If you must force foreign firms to cede shares to locals, do so transparently

Tuesday November 27 2012



If you are the proprietor of a foreign company wishing to invest in the mining sector in Kenya, you have to be prepared to sell 35 per cent of the shareholding to a Kenyan citizen.

Popularly known as the Mwakwere Rules, this new requirement came into force by Gazette notice published by Environment Minister Chirau Ali Mwakwere on October 12.

The value of forcing foreign investors to cede shareholding to locals in some of these new ventures cannot be gainsaid.

When, as a foreign investor, you allow local citizens to own a stake in your company, you have more or less bought insurance against being accused of coming here to exploit resources and repatriate profits abroad.

We must not forget that following the passage of the new Constitution, and with the coming into force of the devolved system of government, the Kenyan citizen has developed a bloated sense of his rights.

The pressure on international companies especially the mining and oil exploration companies, will be immense.

The usual corporate social responsibility stuff — the building of new primary schools, health centres and the digging of boreholes — may no longer suffice. The people will demand to own a piece of the action.

But there are many aspects of the new rules that I don’t agree with.

It is grossly unfair to force this rule on existing mining companies. In civilised societies, you don’t effect regulations retroactively.

When, as a minister, you introduce new rules and insist that they must be obeyed long after the implementation has started, you distort plans and introduce unnecessary uncertainty.

Since Mr Mwakwere gazetted the rules, the market share of Australian firm Base Titanium Ltd at the Toronto Stock Exchange where it has raised most of the equity for the project has gone down by 40 per cent, reflecting investor fears.

Indeed, the predicament in which the firm now finds itself is pitiable.

When designing its financial model long before Mr Mwakwere came up with the rules, it had to pledge its shares as security to some of its lenders.

Usually, these loans are drawn down in tranches, with financiers attaching several conditionalities, which must be met before actual cash can disbursed.

If you force the Australian investor to sell 35 per cent of its shares right now, you compromise the agreements signed with lenders.

Secondly, if we want to force mining companies to cede 35 per cent to locals, why don’t we do it transparently?

Mark you, a new Mining Bill proposing to introduce the same local ownership threshold for foreign companies was published several months ago.

Why Mr Mwakwere decided to circumvent the published Bill and to effect parts of it in a mere Gazette notice is one of the most puzzling aspects of this saga.

Did he suspect that this controversial rule would not pass in Parliament?

Or are we dealing with a situation where the big boys want to lock up gains before they go for the elections?

I am suspicious of the motives because manoeuvres like these are not without precedent.

Way back in 1984, and in the name of promoting local ownership of insurance companies, the government introduced a rule directing all foreign insurance companies to cede one third of shares to locals.

The argument at that time was that the insurance sector was too strategic to be left to foreigners. But it was just a ploy to allow the political elite of the former Moi regime to buy into the foreign insurance companies.

In 2001, the government introduced a rule requiring that all foreign investors coming into the telecommunications sector had to sell 40 per cent to locals.

As it turned out, it was just a ploy to arm-twist foreigners to sell shares to the political elite of that time on the cheap. This is how we ended up with the shady company, Mobitelea.

I am not against the idea of forcing foreign companies to cede shares to locals. But let’s do these things transparently.