Overview
There is no universal standard of legal adequacy for local or foreign investment in the mining industry; generally, it is always a question of what will satisfy a particular investor in a particular case. Indeed, decision making by mining investors is peculiar to individual investor. Similarly, there are no universally accepted legal safeguards for mining investors. In reality, it is more often than not a question of some investors being more capable and willing than others to take risks. However, the vast majority of mining investors remain risk-averse and, in recent years, seem to be more risk-averse than ever. Satisfying the requirements of bankability (such as the need for credit support and management of completion risk) can seriously complicate the making of mining investment decisions. The focus of this paper is thus on general legal mining sector safeguards for investment in Kenya and investment protection regime as will be discussed in subsequent sections.
Recognizing that there are never absolute or universal standard legal safeguards that mining investors consider in making their investment decisions, the paper gives a general approach to legal safeguards that are likely to inform decision making process by investors, namely:
- Legal security and stability; and
- Mining Investment Protection Regime in Kenya.
Legal Security and Stability
Enactment of the Mining Act, 2016 has been viewed as a reflection of the spirit and intent of the Constitution of Kenya 2010 to ensure that mineral exploitation and other mining activities are beneficial to the people of Kenya. The Mining Act 2016, has also established an institutional framework that is considered somewhat aligned to international best practise that is favourable for mining investors. Mining Act 2016, introduced certain provisions that designate roles to county governments. The County authorities will be involved in the provision of consents for licensing operations and surface rights, promoting community engagement in mining operations and selection of the mining sector operators. Similarly, the national Land Commission, a Constitutional body charged with management of land in Kenya, also has a role in the licensing of mining operations especially where such operations involve the acquisition of land and resettlement of persons or communities. The Act establishes several institutions which in essence breaks the concentration of decision making in the office of the Cabinet Secretary. The previous Act only made provision for a Commissioner of Mines and Geology, who carried out most of the duties and decision making that is now carried out by the different institutions and bodies established under the new Act.
As such, in order to enhance good governance in the mining sector, policy, regulatory, and commercial functions of government are separated.
The reform of Mining law in Kenya has been regarded as a response to a call by investors and policy makers for fundamental changes in the mining legislation which was drafted at independence and also as a process that followed changes in economic development policies in the country. The mining law reforms were employed as an instrument of revitalizing Kenyan mining industry that was deficient of proper legal safeguards for investors to ensure security and protection of mining investments.
Legal security and stability has been considered as a factor that policy makers should consider when attempting to not only attract foreign mining investment in the country but also protect local mining investors. Generally if a country does not provide adequate legal security and stability, mining investors may balk at making an investment, no matter how attractive the rewards may be. If mining companies are not confident of legal protection under the Constitution, mining statute, regulations and government policies, then they are unlikely to invest. Moreover stability of other laws such as ethics and anticorruption laws, taxation and land laws more often than not inform whether an investor will make a decision to venture into mining or not.
Legal security determines whether the investor is guaranteed security of tenure over mining titles through mineral right license with the right to freely pledge and alienate them. A mineral right is defined under Section 4 of the Mining Act to mean a prospecting licence, a retention licence, a mining licence, a prospecting permit, a mining permit or an artisanal permit. Section 32 of the Act which falls under Part VI of the Act that deals with general provisions on mineral rights categorizes mineral rights into two: Large Scale Operations and Small Scale Operations. The power to grant, deny or revoke a mineral right is vested on the Cabinet Secretary. However, such powers can only be exercised after the recommendation of the Mineral Rights Board.
Security of tenure, has been broadly presented as the provision of assurance to investors such that they are able to develop a successful discovery before committing significant resources to exploration, or the right to proceed from exploration to mining stage, taking into account the uncertainties involved and the need to make profit. As a result, it is essential that the legal framework contributes to minimising risks, by providing clear and predictable rules, procedures and requirements for private investments. A legal framework that offers clear rules and procedures for allocation of mineral rights, guarantees mineral tenure throughout the mining value chain and in effect reduces transaction cost for investors.
Stability on the other hand ensures that certain obligations such as those imposed by taxation laws are stable. It is important that an investor is assured of government approvals to develop and continue to operate the project during its economic life cycle. Moreover, stable policies on local content affords investors ability to procure equipment and materials both locally and internationally at sources that they deem will supply affordable goods and services of highest standards. Legal security also guarantees investors the freedom and ability to sell their mining products locally and export in foreign markets without many restrictions and heavy tax impositions.
Mining Sector Investment Protection Regime in Kenya
The reform of the mining sector in Kenya emerged after enactment of the Mining Act 2016 which arguably will pave the way for a new era of mining. The Act has introduced a new concept which requires investors, involved in mining projects with capital expenditures over a certain threshold, to offer a minimum of 20 percent of their shares to the public on a local stock exchange, in this case, Nairobi Securities Exchange. As a measure to protect investor interest and as a strong commitment to transparency, the Act requires a range of mining industry information to be made available online which includes mining revenues paid to Government, production volumes of mining operations, and copies of signed mineral agreements; which must be entered into with the State before engaging in mining activities under a mining license. Making such information more readily available is viewed to boost stability and confidence for investors and other stakeholders in the Kenyan mining sector.
Nevertheless, the provisions under the Mining Act are not enough in ensuring investor protection. Kenya as a host country to several mining investors can also attract investors by supporting business relationships between private parties, protecting the rights of the private sector against encroachment by the government and by removing special privileges accorded to State owned corporations to create a fare and competitive ground for all industry players in the mining sector.
Even though the absence of investment protection treaty in itself is never an absolute barrier in mining investment, it however, indicates a country’s reluctance to create a favourable environment for foreign investors. Moreover, absence of an investment treaty may also mean an underlap in reforming domestic legal system to conform to the requirements and disciplines of an international treaty. Such reforms have been applauded and proven as means of eliminating investment obstacles in the domestic regulatory and institutional framework. Without an investment protection treaty, investor confidence is shaken. On the other hand, accession to a relevant investment treaty is a positive signal to investors in the mining sector given its high risk-high capital nature.
Bilateral Investment Treaties (BITs) for example, serve the purpose of reducing non-economic risks to foreign investors involved in mining investments. BITs also protect and defend investors against unilateral exercise of State power by host countries thus encouraging investment flow. They ordinarily operate to prohibit expropriation by following certain prescribed procedures before taking any expropriation measure in the interest of the nation. Such procedures include; non-discrimination, issuance of adequate and effective compensation, payment of interest, and making provision for some form of judicial review.
Conclusion
In reality, mining investments are exposed to high levels of risk and uncertainty which require stability and predictability of laws and regulations that enable the investor to ensure an adequate and timely return. Risks in Mining industry are usually spread throughout the life of the project, starting with the uncertainties surrounding the discovery of commercially viable mineral deposits, to the usual challenges of raising finance for the development of the project, coupled with volatile mineral prices, and shifting trends in mineral markets.
As a result, it is essential that the legal framework contributes to minimising risks, by providing clear and predictable rules, procedures and requirements for private investments. A legal framework that offers clear rules and procedures for allocation of mineral rights, guarantees mineral tenure throughout the mining value chain and in effect reduces transaction cost is the most favourable for miming investors.
