Tuesday, July 16, 2013

The Government of Kenya (GOK) had in the last decade introduced progressive policies to encourage exploration both in the mining and oil & gas sectors. Notwithstanding a burgeoning mining sector coupled with discoveries of oil and natural gas in Kenya in 2012, the incumbent Government has introduced two pieces of legislation that have in effect shifted the goal posts and compromised investor confidence.

The first of these is, the Mining (Local Equity Participation) Regulations of 27 September 2012 (LE Regulations). The LE Regulations impose a 35% minimum local equity participation in ‘mineral rights’ over which a licence is granted, as a requirement for every ‘mining licence’ falling under the Mining Act. For starters, the terms ‘mineral right’ and ‘mining licence’ are not defined in the Mining Act.

The LE Regulations have been heavily criticised by industry players, financiers and legal practitioners for their arbitrariness and silence over a number of critical issues, not to mention exacerbating red-tape in the industry. The regulations do not specify whether existing or just new licensees were affected by the 35% equity requirement. They also make no mention as to how the equity require- ment is to be implemented by the Government, licensees, and local industry stakeholders, nor do they address any compliance timeline or time limits by when affected licensees must have attained a 35% local equity ratio.

The regulations further fail to provide any specifications relating to consequences for non-compliance and whether there will be any exemptions as provided for by other industries. There is resounding silence as to which stages of the mining lifecycle are affected, whether reconnaissance, prospecting, or mining and exploitation. The Regulations are also wanting in their failure to distinguish between the requisite forms of equity by way of free equity or equity for consideration, as well as any permissible phases for subsequent contributions or dilution.

The only guidance given to date by the government on the exact play-out of the local equity requirement is an informal statement by the Ministry for Environment and Mineral Resources that the equity requirement is to be determined on a case-by-case basis. It is also reported that the Attorney-General has issued an unpublished formal statement that only licences issued after the date of coming into force of the LE Regulations are required by law to comply with the local equity ratio.

In general, the guidance provided by these statements may imply that the equity participation requirements are to be met through negotiated terms between  government and prospective licensees. Lack of any official statement to this effect leaves the precise legal position as largely inconclusive. A comparative review with other countries having similar requirements reveals a more comprehensive regulatory regime for local equity participation rules.

A number of foreign investors have now been left with the unpleasant choice of either pulling out their investments altogether, or engaging the government through protracted court actions.

The second piece of legislation is an amendment to the Income Act that makes the value or consideration from the sale of property or shares in respect of oil companies, mining companies and mineral prospecting companies subject to a withholding tax. These measures came into force on 1 February, 2013.

The new law on withholding tax provides that income from the sale of property or shares for oil, mining and mineral prospecting companies paid by a resident to a non-resident not having a permanent establishment in Kenya is subject to a withholding tax of 20%, and income paid to a resident in respect of the same is subject to a withholding tax of 10% where the ‘sale of property or shares’ includes the assignment of rights, sale of companies and businesses and takeovers or any other ‘non-inventory assets’.

Unfortunately, an oil company, mining company or mineral prospecting company is not defined. While any exploration company will readily acknowledge that a country and its citizens must benefit from their natural resources, the haphazard and arbitrary manner in which these ambiguous regulations are being introduced, have the effect of actually triggering capital flight and a decline in investment.

It is hoped that in applying these new rules and regulations government agencies will act fairly in order to attract further investment and interest in the exploitation of Kenya’s natural resources.

With the new devolved system of government in Kenya which is set to kick-off after the 4 March 2013 general elections, both national and county governments will play a vital role in the oil & gas and mining industry through licensing, authorisation policies, standardisation, and conflict resolution. Despite the tight-rope balance between protection of national interests versus the compelling market forces driving investors, it is every local and foreign investor’s desire that the legal regulatory environment, though providing for strict requirements, remains transparent and relatively stable.