Last week, the Kenyan government gave local miners a breather with their new terms of ownership of mining companies. The published law states that foreign-owned mining companies are expected to give up 35% of their local operations to Kenyans.

A press release from AfricanLaughter states that the move has sounded the knell of death for the budding mining industry and may increase the rate of unemployment in the country. According to the Embassy of the United States, Kenya is the most developed economy in Eastern Africa. The country’s strengths include human resources, natural assets and strategic location. Mining has been recognized by the government as one of the important sectors for national development in line with Vision 2030. It will help bump Kenya up to the middle-income status by reviving foreigner’s interest in Kenya’s mining potential.

The economic outlook by Deloitte shows that the mining and quarrying sector made a 9.8% contribution to the country’s GDP growth rate for 2012. Statistics from the Kenya National Bureau of Statistics (KNBS) for last year indicate that the industry’s contribution to the economy came to KES 7.25 Billion in 2011. This year, the economic growth has slowed down in the second quarter with GDP growth coming to 3.3% compared to 3.5% in the same period last year.

Why Nationalise Foreign Mining Companies?

Nationalisation is the process of taking what was once owned in a private capacity and making it available to the public sector. It results in job creation for the locals and an increase in tax revenue from them.  Mining is however, a capital intensive endeavour and even multinationals must explore far and wide to source funding through long term credit facilities and rights issue for each new mining venture. Local financial institutions will rarely fund such ventures as the amount of capital required is quite high. Base Resources, for example, launched a share offer in order to raise KES3.41 billion to finance operations at its titanium mine in Kwale.

The Kenyan government has taken quite the amount of money from the public through borrowing instruments and cannot afford to drain more funds from them. In a press statement by Hon Njeru Githae on financing options for the wage adjustments for public sector, he notes that domestic maturities stand at KES 170 Billion. Further borrowing would increase interest rates and crowd out private sector investment.  It’s basically bad news for foreigners who already consider Kenyan investments risky in light of the nationalization announcement and oncoming elections.

Using Zambia as a case study, one can see that nationalization has ominous consequences attached to it. Their government nationalized Anglo American and Selection Trust’s copper mines in 1969. According to ConsultAfrica copper prices peaked around that time at US $1.50 and copper mining accounted for a third of the country’s GDP. An oil crisis a few years later resulted in decreased copper output to 257,000 tons from a high of 750,000 tons in 1973. The government ended up privatizing those very companies and borrowed money to restructure the economy.

What does it mean to Kenya and its citizens?

There are currently 10 mining licences issued to investors, with 4 belonging to foreigners among them, Australian-based Base Resources. While increasing local stake in an international firm is good, its benefits are likely to be enjoyed only in the medium term. It also sets a framework from which local ownership laws can be adjusted to include more Kenyans in international firms. Increased employment doesn't necessarily mean improved quality of labour.

It's up to the citizens to ensure that they acquire the necessary skills to sustain the industry's development and make the sector a reliable contributor to Kenya's GDP. We could certainly do with more geologists and other mining-related graduates as a start.