By Rainbow Field, director at Bowman Gilfillan Africa Group (Nairobi)
Government regulation of the East African mining sector is increasing as various authorities hope to leverage investor interest to swell their coffers and benefit their economies. These tendencies can be seen in the changing mining sector regulations and ownership requirements in countries in the region.
For example, the Kenya Mining Bill, which was passed by the National Assembly in October 2014 and is due to be enacted imminently, provides that the state will acquire a 10% free-carry interest in the share capital of a ‘right’ without making a financial contribution for it.
The Bill does not define exactly what ‘right’ will be impacted. However, it is likely that this refers to the mineral right which covers prospecting licenses, retention licenses, mining licenses, prospecting permits, mining permits or artisanal permits. The Bill further provides that all immovable assets of a mining licence holder will vest in the government when the licence is surrendered or terminated.
Although these provisions may be unconstitutional (because Kenya’s constitution prohibits its parliament from enacting a law that permits the state or any person to arbitrarily deprive another person of property unless it is for a public purpose or in the public interest and is carried out in accordance with the constitution and any Act of parliament), the Bill also unequivocally states that the state will have a right of pre-emption of all strategic minerals before they are sold.
While it does not set out the procedures for the offer of sale of minerals to the state and also places the responsibility on the Cabinet Secretary to make regulations providing for the exploration, mining, processing and export of strategic minerals and strategic mineral deposits, as the Bill stands, there is no clarity on how the government will exercise its pre-emptive rights.
In relation to local equity participation, the Bill provides that a holder of a mining licence whose planned capital expenditure exceeds the prescribed limit, will be required to list at least 20% of its equity on a local stock exchange within four years after commencement of construction. There is no reference in the Bill as to whether the local equity participants will have to pay market value for such interest. However, it is not likely that the shares to be listed on the stock exchange will be subject to a sale below market value of the share price. The Bill does not specify whether the existing Local Content Regulations (requiring 35% local ownership) will be repealed.
Lastly, the Bill provides that holders of mining licenses will be required to sign a community development agreement with the community where mining operations are to be carried out. The format for this agreement will be set out in further regulations.
Under Tanzanian law, ownership is not restricted except for small scale mining which is reserved for citizens of Tanzania and for corporate entities registered in Tanzania and owned and managed by citizens of Tanzania.
Small scale mining is done under a primary mining licence (PML). A PML is required for mining activities characterised by minimal machinery or technology of an initial investment capital of USD 5 million. Holders of PMLs are generally restricted from concluding deals with foreign investors.
Other types of licences include prospecting licences (PL), mining licences (ML) and special mining licences (SML) whose ownership is not restricted. This only affects foreign investors who seek to mine in areas covered by PMLs. However, investors and PML holders have used other ways to conclude joint venture deals and the common way of doing this is through conversion of PML to ML.
In addition, the government may also conclude mining development agreements (MDA), valid for 10 years, with holders of SMLs relating to various matters including government free-carried interest and state participation in mining and the financing of mining operations. The level of free-carried interest and state participation is a matter of negotiation and depends on the level of investment and the type of minerals.
The new Tanzania Extractive Industries (Transparency and Accountability) Act, 2015 has introduced reporting and disclosure obligations for mining companies including reporting/disclosure on financial and revenue matters, local content and corporate social responsibility; and publication of contracts, licences and individual shareholder details.