Mineral discoveries put Kenya’s policies under the spotlight

Thursday December 13 2012

In Turkana County, a windswept terrain where goats browse the shrubs in the semi-arid landscape, oil prospectors have been searching for the precious mineral.

While the past few months — after several missed attempts — have given oil firms renewed hope after striking oil at Block 10BB-Ngamia 1, Kenya is being challenged to avoid political “sweet heart” deals and come up with a tax regime that will make the companies pay.

The African Tax Administration Forum (ATAF), the 35-member body based in Pretoria, South Africa, says an estimated $3 trillion (Sh255 trillion) was lost through tax corruption in Africa in the past three years, as deals between companies and governments in the sector continue to deprive the citizenry of the benefits associated with discovery of natural resources across the continent.

“There is evidence that African countries receive less revenue from natural resources than many other countries in the world,” said ATAF executive secretary Logan Wort in the report titled Good Tax Governance in Africa. “Generally, there is more than corruption involved.”

Part of these leakages, ATAF says in the report, were due to tax incentives given through deal-making outside the policy framework.

The forum says governments must renegotiate these deals within three years of gas and oil inflows because they largely favour companies.


“We discourage tax incentives through deal making. We encourage politicians to involve policymakers,” the report dated November notes.

The forum says contracts are often subject to strong confidentiality clauses by multinationals, governments, investors and banks involved.

But in the budding mining industry in most countries, revenue losses are due to lack of tax experts, especially in the sector coupled with ill intentions of those who want to control a country’s natural resources.

“There is no expertise to tax the sector properly. In South Africa, banks started paying proper taxes after five years,” adds the ATAF report, noting that this tends to brew conflicts in the sector.

Since most conflicts linked to oil revolve around revenue sharing and environmental protection, the greatest losers or gainers are the host communities in the resource-rich areas.

ATAF proposes that the International Monetary Fund and World Bank should help African countries to build capacity to negotiate contracts for taxing extractive industries.

Kenya’s tax provisions under the Production Sharing Contract (PSC) in case of a discovery, include the profit, which is shared between the government and mining company after deduction of costs comprising production expenses as well as capital expenditure amortised at 20 per cent Capex . These exclude intangible drilling costs such as labour, fuel, repairs, maintenance and mobilisation.

Here, government share includes all taxes due on the company’s stake.

Other capital deductions include building structures, pipelines and storage tanks, erection of rigs and tanks, acquisition of rights in or over petroleum deposits, exploration testing and expenses and capital expenditure deductible equally over five years from the date production starts.

Expenditure incurred in drilling a well that is later abandoned for lack of petroleum is claimed in the year the well is abandoned.

It also provides for deficits which may be carried back including one year of income which the petroleum company has ceased permanently to produce petroleum and three years of income from the year in which the deficit occurred.

Other provisions include government participation but it has an option on whether or not to exercise the option. Domestic market has priority on any oil produced, the PSC reads in part.

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Uganda which is on the brink of joining the top 50 global oil producers has just passed legislation to regulate the country’s nascent petroleum sector.

But critics say the new law vests too much power in the executive. The vote could help pave the way for a new licensing round for exploration blocks, which have been held up by the standoff between Parliament and ministers over natural resources such as oil.

Kenya’s energy legislation currently in the works, lays emphasis on local communities who, if affected by the exploitation of the natural resources, would be effectively compensated. This is necessary to ensure that oil money benefits the host country, community and the oil company.

Policymakers at the Ministry of Energy are also planning to review the Petroleum Act, the law governing the oil sector. The government says it is seeking stronger legislation on sharing of benefits from the resource.

Consultants from the World Bank and the African Development Bank have been hired to help secure better revenue sharing terms with oil explorers.

The experts will review the Petroleum (Exploration and Production) Act Cap 308 and Model PSC to ensure the government, local authorities and communities get the most from the oil wealth.

In the new licensing regime, Kenya would raise the signing bonus that companies pay when they are granted new licences, which stands at Sh25.5 million.

“Currently, an oil exploration company could sink wells and pocket 100 per cent from sales. We are looking at a revenue enhancement and management model,” says Energy PS Patrick Nyoike.

Other challenges include practical testing of the tax legislation as well as limited skills among Kenyans on the taxation of the petroleum production.

Multiplicity of tax provisions also calls for standardisation in the PSC while experts have faulted the level of discretion in the hands of the ministry.

In the draft National Energy Policy, the government has committed itself to adopt the Extractive Industries Transparency Initiative (EITI) treaty — a global standard that promotes revenue transparency.

But Ministry of Energy officials say this can only happen in the last and final stage of production.

“We are not ready because we do not yet have revenues from oil,” said Ministry of Energy commissioner for petroleum Martin Heya.

Civil society groups want the government to sign the transparency laws following the recent discoveries of commercially viable petroleum, coal and other mineral resources.

Even before the viability of these resources is determined, the civil society proposes that Kenya needs to promote openness and accountability in the mining sector by signing the EITI treaty.

They argue that the move will help the country to avoid a political and/or oil management curse witnessed in other mineral-rich countries in Africa.

“One of the deliverables from the regulatory framework review will be to join the EITI as the logical confirmation of intention to undertake transparency and accountability in the sector,” said a coalition of NGOs in a press statement. “The draft Energy Policy does indicate that Kenya will join EITI.”

Industry analysts say the treaty is necessary to ensure proper governance which is not guaranteed in the management of the sector.

“EITI is not a panacea to Africa’s resource problems. The solution lies in streamlining issues of governance but EITI helps to ensure higher accountability,” said industry expert Mwendia Nyagah.

Global standards

Petroleum Focus Consultants director George Wachira says the country first needs to go through the logical process of formulating policies, strategies and adoption of laws that fully address the oil and gas sector. This is currently being drawn up by the Ministry of Energy.

“At the right time I am sure Kenya will join the EITI,” he says.

EITI monitors and reconciles company payments and government revenues of a country. Each signatory State creates its own EITI process, which is overseen by participants from the government, companies and the national civil society.

The multi-stakeholder initiative, which comprises governments, companies, civil society groups, investors and international organisations is widely accepted and used in the oil, gas and mining sector to strengthen good governance, promote openness and accountability.

It has set rules and requirements that detail what countries must do to join, achieve and maintain compliance with global standards for reporting extractive revenues.

Canadian firm Africa Oil Company, which based in Vancouver, recently became a supporting entity of the EITI, an important step through which oil exploration companies reaffirm the importance they attach to doing business in an open and transparent manner.

“Formally supporting EITI was a natural extension of our on-going business practices and demonstrates our commitment to the oil industry playing a positive role in the sustainable economic development of the countries in which we operate,” said Africa Oil CEO Keith Hill.

Eight African countries are members of the EITI. They are Ghana, Mauritania, Mozambique, Nigeria, Niger, Zambia, Central African Republic and Mali. In all, there are 16 compliant countries and 21 candidates for the EITI.

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But Nigeria together with some countries signatory to initiative are not the best example in terms of transparent and accountable management of their mineral resources.

In fact, Nigeria has not yet passed the basic oil and gas law. The New Nigeria Petroleum Industries Bill is presently before that country’s Parliament. 

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