Kenya

Can New Legislation Hold the Key to Rehabilitating Kenya’s Extractive Sector?

photo credit: Christopher Michel
photo credit: Christopher Michel

Sustained economic growth for Kenya has been an elusive target. For decades it has been middle-of-the-pack within East Africa, and fallen only slightly above the continental average when measuring GDP growth. Redeveloping the extractives sector, the latest plan to finally push the country into a leadership position, brings Kenyans face-to-face with social and political issues that define the history and current state of governance and growth in Kenya.

Kenya’s natural resources are diverse and numerous. Wildlife, access to Lake Victoria and the Indian Ocean, timber, agriculture, and even recently discovered oil reserves suggest—at least on paper— that Kenya should be able to leverage resources for investing in impactful development projects. In fact, there is a long history of attempting to do so. Gold mining in the first half of the 20th century by the British, for example, created boomtowns in Western Kenya, bringing Kenya’s resource potential to the international level. However, exploitation by foreign settlers only brought “short-lived benefits to a tiny minority” of Kenyan households. The superficial resources were soon depleted and the industry eventually reverted to inefficient artisanal techniques, which even today are still used by around 30,000 individuals.

Only since the political stability and general investment climate began to improve in the last 15 years have mining companies with the ability to exploit Kenya’s reserves begun to enter the playing field, with around 35 firms active and another 25 with applications tendered. In the same period, advanced mapping technologies have revealed new mineral and oil deposits, further encouraging Kenya to bring mining back to life. One such discovery of rare earth elements was valued at $64 Billion and will soon bring Kenya into the top-5 global producers of that class of minerals. In all, new mineral and petroleum discoveries amount to hundreds of billions of dollars of viable resources waiting for their moment.

Reflective of this untapped potential, the Government of Kenya has increasingly begun to position development plans around a resurrected extractives sector. Conservative analysis suggests that mineral and carbon exports may contribute upwards of 5% of GDP in the coming years and 12-15% in the long run, (compared to the less-than of 1% GDP it contributes today). Other studies suggest that in the future mining and oil revenues could represent as much as one-third of total government revenues in Kenya. However, realizing the dream of a natural resource engine for growth requires serious reflection on what has stunted this sector in the past, and where such plans have failed elsewhere in Africa.

Increasingly, empirical studies have highlighted the state of institutions prior to natural resource windfalls as essential to the legal and efficient distribution and application of revenues. Nigeria, which is currently unable to locate $20 billion in missing oil revenues from a single 15-month period, is the poster child for this relationship since it began exporting oil in the 1970’s. Unfortunately, the current status of Kenya’s institutions gives cause to worry about a similar fate as it begins to export oil and minerals in earnest. It currently falls below Nigeria in corruption indices, scoring 145th of 175 countries (according to Transparency International).

As such, ameliorating governance in Kenya—and resource governance in particular— has become a priority for the Government of Kenya, The World Bank, African Development Bank, and others. At the center of this reform project is new legislation and new institutions.

The first-ever Ministry of Mining was created in 2013 with a renewed vision for attracting investment and managing applications, licenses, and agreements. However great its potential may be, its short history has been mired in controversy. In 2013, the Ministry suspended the license of Base Titanium by executive decision, (after the publically traded company had invested over $300 million in a project)— a move that hearkened back to the days of post-independence nationalization of foreign firms. While there were “non-compliance issues” with that license, the opaque legal foundations of the Ministry’s actions have pushed many potential investors into a holding pattern. Those investors are some of the first in line, waiting to see new mining legislation pass. However, their wanting to see clear and fair legal frameworks may have to wait longer, as the Ministry’s proposed deadline for the legislation has been overshot by several months.

While a stable investment climate will bring investors to the table, establishing checks on corruption will be equally vital to the productive management of natural resources. To answer this, nearly all stakeholders have turned to the theme of transparency to varying degrees. The draft versions of the forthcoming Mining and Energy (Oil) bills set clear provisions to improve openness. Each will attempt to establish a distribution of revenues between the national, county, and local governments and requires the associated ministry to publish the royalty rates for each class of export. Furthermore, they put forth plans for the national portion revenues to be distributed directly into infrastructure development and sovereign wealth funds, systems associated with open and deliberative management.

Perhaps the most vital and most tenuous provisions are meant to secure the public right to review licenses, agreements, and revenue reports. For now, this information will chiefly be published in the Kenya Gazette, a source for legal information produced at the national level. If well circulated, this could give significant power to Kenyan civil society to hold politicians and bureaucrats accountable. However, this remains a big “if”. While being a registered newspaper, the Gazette does not circulate well, is only printed in legalese, and costs $150 to for an annual subscription, raising serious doubts about its reach and functionality in this case. It appears that without further mechanisms to realize the transparency provisions of the laws, they run the risk of being broadly ineffectual.

Enter international community. The Information Center for the Extractives Sector (ICES), an organization associated with a number of key development players, including DFID, the African Development Bank, and the UNDP, aims to push the potential of Kenya’s extractives by providing an information hub. Bringing plain-speak analysis to a friendly online platform, they are already amplifying the reach of information. Furthermore, ICES is considering new methods, such as mobile phone-based campaigns, to reach the remotest places. At the same time, a 12-month World Bank project to develop institutional capacity in the petroleum sector has directed significant resources to a communications strategy for the Government of Kenya to strengthen public engagement in the industry, and is also seeking out innovative strategies.

Establishing an early civil society check on extractives related corruption would help foster sustainable rehabilitation of the sector, and this seems to be acknowledged in recent and coming policy changes. However, the gap between intentions and implementation appears to be the deciding factor on whether Kenya will follow the earlier example of Nigeria, or Botswana, which currently ranks 31st in Transparency International’s index, despite relying overwhelming on copper and minerals for development.

In any case, mineral and petroleum exports are heating up and will continue to grow significantly as portion of Kenya’s GDP, whether civil society is ready, or not. However transforming a cottage industry into a key economic sector will require policies that reassure investors, allow civil society to demand accountable management of their resources, and foster sustainable investment of revenues. If done correctly, it will raise Kenya’s GDP growth rate beyond the current rate of 5.7% and provide strong domestic revenues to lift the nearly half of Kenya’s 43 million living in poverty to safer ground.

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