend from nascent mining sector

Events in Kenya’s rapidly evolving mining sector should lead us to ponder how we as a nation can build a sustainable mining industry.

As a Kenyan who has lived and worked on mine sites in countries as diverse as Australia, Finland, Zambia, Mauritania, and the Democratic Republic of Congo (DRC), I believe I have an intimate understanding of the promise and pitfalls of this industry.

So far, we have done certain things right. First, the government has created a Ministry of Mining to harness the industry’s potential. Second, the Cabinet Secretary has rightly recognised that the 1940 Mining Act is out of sync with the 21st century.

Third, Kenya’s largest mining project developed by Base Titanium Ltd in Kwale is set to achieve commercial production. Finally, Kenyans have taken a keen interest in a high potential sector that currently accounts for less than one per cent of the gross domestic product (GDP).

However, the controversial side of mining has also been exposed in the form of reports of alleged dodgy exploration licences. We have heard murmurs of discontent from local communities hosting mineral deposits.

This reminds us that mining is fraught with challenges, particularly in Africa. Experience has taught me that a successful mining sector is based on four core pillars: Competitiveness, sustainability, equity, and accountability. Of course, these concepts are inseparable but I will focus on competitiveness.

Mining is truly global. Tanzanian gold extraction is financed by Canadian investors, traded in London, and physically sold in India. Competitiveness is based on many factors, principal among them being geology, availability of capital, and a stable investment climate.

Geology is a stroke of luck. The occurrence of minerals is beyond human control. Countries such as Australia and Brazil, and closer to home, Tanzania and the DRC, count their blessings in billions of dollars’ worth of proven deposits. Kenya has a long way to go to match this and requires large amounts of exploration capital to realise the much-touted mineral potential.

Competition for capital is intense and based on a trade-off between risk and return. Globally, sophisticated investors also seek a high return on investment. In mining, primary investment sources invest from Chile to Mozambique, Kazakhstan to Mongolia, spreading risk across geographies, jurisdictions, and projects.

Mining is a capital-intensive and long-term industry. Substantial projects often take 10 years or more from discovery to commercial production. Each step requires increasing amounts of capital with no returns for long periods.

A serious investor is a long-haul investor and necessarily chooses an appropriate investment climate. Countries that have been successful in attracting substantial capital for mining development share three key characteristics.

First and most importantly, a carefully crafted policy, and the will to implement it, is indispensable. Ten years after Tanzania’s 1997 Mineral Policy was unveiled, over $2.5 billion (approximately Sh218 billion) had been invested in the sector.

Tanzania has set herself a vision of 10 per cent mining GDP contribution by 2025. Conversely, while the DRC has a mining code with attractive provisions, implementation challenges have stunted potential mining growth.

Second, a stable and transparent legal and regulatory framework goes a long way to achieving the balance between the industry and the nation’s interests. Third, dialogue between the key players is essential.

Governments, industry, communities, and organised labour often have competing objectives.

As we formulate our mining sector governance, the guiding principle should be that mineral resources are generally finite and we must strike a balance between returns to the nation and returns to the investors who risk their capital.

I pray that Kenya has the right geology because this can truly be a transformational industry in line with our Vision 2030. The greatest impact on the development of Kenya’s mining sector will be our ability to attract exploration and development investment — high risk but only potentially high return capital. Will we be sufficiently competitive?

Mr Otega is a Nairobi-based mining consultant. ([email protected])