FINAL DRAFT REPORT - Centre For Economic Governance€¦ · attention. Flagship projects like Base Titanium’s Kwale Mineral Sands project , and recent oil discoveries announced

UK Department for International Development

FINAL DRAFT REPORT

Recommendations for the Development of Kenya’s Extractive Industries Based on inclusive multi-stakeholder consultation September 2013

Acronyms/Abbreviations CPV

AfDB African Development Bank AMSI African Mineral Skills Initiative ASI Adam Smith International CEC Cabinet Extractives Committee CIDA Canadian International Development Agency CPI Corruption Perception Index CRA Commission on Revenue Allocation CSO Civil Society Organisations DFID UK Department for International Development ESIA Environmental and Social Impact Assessment EITI Extractive Industries Transparency Initiative ESWG Extractives Sector Working Group GoK Government of Kenya ICMM International Council on Mining and Metals IFC International Finance Corporation IHRB Institute for Human Rights and Business IMF International Monetary Fund IOC International Oil Company KEPTAP Kenya Petroleum Technical Assistance Project KOGA Kenya Oil and Gas Association KPC Kenya Pipeline Company KRA Kenya Revenue Authority LAPSSET Lamu Port and South Sudan-Ethiopia Transport Corridor MDA Ministries, Departments, Agencies MDP Ministry of Devolution and Planning MOF Ministry of Finance (The National Treasury) MOU Memorandum of Understanding MPE Ministry of Petroleum and Energy MSG Multi-Stakeholder Group NAFFAC National Fossil Fuels Advisory Committee NEMA National Environment Management Authority NESC National Economic and Social Council NGO Non-Governmental Organisation NOCK National Oil Corporation of Kenya NRC Natural Resource Charter OECD Organisation for Economic Cooperation and Development PIEA Petroleum Institute of East Africa PEFA Public Expenditure and Financial Accountability PWYP Publish What You Pay RWI Revenue Watch Institute SESA Strategic Environmental and Social Assessment UNDP United Nations Development Programme VAT Value Added Tax

Recommendations for the Development of Kenya’s Extractive Industries

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Table of Contents A. Summary recommendations and actions .......................................................................................................................................... 2

1. Summary ...........................................................................................................................................................................................................2 2. Next Steps .......................................................................................................................................................................................................4

B. Introduction ............................................................................................................................................................................................................ 5 1. Context ...............................................................................................................................................................................................................5 2. The opportunity for Kenya - the cases of Botswana and Ghana ..........................................................................6 3. Our approach to the assignment ...................................................................................................................................................8

3.1. Terms of reference ............................................................................................................................................................................8 3.2. Approach ...................................................................................................................................................................................................8 3.3. The five principles of extractive sector good governance ................................................................................. 10

C. Issues, analysis and recommendations ............................................................................................................................................ 11 1. Vision, policy and legislation ........................................................................................................................................................... 11

1.1. A coordination mechanism should be developed, agreed and implemented ....................................... 11 1.2. A vision for the extractives sector should be developed through wide and meaningful consultation .......................................................................................................................................................................................................... 13 1.3. A strategy to communicate the vision and manage expectations should be designed and implemented ......................................................................................................................................................................................................... 14 1.4. A policy and legal framework should be developed for the extractives sector ................................ 16

2. Revenue management........................................................................................................................................................................... 18 2.1. A tax regime that attracts investment and optimises revenues should be developed ................. 18 2.2. A framework for managing resource revenues optimally over time should be developed ........ 20

3. Transparency and accountability .................................................................................................................................................. 21 3.1. Establish a process to ensure transparency and accountability in the extractives sector ........ 21

4. Economic development ........................................................................................................................................................................ 22 4.1. Create wealth and jobs for Kenyan companies and citizens .......................................................................... 22 4.2. Kenya should develop skills to supply (directly and indirectly) to the extractives sector and downstream industries .................................................................................................................................................................................. 24 4.3. A policy framework for regional cooperation and infrastructure should be developed in Kenya 25

5. Communities and environment ....................................................................................................................................................... 26 5.1. A community development legal framework should be developed and implemented .................... 26 5.2. County development programmes should be designed and implemented ............................................. 28 5.3. An inclusive community socio-economic development fund should be developed .......................... 29 5.4. Kenya-regional strategic environmental and social assessments should be conducted .............. 30 5.5. Environmental assessment and monitoring functions should be strengthened ................................... 31 5.6. There should be focus on artisanal mining development .................................................................................. 32

6. Effective and efficient institutions ................................................................................................................................................ 34 6.1. Establish a fit-for-purpose institutional framework ................................................................................................... 34 6.2. Transform the capacity of key institutions and stakeholders ......................................................................... 35

D. Annexes ................................................................................................................................................................................................................... 36 1. List of stakeholders consulted .............................................................................................................................................................. 36 2. The five principles of extractives sector governance (and associated programmes) .................................... 40 3. Kenya’s Status in Relation to the 5 Principles .......................................................................................................................... 41 4. Role of government institutions in the extractives sector in Kenya .......................................................................... 42 5. References ............................................................................................................................................................................................................ 43 6. The consulting team ..................................................................................................................................................................................... 44

A. Summary recommendations and actions 1. Summary Following a request for assistance on extractives from the Government of Kenya in 2012, DFID Kenya undertook initial consultations and commissioned this scoping review in March 2013. This resulting high-level report makes actionable recommendations for the development of Kenya’s Extractive Industries (oil, gas and mining). It serves to identify the immediate steps that Kenya must take to ensure that it can mitigate the risks and leverage the significant opportunities of mineral resource exploitation. The recommendations are evidence-based, and derived from wide-reaching and comprehensive consultation with representatives of all key stakeholder groups in Kenya including the key Government ministries. The report is currently being reviewed by all key Cabinet Secretaries, many of whom have already provided feedback and an endorsement of the recommendations. This is complemented by international best practice, expertise and seasoned experience.

Guiding the development of this report is the critical need to manage and align the expectations of all sector stakeholders, including the host communities, to ensure a stable, conflict-free, successful extractives sector. Thus, all of the outlined recommendations speak to a transformative and inclusive approach to the development of the extractive sector from the outset. Such an approach will serve to ensure that the Kenyan people benefit from the country’s resource wealth by guaranteeing durable economic and social benefits for Kenya, whilst also ensuring that Kenya remains a competitive oil, gas and mining investment destination.

The study is independent of any one stakeholder party, and seeks to provide objective analysis. The overarching objective of the study is to support all stakeholders, including the Government of Kenya (GoK) and development partners, to devise a fit-for-purpose programme of development of Kenya’s extractives sector for the benefit of all Kenyans, now and in the future.

The table on the next page summarises the report’s recommendations, grouped by the priority and timeframe in which they need to be taken forward by the Kenyan Government, its partners and key stakeholders. The subsequent sections contain expanded details of the recommendations, the methodology, stakeholders consulted and the consulting team. The details presented under each recommendation require further assessment. The next step will be to establish which activities are priority activities and appropriate strategies for implementation.

Further, the scope of this report is broad and as a result captures a number of issues. There are thematic issues which run throughout the report, in particular, conflict mitigation, which essentially underpins all recommendations. Some will need to be further expanded upon. These include:

» Human rights » Regional context » Community conflict » Land » Gender and Youth » Infrastructure

The political backdrop, including the on-going process of devolution, has been considered throughout. Note that there are several actions that require urgent attention (those highlighted in red), and the authors urge the Government of Kenya, its partners and stakeholders to take immediate steps to address these. Furthermore, it is strongly recommended that these actions be undertaken under an umbrella 6-year programme with Cabinet-level oversight, and engagement with community and county representatives, and the private sector.


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Recommendation Summary Priority Timing Q3 Q4

2014

2015

2016

2017

2018

Category

1 GoK agrees on and implements a coordination mechanism

V HIGH September Vision, Policy & Legislation

2

Establish a compelling & inclusive national vision and roadmap for extractives

V HIGH October Vision, Policy & Legislation

3 Design & implement communications strategy V HIGH 2013-18 Vision, Policy &

Legislation

4 Develop policy, legal and regulatory framework for extractives

HIGH 2013-14 Vision, Policy & Legislation

5 Develop community development framework HIGH 2013 Communities &

Environment

6 Strategic Environmental and Social Assessments (SESAs)

HIGH 2013 Communities & Environment

7 Ensure transparency & accountability in extractives

HIGH 2013-16 Transparency & Accountability

8 Design an inclusive community investment framework

MEDIUM 2013-18 Revenue Management

9 Design and implement tax regime MEDIUM 2013-18 Revenue

Management

10 Design & implement system for managing resource revenues

MEDIUM 2014-18 Revenue Management

11 Comprehensive skills & education programme MEDIUM 2013-18 Economic

Development

12 Develop policy framework for regional cooperation MEDIUM 2013-15 Economic

Development

13 Design comprehensive wealth & job creation programme

MEDIUM 2013-18 Economic Development

14 Design Resource County Development Programmes MEDIUM 2013-18 Communities &

Environment

15 Strengthen environmental assessment & monitoring MEDIUM 2014-16 Communities &

Environment

16 Strategic focus on small-scale and artisanal mining

MEDIUM 2014-16 Communities & Environment

17 Establish a fit for purpose institutional framework

MEDIUM 2013-14 Institutional Development

18 Capacity building in key institutions/organisations MEDIUM 2013-18 Institutional

Development

2. Next Steps

For each recommendation, immediate actions have been highlighted. These are the actions considered critical to kick-starting the implementation of the respective recommendation.

In addition, there are a number of overarching next steps, and these are listed below:

1. Cabinet Secretaries to engage with development partners to indicate required support. This includes prioritising and refining interventions, and agreeing timing, counterparts and ways of working. It links closely to Recommendation 1: the GoK agrees on and implements a coordination mechanism.

2. Multi-donor collaboration arrangements to be agreed upon. The World Bank, AusAID, and the African Development Bank (AfDB) are planning interventions in the extractive sector. Any DFID programme of support should dovetail with these initiatives. Currently there is a planned coordination and information sharing mechanism due to be established and managed by the AfDB which has been integrated into the proposed interventions. Specific financing arrangements will need to be finalised ahead of programme implementation.


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B. Introduction

1. Context Kenya has an abundance of largely untapped natural resource wealth which, to date, has attracted considerable investor attention. Flagship projects like Base Titanium’s Kwale Mineral Sands project, and recent oil discoveries announced by Tullow Oil and Africa Oil, signal the strong potential for sector growth. According to government estimates, extractives currently contribute just 1% to Kenya’s GDP and in terms of total export revenues it is less than 2%. This contribution is set to grow significantly (current estimates suggest the sector may grow to 10% of GDP) and the opportunity to use the sector to catalyse transformational national development and economic growth requires careful planning at this critical and early stage.

In this vein, there is consensus with regards to the need to mark Kenya out as an attractive investment destination, align regulation and governance of the sector with the devolved arrangements of the constitution (adopted in 2010), and institute mechanisms designed to make sure that the country derives value from the activities of its extractives industry. This urgency has been compounded by the need to position East Africa as an emerging hub for investment in the extractive sector, and the growing recognition that collaboration can create regional economies of scale.

There are key challenges currently facing Kenya’s extractives sector which require immediate attention. The constitution provides for a devolved government with significantly more power than previously. Under these provisions, county governments will play a role in regulating extractives activities. Furthermore, their direct representation in parliament will considerably alter the landscape of regional politics. We expect issues around entitlement – in line with constitutional provisions on land and ownership which stress the responsibility of parliament and government in ensuring the benefit to the people of Kenya and local communities of any resource exploitation and investment – to be further emphasised as the constitution is fully implemented.

The Kenyan extractive landscape is on the cusp of reform. Any recommendations must adequately take into consideration the following:

Tensions are high. Without effective interventions, existing tensions in Kenya are likely to be exacerbated by extractives sector growth (lack of transparency, illicit financial flows, land grabbing, pollution, community distrust, lack of government agency coordination). Social unrest is not far off, and the potential for escalation of tensions in Kenya is well-documented.

Kenya is ready. Kenya has just managed a relatively smooth transition of power and capable and cooperative Cabinet Secretaries for Mining and Energy and Petroleum have been appointed. There is a real opportunity to engage with the sector in its infancy and to support these two key ministries to craft internationally attractive sector strategies;

The sector requires coordination support to succeed. The creation of the Ministry of Mining, alongside the Ministry of Petroleum and Energy and the Ministry of Environment, Natural Resources and Water requires strong coordination support;

Competing interests need to be managed. Kenya’s extractives sector involves a complex stakeholder landscape and a number of competing interests;

Kenya is a leader in the region. There is a sound expectation that Kenya will perform competitively in the region in a number of sectors, including extractives; Kenya has the best infrastructure in the region. Thus, Kenya is well positioned to lead regional cooperation ensuring each EAC member country contributes according to its own competitive advantages;

Constitutional devolution Kenya has been under a new constitutional dispensation since 2010. The key relevant change in the constitution is the devolved system of government, where 47 county governments have been created and are led by elected county governors, each with their own Cabinet. Each county also has a county assembly to deliberate and legislate on issues concerning the county.

Whilst there is still a significant degree of ambiguity as to the boundaries of power between the national government and the county governments, the Fourth Schedule of the constitution attempts to provide some clarification on the distribution of functions. In relation to the extractive industry, the national government is responsible for land planning and coordination of planning by the counties; transport and communications including pipelines; protection of the environment and natural resources to ensure sustainability; and energy policy.

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The county government functions meanwhile include county planning and development, including land surveys and mapping; implementation of specific national government policies on natural resources and environmental conservation, including soil and water conservation; and forestry.

Stakeholder perspectives There is anticipation in Kenya that the extractive sector – oil and gas in particular – can bring transformational economic growth to the country. This is closely coupled with a strong public will that Kenya should not follow a similar path to the likes of Nigeria, which has failed to translate its natural resource wealth into real and tangible development outcomes.

A selection of quotes and sentiments is presented below:

“Kenya can buck the trend of the resource curse: the media and civil society thrive in Kenya. There’s a freedom in Kenya that doesn’t exist elsewhere. Kenya can do the right thing.” Oil company representative

“We don’t want to be perceived as an oil producing country. We want to create a regional hub for training, know-how, research and logistics.” Vision 2030

“Kenya needs a coherent national policy on extractives so all stakeholders can understand how they fit within this” Mining company representative

“We want a county strategic plan that fully appreciates our natural resource wealth. We must utilise our natural resources to improve the lives of all the people living in the county through training, and the provision of jobs and better healthcare”. County Governor, Kwale

“The counties need each other. We must agree on ideas of commonality and see the opportunities for one another” County Governor, Kwale.

“The conversation around extractives needs to be designed properly. A two-pronged approach is required, bottom-up and top-down in parallel.” County Governor, Taita-Taveta

“Government is fighting for itself, but who fights for the community?” Kwale CSO member commenting on the sharing of benefits

“The communities lack capacity to adequately understand the implications of mining activities.” Kwale CSO member

“Mining operations should be stopped until consultations with the local community are done.” Taita-Taveta resident

“How can we give them land for another site when they have not met our previous proposals? No classrooms for children, no water in Kapese, no bursary. No money has been given out, nothing has been done.” Lokichar resident

2. The opportunity for Kenya - the cases of Botswana and Ghana It is important to understand the opportunity for Kenya if the sector functions effectively and in the best interests of the people of Kenya. The extractive sector has the potential to provide significant benefits to Kenya, but must be placed in the context of an already mixed economy. The case for developing the extractive sector needs to be compelling when set against other potential opportunities such as tourism and agribusiness.

A statistically reliable forecast should be developed as a fundamental element to sector and national planning, but for the purposes of this report, consideration of relevant case studies serve to provide a useful frame for the opportunity facing Kenya today. Botswana and Ghana are often referred to as excellent examples of country’s that have used their natural resource wealth to generate strong economic growth, foster sustainable social development and significantly reduce poverty levels. Furthermore both of these countries demonstrate show that the resource curse is not inevitable as long as the right policies leading to favourable circumstances are firmly in place. Looking briefly at Botswana and Ghana will provide additional evidence to show that managing resource wealth effectively can engender a highly positive impact.

Botswana

Botswana is one of only thirteen economies in the world to have achieved a sustained GDP growth of 7 percent or more in the post-war period according to the Growth Report by the World Bank’s Commission on Growth and Development. Among the natural resource rich countries, Botswana ranks alongside Brazil, Indonesia, Malaysia,


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Oman and Thailand.1 This rapid economic growth was driven by the discovery of diamonds soon after independence in 1966. Diamonds are the main contributor to government revenue, exports and GDP. Botswana’s diamonds are mined mainly by Debswana Diamond Company, a Government of Botswana and De Beers 50-50 joint partnership. Debswana is the world’s leading diamond producer by value and produces in excess of 70 percent of Botswana’s export earnings, 30 percent of GDP and 50 percent of government revenue. In 2010, Debswana’s revenues totalled Pula 18.34 billion (US$ 2.79 billion).2 Botswana’s efficient exploitation of its resource rents is attributed to having good policies which effectively protect the property rights of investors, provide political stability and encourage public participation, and ultimately promote investment and economic development.3

World Development Indicators, World Bank 2011.

Ghana

Ghana is one of Africa’s fastest growing economies, recording 14.3 percent in 2011 according to the World Bank’s World Development Indicators. Ghana’s extractive sector straddles the oil, gas and mining sectors. It recently became one of Africa’s new oil producers, with the discovery of major offshore oil reserves in 2007 and production officially beginning in 2010. Between January and June 2012, Ghana received US$ 327.17 million from petroleum exports.4 Ghana’s mining sector also makes a significant contribution to the economy. It has a long history of gold mining, which accounts for over 80% of the total income from the sector.5 Ghana was the ninth largest gold producer in the world in 2009 (accounting for nearly 4 percent of global production) and the second in Africa. A significant local supplier industry has developed to support the mining sector including in construction, distribution, metals and metalworking, chemicals, civil engineering, business services and logistics. In 2008, the reported spending on local purchases (excluding fuel and power) by major gold mining companies was US$467 million.6 Ghana signed on to the Extractive Industries Transparency Initiative (EITI) in 2003 and became compliant in November 2010. The Ghana Extractive Industries Transparency Initiative (GHEITI) has issued reconciliation reports in the mining sector, covering the period 2004 to 2009. The initiative was extended to cover the oil and gas sector in September 2010.7

1 Commission on Growth and Development. 2008. The Growth Report: Strategies for Sustained Growth and Inclusive Development. The World Bank, Washington, D.C. 2 Debswana. 2011. Report to Stakeholders 2010–2011 and http://www.debswana.com/About%20Debswana/Pages/Introduction.aspx (accessed 13 June 2013) 3 Rodrik, Dani (ed). 2003. In search of prosperity: Analytic narratives on economic growth. Princeton and Oxford: Princeton University Press, pp. 481. 4 Republic of Ghana. 2012. Public Interest and Accountability Committee (PIAC) Report on Management of Petroleum Revenues for the Period 1st January 2012 to 30th June 2012 5 Ministry of Finance and Economic Planning (GHEITI). 2013. Final Report on the Aggregation/Reconciliation of Mining Sector Payments and Receipts: 2010-2011. 6 Morris, Mike; et al. 2012. One Thing Leads to Another: Promoting Industrialisation by Making the Most of the Commodity Boom in Sub-Saharan Africa. 7 Ministry of Finance and Economic Planning (GHEITI). 2013. Final Report on the Aggregation/Reconciliation of Oil and Gas Sector Payments and Receipts: 2010-2011.

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World Development Indicators, World Bank 2011.

3. Our approach to the assignment 3.1. Terms of reference

In April 2012, the Ministry of Northern Kenya and the Arid Lands, for the Government of Kenya, requested that DFID undertake a scoping study and provide support to the inclusive development of the extractives sector in Kenya. Consultations with this Ministry and with the Ministries of Environment, Energy and Treasury confirmed the request. DFID attended the first of a series of ad-hoc donor group meetings shortly thereafter at which confirmation was provided to the development partners that DFID would engage in consultations and a scoping study. DFID subsequently confirmed intentions to the Government of Kenya. Initial broad based consultations with partners and the Government followed, including the private sector, civil society and communities, and based on these DFID commissioned this formal scoping review in March 2013.

The objective of the assignment was to undertake a fact based scoping study and options review to identify ways DFID can contribute to the inclusive development of the extractives sector.

This initial phase has considered the current situation and options for fuller, medium to long-term engagement. The second phase will entail a much more detailed scoping involving analysis to underpin a proposal for work in one or more specific agreed areas, and recommendations for action.

This study aims to develop a high-level, factual picture of the sector’s issues and prospects including; current roles of institutions; policy, legislation, management procedures; implications of constitutional and other changes; donor positioning; political economy of the sector and forces for change (leading players, private investors, public stakeholders, key communities and NGO/INGO interest); institutional capacities; policy gaps; fiscal burden; transparency, corruption, incentives; communities and exclusion; environmental issues. It also considered the potential development path of the sector, supply chain, local content, skills base; roles for stakeholders including domestic and international private sector; and reviewed global best practice. Many of the highlighted areas are not discussed in detail, due to the limitations of the report.

3.2. Approach The Extractive Sector Scoping Study was carried out over 6 weeks in May and June 2013, with follow up consultations in July and August 2013. In an effort to provide objective analysis and recommendations, approximately 120 people were consulted from the public sector, private sector, civil society, local communities and development community. The full list of stakeholders consulted is in Annex 1.

The study combined desk research, one-to-one and telephone interviews with stakeholders, two field trips (to Turkana and then to Kwale and Taita-Taveta) and a stakeholder workshop. One-to-one interviews were conducted with a wide range of stakeholders. The questions were open-ended to elicit broad insights from the respondents on the extractive industry in Kenya, the activities of their organisations, the challenges faced and their recommendations.

The team consulted officers in key public institutions including the Ministries of Energy and Petroleum, Mining, Planning and Devolution and Finance. We also met with relevant government agencies including the National Environment Management Authority, Kenya Revenue Authority, Commission for Revenue Allocation, Vision2030 and the National Economic and Social Council.

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Figure 1 - Consultations in Turkana


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On the private sector side, the team consulted the key sector associations in oil and gas, and mining; private investors in the oil and gas, and mining industries; and local suppliers to these industries. The team also consulted the Kenya Civil Society Oil and Gas Platform and Kenyan think tanks. In addition, we met with a range of multilateral and bilateral development organisations.

Turkana

On the first day, the team held meetings with the Governor and local and international NGOs working in the area. On the second day, the team visited one of the exploration sites for an oil firm and also held focus group discussions with the women and men in the local community. The Chief of the area provided the translation.

Kwale

The team visited Base Titanium’s headquarters, and site operations to gain a strong understanding of the opportunities and challenges the company has faced to date. The team then visited the Governor and Deputy Governor of Kwale followed by a meeting with a WWF representative responsible for Kwale. To end the day, the team met with the chairlady of Taita-Taveta Women’s Mining Group, an artisanal mining group.

Taita-Taveta

The team started the day with a meeting with the Governor of Taita-Taveta, followed by a meeting with the Minister of Mining of the Taita-Taveta County Government. The Minister kindly accompanied the team to an artisanal iron-ore mining site, one of the larger and more established artisanal operations in the County. The team received a tour of the operations followed by consultations with workers and managers of the site. On the way back to the main town, the team stopped at a neighbouring village for a considerable time to speak to community members about the challenges they face, their expectations of living next to a mining operation and the future they would like to see for the extractives sector in Kenya and the impact on their community.

Stakeholder workshop

A stakeholder workshop was convened on the afternoon of 5th June 2013 to disseminate the initial findings of the study and receive feedback from the participants. Nearly 40 people attended representing the public sector, private sector, civil society, development partners and academia/think tanks.

Figure 2 - Consultations in Kishushe village, Taita Taveta County

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3.3. The five principles of extractive sector good governance The authors of this report have divided good governance of the extractive sector into 5 core principles, as illustrated below: 8

Figure 3 – Adam Smith International: 5 Principles of Extractives Good Governance

Underpinning these 5 principles of extractives good governance are fit-for-purpose and adequately capacitated governance institutions; institutions which have the right structure, functional definition, core business processes and skills and technology to fulfil their legal and regulatory mandate.

In Annex 2, we describe these principles with specific reference to Kenya.

8 This framework relates closely to those adopted by other organisations, e.g. the World Bank extractives value chain, and the Natural Resource Charter.


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C. Issues, analysis and recommendations

What follows lays out the key issues facing governance of the extractives sector in Kenya and our recommended responses and interventions, categorised by the five principles of extractive sector good governance as outlined at the end of Section B above.

1. Vision, policy and legislation 1.1. A coordination mechanism should be developed, agreed and implemented

Current context, Issues and Risks

There are currently at least two potential coordination mechanisms for extractives sector development within the Government of Kenya at national level:

The Inter-Ministerial Committee on the Policy and Legal Framework for Geology, Mining and Minerals (with the Ministry of Finance as the lead agency). This Committee is not an inclusive committee and key Ministries often do not participate.

NAFFAC (National Fossil Fuels Advisory Committee) which is led by the Ministry of Petroleum and Energy and includes the National Oil Corporation of Kenya (NOCK), the Attorney-General, NEMA, Kenya Revenue Authority, the Ministry of Finance and the Petroleum Institute of East Africa (PIEA) as members. NAFFAC is currently set up as the licensing review body.

In addition, as a fully integrated national oil company with upstream, midstream and downstream operations, NOCK will doubtless play a central role in sector development, both as a member of NAFFAC, but also as a focal point for external investment as both an operator and a partner in oil and gas projects.

The African Development Bank (AfDB) is in the process of setting up an information centre on the extractive industries in Kenya, and likely allied to this, a donor coordination committee is planned9

There remains a significant risk that the Government of Kenya is not coordinated across extractives sub-sectors (oil, gas and mining) and between national and county governments, and that development partners do not work in sync with each other. Without an integrated and aligned coordination mechanism across government, the development partners and the private sector, there may be a duplication of effort, or implementation of parallel initiatives, which in time veer off in different directions.

The tensions between the county governments and the national governments during this transitional period of devolution will need to be managed carefully in relation to establishing an effective coordination mechanism. Furthermore, the nature of county to community engagement needs to be strongly considered. More work is required here to fully understand these relationships.

Recommendations

1. A Government coordination mechanism to be established. To ensure joined-up and cohesive governance, a Cabinet-level coordinating body is required that is led by the Office of the President, and involves the most relevant Presidential Adviser(s) as well as the cabinet secretaries of the Ministry of Petroleum and Energy, the Ministry of Mining, the Ministry of Finance, the Ministry of Industrialisation and Enterprise Development and the Ministry of Environment. Different options and models should be considered, though this is likely to require a small secretariat that could be housed in the Office of the President. It is important that this body is small, dynamic and the single body with the authority to make key decisions in relation to extractives governance. We refer to this body as the Cabinet Extractives Committee (CEC) in this paper.

9 http://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/multi-donor-secretariat-for-extractive-sector-mdses/

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2. A multi-stakeholder “Extractives Sector Working Group” (ESWG) to be established This should include representation from the Cabinet-level coordinating body, the National Economic and Social Council, the National Oil Corporation of Kenya (NOCK), development partners, the parliamentary and senate committees for Mining and Energy and the organised private sector (including the PIEA, the Kenya Oil and Gas Association- KOGA, KEPSA, KCM). It is vital that the private sector is accorded a key role in supporting the government to shape the development of the sector, to avoid policy shocks, provide expert input and ensure that concerns and issues are effectively absorbed. CSO participation is critical to the coordination mechanism to ensure there is citizen inclusivity and that community perspectives feature in high-level decision making groups. The question of how the ESWG is driven by government but is also consultative needs to be considered and agreed upon. Successful models upon which this body be based include the EITI multi-stakeholder groups which includes elected community and private sector relationship, and Ghana’s Public Interest and Accountability Committee, established under the Petroleum Revenue Management Act.

3. County government-level coordination committees to be established. The purpose of these committees is to coordinate between county and national level.

These bodies are interdependent, and must be interconnected through appropriate representation and reporting mechanisms.

Immediate Actions

1. Establish the CEC and its secretariat.

2. Undertake a situational analysis of the extractives sector to identify and assess institutions, stakeholders and decision-making processes, in order to recommend progressive entry points for development partner interventions. The analysis should identify and assess key areas of discretionary decision-making and competing interests currently at play in the extractives sector across the value chain.

3. A short study on coordination, which provides mechanism options and provides a Terms of Reference for the proposed ESWG, which includes how the body will be embedded within existing institutions and processes

4. Securing buy-in from the key stakeholders will be key to a successful and coordinated working group. Further consultations to communicate the benefits of collaboration will be undertaken.

Priority: VERY HIGH Timing: September 2013 Owner: Office of the President

Impacts and Benefits

1. The working group has no direct impacts or benefits; it is rather a critical and necessary precursor to all proposed interventions.


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1.2. A vision for the extractives sector should be developed through wide and meaningful consultation


Prior to the discovery of commercial quantities of oil in Turkana in 2012, the extractive sector was not a priority sector for the Government of Kenya. However, attitudes have shifted and the extractive industry is now the seventh sector under the economic pillar of Vision 2030. The next Medium Term Plan (MTP) was completed at the end of July and included reference to the extractive sector.

There is therefore an urgent need for a vision to be developed, which addresses and responds to a set of high-level strategic questions: how does Kenya avoid the oil curse and Dutch disease? How can Kenya ensure that oil revenues are for the benefit of all Kenyans? How can Kenya guarantee that there is as much value-addition and downstream processing as possible? How can Kenya work most effectively with its regional neighbours in developing the sector? What does Kenya have to do to ensure it develops the right skills and expertise among its young to supply the sector? What downstream industries does Kenya want to develop in order to move “beyond oil”? How does Kenya avoid environmental damage? How can Kenya ensure that operating companies effectively engage with local communities and acquire a social licence to operate? How can Kenya ensure sustainable investment in the sector? What role should the national oil company, NOCK, play in sector development, and how should NOCK relate to the GoK? All these questions must be discussed and consensus achieved across a wide variety of stakeholders at all levels. Only when the vision is collectively owned can it become a plan for reality.

There are several frameworks for best practice that can serve as inputs to the vision-creation process, such as the Africa Mining Vision and the Natural Resource Charter. In addition, best practice principles on various aspects of the extractives sector have also been developed by the International Finance Corporation (IFC), the International Council on Mining and Metals (ICMM) and the Extractive Industries Sourcebook, among others.

The chief risk is that the Government of Kenya rushes into developing legislation ahead of consensually drawing up a vision. This will result in inadequate legislation that does not reflect agreed priorities and will require subsequent redrafting in order to address imbalances or tensions between stakeholder groups.

Recommendations

1. Undertake extensive stakeholder consultation. The proposed CEC and ESWG should together plan an extensive stakeholder consultation exercise (government partners, legislators, private sector players, communities, CSOs, county governments) to develop a holistic vision that all parties can buy into. The vision for the extractive sector can be developed over a period of months.

2. Develop a roadmap - as a complementary document - for implementing the vision. This roadmap will be as comprehensive as possible, at the same time being a relatively detailed step-by-step plan for all reform programmes and activities in the sector

3. Communicate effectively. The vision (and the roadmap) then needs to be collectively owned and communicated at all levels of Kenyan society in tandem, enabling bottom-up communication flows as much as top-down. Part of this process will be to develop a risk and mitigation matrix.

Immediate Actions

1. Knowledge of the extractive sector across government, among CSOs, the media and the general public is still very low in Kenya. An immediate opportunity is to offer two-day “primer” workshops that would take place across Kenya (for both national and county governments and cover all key aspects of oil, gas and mining

2. An initial set of two-day vision workshop can then be carried out, again taking place across Kenya, to ensure there is adequate consultation and buy-in among all stakeholders to the new extractive sector vision

Priority: VERY HIGH Timing: October – December 2013 Owner: CEC & ESWG


1. A consensually developed, clearly articulated and collectively owned vision for extractives sector development will help to reduce conflict in Kenya by managing expectations and providing a responsive two-way feedback mechanism.

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1.3. A strategy to communicate the vision and manage expectations should be designed and implemented


Expectations of increased employment, income and opportunities are excessively high amongst host communities, the general public and even some government officials. This is due to several factors typical to a nascent resource economy, including lack of understanding and awareness of the oil, gas and mining industries and their development and production lifecycles, electorally motivated but misinformed promises, and the emergence of hope in response to difficult economic and social circumstances. Communicating the time lags of economic development will be critical.

The actual situation is that commercial viability of oil & gas reserves remain as yet unproven, and even if they are proven it will take a few years at the very least before there are revenues flowing to state coffers. Furthermore, although increased mining activity should bring with it increased employment opportunities, the oil & gas development will have very limited opportunity for direct employment.

The combination of these factors is a potentially dangerous situation that is already causing social unrest that may escalate into localised retaliation as well as potential conflict that could realistically be armed. In Turkana, Tullow Oil has already experienced incidents of conflict when moving oil for testing. It is of critical importance that all Kenyans’ expectations are very clearly managed.

Recommendations

1. Design a comprehensive communications strategy (aimed at both national and county level) that sets for all socio-economic groups a clear set of expectations. This is critical to ensuring that the unrest-conflict security risk is urgently mitigated. It has the dual effect of also focusing people’s minds on the necessity to work hard, smartly and together to ensure that the potential benefits are forthcoming. Petro-wealth can often impose a strain on productivity, with elite role models leading to a get-rich-quick ethos.

2. Develop effective messaging. This socio-cultural form of the resource curse must be counteracted as much as possible by effective messaging. This activity should flow quickly from the visioning exercise, and just as with the vision development, it is important that communications take into account all strata of society. The core message(s) will be the same, but they will be delivered in different forms, media and frequency depending on the intended recipients. The involvement of independent actors, such as civil society will be important to ensure message delivery is considered credible by all of society. The messages must also be developed in a participatory fashion, incorporating community representatives’ views as part of the vision development activities. It is important that the Presidency plays a key role in this process.

3. Motivate rolling communications. For Kenya to be truly effective in maximising the resource benefits, there needs to be a shift in national psyche that provides a focus for the entire nation (something that can be observed today in Rwanda). In order to achieve this goal, a drumbeat of communications must be developed that sees frequent, repetitive information delivery by key Government, community, media and private sector actors over the medium- to long-term.

4. Feedback mechanisms to be designed. Effective messaging must be put alongside effectively designed feedback loops, which enable the GoK to be responsive to host community concerns, also providing an early-warning system for potential conflict in specific cases.

Immediate Actions

1. Engage strategic communications experts to develop a communications strategy framework, in consultation with a wide range of community, central Government, county Government, parliamentary and private sector actors.

2. Incorporate communications development into visioning workshops.

3. Draft messaging for presidential review.

Priority: VERY HIGH Timing: 2013 Owner: CEC/ESWG


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1. Stakeholder expectations will be managed and aligned as a result of an informed stakeholder landscape.

2. Conflict situations will be averted.

3. All stakeholders will feel empowered to provide feedback through organised channels in a constructive way

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1.4. A policy and legal framework should be developed for the extractives sector


The draft policies and bills for the oil & gas and mining sectors – the National Energy Policy, the Energy Bill, the National Minerals and Mining Policy and the Geology, Minerals and Mining Bill – have been in circulation for some time. The draft Energy Bill relies on direct negotiation (via NAFFAC) rather than open and competitive bidding. In a similar manner, the draft mining legislation also retains the principle of direct negotiation. Apart from a reference to adopting EITI in the draft Energy Bill, there are no significant transparency and accountability provisions in any of the draft documents (e.g. no further more detailed reference to EITI – for instance in terms of reporting requirements – in the bills). The legislation is also not harmonised; for instance, there is no linkage between the draft mining bill and the draft energy policy on coal.

The existing model Production Sharing Contract is out of date and needs to be in line with contemporary requirements. There is no reference to royalties, which is unusual. The windfall tax provisions are generous in favour of companies (companies only need to pay 26% of their cut of profit oil above US$50 per barrel). Meanwhile, provisions on gas flaring are weak – a significant environmental issue in other oil and gas producing countries.

The World Bank has provided initial support revising gas contracts, in advance of a large (potentially US$50m) Kenya Petroleum Technical Assistance Project (KEPTAP) for oil and gas governance, which includes planning, policy and legal development, as well as institutional reform and capacity building. Meanwhile, the IMF has prepared a draft fiscal framework for the oil and gas sector.

No programme of policy, legal and institutional support equivalent to KEPTAP has been planned for the mining sector. There are opportunities for the (more labour-intensive) mining sector to grow significantly in Kenya, in terms of titanium, coal, gold and semi-precious stones. However, without a clear and coordinated legal and regulatory framework (driven by a vision), the opportunities for sector growth will be restricted.

Other draft legislation needs to be carefully considered in line with extractives sector policy and legal work. Foremost here is the draft Community Land Bill, which will clarify communal land ownership. A critical question to be addressed here is how land is valued (at surface level or in terms of sub-surface deposits) and how this translates into fair and balanced compensation mechanisms.

The distinction between large-scale, small-scale and artisanal mining will need to addressed during policy and legislation drafting. In counties such as Migori and Taita-Taveta where artisanal mining is a livelihood source to a large population of the locals, the sector can be a significant actor in county development. There is a genuine intention to promote rights and access of ASMs in the current policy changes. Bearing in mind the current informal nature of the sector, Kenya must be careful not to establish regimes that will criminalise the sector based on the complex legalisation processes.

Policy and legal work for oil and gas in Kenya must also place the national oil company, NOCK, at the centre of developments. NOCK is already an integrated national oil company, with upstream, midstream and downstream operations. The most significant policy question is that of how independent NOCK should become from government. The lesson learnt from successful national oil companies overseas (such as Petronas, Petrobras and Statoil), is that private sector equity in national oil companies can bring independent and commercially-minded experience and wisdom to the leadership and governance of the company.

Recommendations

1. Once the extractive sector vision has been established, policy for the oil, gas & mining sectors should be developed, and only after these policies have been finalised should supporting primary and secondary legislation be progressed.

2. The KEPTAP support package should be coordinated by the CEC and make full use of the donor coordination mechanism to be set up by AfDB.

3. A similar package of support for the mining sector should be drafted, with a request from the Government of Kenya for development partner support.

4. Both sectors need to adopt a “one-stop-shop” approach to facilitate investor engagement and enhance the business environment for private sector operators.


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Immediate Actions

1. There is an opportunity for donors to contribute support to the World Bank KEPTAP programme, while at the same time considering gaps in support to the extractives sector elsewhere (for instance, in terms of community development, the environment and private sector development)

2. The Ministry of Mining to consider the opportunity for a KEPTAP-like programme of support its plans to reform the mining sector.

Priority: HIGH Timing: 2013-14 Owner: CEC


1. A contemporary best practice policy and legal framework for the extractives sector will drive growth in the sector, increasing revenues to government, creating jobs and reducing poverty.

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2. Revenue management 2.1. A tax regime that attracts investment and optimises revenues should be developed


The existence of an immense tax gap in Africa is well documented, for example the African Development Bank (AfDB) estimated recently that Africa lost up to $1.4tn in illicit financial flows between 1980-200910, with a significant component related to extractive industries activity. Kenya is at risk of falling into the same trap with a tax regime that is not yet configured to modern international standards of resource taxation, and if left as is would result in comparatively low government income from oil, gas and mining activities.

This risk applies not only to tax policy, but also just as importantly to the capacity of the institutions involved to implement the policy. Contract negotiations involve considerable technical expertise. Again, auditing complex tax issues such as transfer pricing, project ring-fencing, thin capitalisation and unitisation agreements in relation to extractive operations is a highly skilled activity for which there is currently little or no capacity in Kenya.

In keeping with the international ‘resource nationalism’ trend, there is increasing public, media and political pressure on the GoK to significantly increase the revenues it mobilises from natural resource activities. Pressure to optimise tax revenues is healthy; pressure to maximise tax rates is not, and tends to lead to a reduction in investment and possibly also overall tax revenue.

There is a lack of understanding that Kenyan natural resource reserves are part of a global pool of reserves that are each assessed by potential investors, taking into account national legislation and tax policy among other risk factors.

Recommendations

1. Continue the existing International Monetary Fund (IMF) support to the Ministry of Finance to establish an international best practice tax regime in policy and law that attracts investment and also optimises government revenues.

2. Establish a modelling unit in the Ministry of Finance to support future decision-making in relation to tax policy.

3. Avoid delays in establishing a broad, medium-term, comprehensive resource tax administration capacity building programme at the Kenya Revenue Authority (KRA), to gradually build their ability to audit complex oil, gas and mining operations.

4. Propose support to the Government of Kenya on contract preparation and negotiation.

Immediate Actions

1. The CEC/ESWG to understand the scope of the IMF’s tax policy support to the Ministry of Finance, and identify any gaps that exist in that organisation with regards to implementation of the IMF’s advice.

2. Develop a resource tax policy and forecasting model with the Ministry of Finance, and identify staff / a unit who will be trained to operate and modify the model for future tax policy discussions and decisions.

3. Work with the KRA to assess its capacity and training requirements, and subsequently design and implement requisite programmes to boost capacity to requisite levels (probably requiring medium-term support).

Priority: MEDIUM Timing: 2013-18 Owner: Ministry of Finance

10http://www.afdb.org/en/blogs/afdb-championing-inclusive-growth-across-africa/post/hemorrhage-of-illicit-financial-flows-in-africa-11859/

http://www.afdb.org/en/blogs/afdb-championing-inclusive-growth-across-africa/post/hemorrhage-of-illicit-financial-flows-in-africa-11859/

http://www.afdb.org/en/blogs/afdb-championing-inclusive-growth-across-africa/post/hemorrhage-of-illicit-financial-flows-in-africa-11859/


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1. Optimisation of Government revenues from resource activities.

2. Increased capacity of Government to ensure that revenue optimisation is sustained as circumstances evolve.

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2.2. A framework for managing resource revenues optimally over time should be developed


Commodity prices tend to fluctuate – sometimes dramatically – over time. In the case that significant resource revenues flow to the Government of Kenya in the coming years, there will be pressure on the government to increase expenditure of these revenues immediately. However, it is important that expenditure planning takes into account the degree to which available funds are sensitive to commodity prices, and ensure that stability of expenditure can continue in the long term. As far as possible, the budgetary process should be de-linked from commodity price cycles.

This pressure can also lead to a prioritisation of the current generation’s needs, and there is a serious risk of over-expenditure and underinvestment today, meaning that the benefits of resource extraction are not optimised over time.

Recommendations

1. There are many financial management models in use around the world to address the risks outlined above. The Ministry of Finance should review these, and brief the Presidency and the CEC/ESWG, noting that no single existing international model will fit Kenya’s situation.

2. However, what weight should be associated with future expenditure? How much scope for investment is there today? Before considering the model best suited to Kenya’s particular circumstances, it is important that Kenyans agree on the principles and priorities to be used as criteria to support savings-investment and other decisions. This is best achieved through expert advice in parallel with consultation with communities, civil society, and various central and county government departments.

Immediate Actions

1. Engage expert support to review international case studies

2. Create Kenya revenue management decision-making framework

3. Begin consultations with stakeholders.

4. Include revenue management discussions in visioning workshops.

Priority: MEDIUM Timing: 2014-18 Owner: Ministry of Finance


1. Optimisation of revenue across generations.


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3. Transparency and accountability 3.1. Establish a process to ensure transparency and accountability in the extractives sector


The extractive sector in Kenya has not been subject to strong transparency and accountability measures thus far. Oil & gas and mining agreements have been a matter of direct negotiation between the GoK and companies, rather than by open and competitive bidding. Commercial agreements are not public documents. Meanwhile, although the draft Energy Bill proposes that Kenya signs up to EITI, a firm commitment has yet to be made. Similarly in the mining sector, the Ministry of Mining has publicly stated a commitment to EITI but as yet, no further action has been taken. Tanzania and Mozambique are already compliant with EITI, while Uganda committed to signing up to EITI at the most recent global EITI conference.

Without a firm commitment to transparency and accountability measures (both at policy level and in detailed disclosure requirements), the extractives sector will not be viewed as a level-playing field for investors. The Government of Kenya may struggle to attract top-flight companies. Meanwhile, unmonitored oil and gas revenues may increase corruption and malfeasance within government.

The 2010 Kenyan Constitution is strongly in support of transparency in government. For instance, Article 35 grants the right to access information held by the government and private citizens if that information is necessary for enforcing a right.

There is now a globalising set of legal frameworks which require disclosure of payments to foreign governments: under the Wall Street Reform Act (Dodd Frank Amendments) and the European Union Transparency Directives. Both laws refer explicitly to EITI. Meanwhile, the US, Australia, France and the UK are four OECD countries that have recently committed to EITI.

Two civil society coalitions focusing on the extractives sector have already been set up. A better understanding of how far the civil society coalitions can keep pace with the agenda and perform a policy advocacy role at both national and local levels will need to be undertaken. This will be partly about their capacity but also whether there’s an official role for them during decision-making processes.

Recommendations

1. The GoK should commit to signing up to and complying with EITI within the term of the current administration. This will require setting up a Multi-Stakeholder Group and drafting an initial work plan. EITI implementation in Kenya should include a sub-national pilot from the outset.

2. In line with the current investment promotion phase for the extractives sector, the GoK should commit to an open and competitive bidding system, which should be embedded in new policies and legislation.

3. The GoK should also commit to contract/agreement transparency, in line with emerging trends worldwide.

4. Any transparency efforts should look at the whole extractives value chain and not just revenue management, and focus on outcomes rather than process. For example, what recourse would there be if it were identified that a company had significantly underpaid for a resource, or land had been leased without following due process, or a lucrative supply chain contract had been awarded to a company in which a senior government official had a stake? Addressing accountability and transparency provisions in existing legislative drafts is a priority

Immediate Actions

1. The GoK should appoint an EITI champion and begin the process of preparing for sign-up to EITI

Priority: HIGH Timing: 2013-16 Owner: CEC/ESWG


1. An explicit commitment to EITI will send a strongly positive signal to international investors. Open and competitive bidding should in turn attract high quality market entrants. Contract transparency will be of benefit to CSOs and communities and ultimately empower EITI (enabling both what-you-pay reporting and what-you-should-pay disclosure).

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4. Economic development 4.1. Create wealth and jobs for Kenyan companies and citizens


Similar to the recommendation in relation to education and skills, the principal risk presented by the extensive business opportunities for Kenya’s large, small and medium-sized enterprises and their employees is that these opportunities will not be leveraged. There are 2 principal opportunities which are aligned with 2 stages of the mineral development value chain:

Supplying inputs to the international resource companies, e.g. camp operations, catering, quality assurance

Buying and processing outputs of the international resource companies, e.g. refining, smelting, petrochemical processing

These activities represent significant opportunities for Kenyan companies and employment levels.

Kenyan companies have little or no experience in these supply and processing activities, and many of the activities could be performed by international companies. Extractives companies operating in Kenya, especially in the mining sector, are keenly aware of the emphasis required on providing training opportunities for local companies to ensure that they can competitively bid for supplier contracts on a par with international company. This is often seen as part of CSR efforts. A large mining company in Kenya made the point that the project is not just about the number of people it employs but about the supply of local goods and suppliers.

As is clear in places like Lokichar and Kalokol, expectations and demands related to employment opportunities for local people are issues that local communities feel strongly about and can be a source of tension. Ensuring that local communities understand what they can realistically expect, both in terms to jobs with exploration companies and with other types of investors, is urgently required.

Base Titanium believes it has established an effective database system to ensure a fair and transparent local employment process, where people can register their interest and skills. Whilst this is working effectively, a key challenge will be ensuring that contractors (international and national) abide by the same processes.

Recommendations

1. Establish a wealth creation taskforce that reports into the CEC/ESWG, with a mandate to develop and maximise business and employment opportunities. It should be led by the private sector, with representation from Government.

2. Kenyan business member organisations (BMOs) need to play a crucial role in supporting and representing Kenya SMEs, in particular to develop their goods and service offering to meet the requirements of the international resource companies. There are several Kenyan business member organisations – Kenya Private Sector Alliance (KEPSA) is the primary umbrella organisation and the industry-specific Petroleum Institute of East Africa (PIEA), Kenya Oil & Gas Association (KOGA) and the Kenya Chamber of Mines (KCM) are the extractives-specific organisations. It is necessary to clarify and formalise BMO roles, and provide a capacity building and institutional strengthening BMO programme for all 4, enhancing research & advocacy competence.

3. Establish SME extractives centres of excellence to conduct research, provide training and advice to Kenya SMEs in a focused, prioritised set of business areas. This should ideally be targeted on a regional basis, achieving economies of scale with neighbouring countries agreeing a specialisation strategy that provides efficient and effective support to all key business areas in the region.

4. Establish Kenya-regional shared service camps (for forward operations) immediately to ensure that employment opportunities are not focused on Nairobi and Mombasa bases.

5. Both NOCK and the Ministry of Industrialisation and Enterprise Development should play a critical role in coordinating and supporting capacity building & local content development for the oil & gas industry.

6. Work with the private sector to incorporate local development initiatives such as training and skills building into Community CSR programmes. This could include financing for the small local businesses, or trainings in Oil and Gas technical skills, or job shadowing.


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Immediate Actions

1. The CEC body should establish a national wealth creation taskforce, with the mandate as indicated above.

2. Conduct a comprehensive local content assessment exercise to gauge and forecast international resource companies’ anticipated demand for goods, services and labour, in the short, medium and long term.

3. Conduct study tours to countries that have delivered success in local content and wealth creation, e.g. Trinidad.

4. Coordinate BMOs and design the BMO capacity building programme.

Priority: MEDIUM Timing: 2013-18 Owner: CEC


1. Enhanced business and employment opportunities.

2. Enhanced national economic growth.

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4.2. Kenya should develop skills to supply (directly and indirectly) to the extractives sector and downstream industries


The principal risk in relation to skills is that the Kenyan labour force’s capacity will not develop sufficiently to meet the varied and extensive demands of international recourse companies and downstream sector development opportunities, thereby forgoing the potentially significant opportunities of job creation in Kenya.

There are various skills assessment and education initiatives taking place, being conducted by several organisations – including the Ministry of Education, the Ministry of Petroleum and Energy, the Petroleum Institute of East Africa (PIEA), the University of Mount Kenya and the private sector – but no one yet has the big picture perspective that is necessary. Any future recommendations will need to be aligned with existing plans.

Recommendations

1. Establish a long-term, national extractives skills programme that is focused on provision of education services to today’s resource-rich Kenya, and tomorrow’s resource-expired Kenya. This should be managed by a secretariat that is led by the Education Cabinet Secretary, with close collaboration with the Labour Cabinet Secretary, reporting into the CEC.

2. A comprehensive training needs assessment for oil, gas, mining and related supply and value chain industries.

3. Partnerships of exchange, support, sponsorship and advice should be established with overseas educational institutions and foundations, including for example Dundee’s Centre for Energy, Petroleum and Mineral Law and Policy11, the African Mining Skills Initiative12 (in Addis Ababa), the Vale Columbia Center13, and the International Mining for Development Centre14.

4. The aggregate national curricula at school, vocational, technical and university levels need to be reviewed and revised as soon as possible.

5. For situations of imported expertise, knowledge transfer and skills programmes are required.

6. A specialisation strategy is required that allocates responsibilities for the development of particular skills (e.g. mining engineering, oil economists) to different institutions. It is important that this be considered on a regional level, whereby centres of excellence could be shared between neighbouring resource-rich countries, achieving the economies of scale necessary to compete internationally.

7. Create centres of excellence for skills and enterprise development in host community areas (taking a value-chain/market-based approach).

Immediate Actions

1. The CEC establishes a national extractives skill secretariat, and engages international expertise to design the programme that is required, including the recommendations listed above.

Priority: MEDIUM Timing: 2013-18 Owner: Ministry of Education


1. Better trained/appropriately skilled workers will find jobs either directly in the extractives sector, or in the extractives service sector, in supply businesses or in downstream industrial processing sectors.

11 http://www.dundee.ac.uk/cepmlp/ 12 http://www.africanmineralskills.org/ 13 http://www.vcc.columbia.edu/ 14 http://im4dc.org/

http://www.dundee.ac.uk/cepmlp/

http://www.africanmineralskills.org/

http://www.vcc.columbia.edu/

http://im4dc.org/


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4.3. A policy framework for regional cooperation and infrastructure should be developed in Kenya


The East African Community Heads of State met in Nairobi on November 29th 2012 to discuss infrastructure development and financing. The heads of state agreed that regional cooperation on infrastructure is essential.

The Lamu Port – South Sudan – Ethiopia Transport Corridor (LAPSSET) project precedes the commercial discovery of oil. LAPSSET now has a secretariat currently based in the Office of the Deputy President. LAPSSET has seven components: Lamu Port, a railway line, a motorway, a crude oil pipeline, an oil refinery, resort cities and airports.

A feasibility study for an oil pipeline from both South Sudan and Uganda to Lamu has been conducted, however it is not clear whether a contract has been signed.

While some stakeholders are sceptical about LAPSSET (particularly from the perspective of feasibility, funding and the question of whether priority should be given to developing Mombasa port first), the pipeline project currently has regional buy-in from both Uganda and South Sudan, as well as potential clients in northern Kenya. The question of how the pipeline might be integrated within a large capacity refinery (in Isiolo) has yet to be finalised.

There is a risk that regional cooperation is not as effective as it could be, with member countries going it alone where there could be cooperation. The bigger prize is for regional cooperation on infrastructure to also include a major “beyond oil” component, with member countries contributing along agreed lines and according to competitive advantage. This would entail different forms of downstream production/sector development in various member countries according to a shared beyond oil regional strategy.

The free movement of services will be something extractives companies will be keenly pushing. This will significantly support a company with a number of operations in the region.

Recommendations

1. In line with the EAC communiqué, the GoK should now develop its own policy framework for development of the extractive industries, including regional integration on infrastructure, leveraging economies of scale in relation to value addition and skills development, trade and free movement of services. A tangible focus for the policy framework will be to create an enabling business environment for the pipeline infrastructure, ensuring that midstream tariffs are competitive and attractive for South Sudan and Uganda.

2. The EAC to be supported to develop a strategy for promoting oil products from a regional perspective, coordination around fiscal regimes, the free movement of services, harmonized EI laws and policy, shared knowledge among policy-makers and also build an extractives platform for CSOs in the region to advocate for regional cooperation.

3. EAC and development partners to consider potential mechanisms for support to EAC in extractives development.

4. Establish a regional extractives platform, to include leading roles for business member organisations and CSOs.

Immediate Actions

1. Assuming that the pipeline feasibility study did not include an assessment of a mega-refinery in Isiolo, detailed business modelling and a watertight business case should be commissioned (by LAPSSET) for this project.



1. A step-by-step approach to LAPSSET, driven by imperatives from the oil & gas sector, could lead to dramatic economies of scale and the development of the EAC as a regional energy hub, both for value-added hydrocarbon products and downstream petrochemical industrial development.

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5. Communities and environment 5.1. A community development legal framework should be developed and implemented


When this report’s consulting team visited Turkana, a group of elders in Lokichar sang, “We’ve heard there’s oil, but we’ve not seen it yet.” There was a palpable frustration bordering on anger at a lack of engagement with the local community. Traditional dry-season grazing areas have been fenced off without adequate communications or community consent. CSO and CBO representatives in the area stated that they were not able to engage with the oil company. Expectations for providing water solutions, education and jobs for locals are running high. Meanwhile, in the south, titanium mining south of Mombasa, Base Titanium has finally resolved long lasting community disputes over compensation claims which prevented the previous licence-holder, Tiomin Resources from moving forward to operational extraction. A lack of two-way communication between extractive industry companies and host communities appears to be the root of a number of issues.

The crisis is a symptom of an absent legal and regulatory framework and accompanying guidelines for community engagement. There is no framework for community engagement or development agreements in the draft legislation referred to in section 1.4 above. Furthermore misinformation and ill-informed expectations regarding the timeline for job and wealth creation further contributes to a negative relationship between private companies and their host communities. The government and the private sector must work together and align their approach to managing these expectations.

The “Nairobi Process” is an initiative developed by the Institute for Human Rights and Business (IHRB) and the Kenya National Commission on Human Rights which aims to embed human rights due diligence through the application of the UN Guiding Principles on Business and Human Rights in the oil and gas sector in Kenya. The Nairobi Process will bring together oil and gas companies to address human rights concerns and adopt international standards of responsible business practice. The inaugural advisory group meeting took place in May 2013.15

Community engagement issues are further compounded by the context of a devolved constitutional framework. The different roles of the governor, senators and MPs vis-à-vis extractive industries in the communities they represent have yet to be clarified. This is a potential source of conflict, which may be detrimental to the peaceful development of the extractive sector in different parts of Kenya. It should be noted that areas of northern Kenya have not ever been effectively policed by the state. There are significant stockpiles of illegal arms, frequent cattle-raiding and vigilante groups. Without regulated and programmatic community engagement, further oil discoveries and eventual operations may provoke and intensify conflict, as has happened elsewhere (such as the Niger Delta in Nigeria).

The Land Act 2012 defines ownership of both public and private land. Meanwhile, the new Land Registration Act rationalises land registration. The Community Land Bill (see also 1.4 above) will address community-owned land (the third type of land ownership defined in the constitution). It should be noted that 65% of land is communally owned (and not formally registered) in Kenya. 70% of this land has already been allocated to oil majors, without free, prior and informed consent of those with communal ties to the land. There is likely to be further land grabbing ahead. This is unfortunately part of Kenya’s colonial and post-independence history. This may take place despite section 40 of the 2010 constitution, which states that land rights of the community cannot be expropriated. As an example, Turkana County Government were not informed about any exploration that took place. In addition, there is a strong perception that there was inadequate consultation during the initial environmental impact assessments in Turkana.

15 http://www.ihrb.org/about/programmes/nairobi-process.html

http://www.ihrb.org/about/programmes/nairobi-process.html


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Recommendations

1. It is critical that a participative community development framework is developed which includes social licence to operate guidelines and community engagement guidelines. Ideally, this framework would then be embedded in new laws governing oil & gas and mining. An assessment of the gaps between current private sector social strategies and optimal structures will be necessary.

Immediate Actions

1. Many lessons in community engagement have been learned (sometimes painfully) in Kwale. A detailed case study on Tiomin/Base Titanium in Kwale should be written, with a focus on lessons learned. This can feed into the production of community development framework guidelines.

2. The Community Land Bill urgently requires support to ensure that it becomes law in 2013. This will clarify compensation claims and mechanisms, and provide a formal legal framework against which the community development framework guidelines can be produced.

Priority: HIGH Timing: 2013 Owner: ESWG


1. Conflict stirred by land-grabbing, undefined social licence to operate principles, power struggles in the context of devolution, set against (in some areas) a historical lack of effective policing are all significant potential negative impacts (or risks). A comprehensive community development framework (which includes principles and guidelines on community engagement) will allay and dampen these tensions, and, in the best cases, lead to genuine community development.

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5.2. County development programmes should be designed and implemented


There is a plethora of critical, interdependent, intractable and refractory risks and issues in each resource county. These relate to devolution, water, land allocation, pastoralism, security, expectations, conflict, benefits sharing, revenue allocation, environment and gender.

The effort and resources required to successfully address these issues are likely to be significant, and well beyond the current capacity of the county or national Government institutions.

In these myriad issues there are many potential sources of unrest and conflict, with several already active. They have the potential to compound each other, and become much more difficult to mitigate once resentment sets in.

Recommendations

1. These issues obviously relate to several others that are indicated in this section; however they are grouped here because it is a strong recommendation that only targeted, sustained efforts on a localised basis can hope to address them. Consequently it is necessary to implement county development programmes focused on county Government capacity, open and active communications, inclusiveness, an holistic approach that recognises the rights and needs of local communities.

2. National leadership and coordination and sharing of experience and learning are necessary, and a national secretariat should be established.

3. Depending on ‘resource county’ size and population, and the number of resource operations in the county, it may well be advisable to amalgamate county development programmes of 2-6 counties.

4. The programme should be piloted in currently active resource counties, and we recommend that Turkana, Kwale, and a group of Transmara counties be primary candidates.

5. A key component of the programme will focus on land rights and allocation, and will necessarily engage with the land reform and community land legislation and policy work that is being undertaken by the national Government and legislature. A county-level land rights review body is required with the exact implementation to be worked out with the legislature; this will have a strong bearing on county development programmes.

Immediate Actions

1. Engage expert advice to design a pilot programme, including case study reviews of and study tours to similar programmes. The programme requires the following components: Communications, Land Rights & Allocation, Water, Security, Gender, Social Planning, Environment, Devolution, Local government capacity building, Benefits allocation, and Job creation.

2. The ESWG should select pilot counties to begin this programme, and engage with the county Government and community representatives. Facilitated workshops that consider the county development programme models identified in action 1 should follow.

Priority: MEDIUM Timing: 2013-18 Owner: ESWG


1. Mitigation of the many potential and unavoidable risks of social unrest, deterioration in security and resulting conflict.

2. Optimised development of capacity, jobs and other economic opportunities in resource counties.


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5.3. An inclusive community socio-economic development fund should be developed


This is not in reference to the distribution of national funds obtained through resource extraction

Typically, even companies with proactive intentions find it difficult to allocate funds to community projects that benefit everyone in the community in a transparent, equitable and sustainable fashion.

The authority/legitimacy structure of community representatives in some Kenyan communities is unclear, and this confusion can be leveraged by opportunistic individuals that operate systems of patronage and vested interests.

Identifying the ‘right’ projects to invest in is often difficult – investing in infrastructure projects is only feasible if there is an on-going investment planned for the running and maintenance of these buildings. Aligning the development priorities of the host communities with national development objectives is key.

Kwale County is rated as 41 of 47 in Kenya’s Poverty Index (47 is the poorest), although Kwale is a resource county with a large mining operation. The Governor of Kwale noted training as the most critical initiative to support the people of the County and whilst he appreciated the positive implications of a well-functioning mining sector, he says his County hasn’t reaped the benefits thus far.

This type of situation has in many countries caused social unrest, and has led to some situations of conflict.

Recommendations

1. ESWG should commission an assessment of different community investment models, in particular examining those that have been successful in other countries, e.g. Peru, Mozambique, Nigeria, Indonesia

2. Select and establish sub-national community investment vehicles, with inclusive governance representation from affected communities, private sector operators, county government and central government. Any contributing development partners could also be granted a governance, oversight or observer role.

3. It is critical that communities are guaranteed an influential role in decision-making, and if the geographical coverage is extensive, best practice and experience suggests that localised councils may need to be established to guarantee communities views and requirements are taken into account. Other critical success factors include:

a. Working closely with traditional, local and county governance structures b. Limiting the type of projects financed, focusing on key areas to ensure real impact. c. Excellent communication between the fund and private sector, and recognition within the companies of

the different speeds at which companies, local governments and communities operate. d. A sustainable financing model (beyond the period of any initial investments).

4. Establish a secretariat to set up and operate this investment vehicle for the duration of the resource project, overseen by the governance board. This secretariat needs to establish project management and quality assurance mechanisms to assess project proposals against requirements of the community and sustainability, and also assure the delivery of the projects over the short to medium-term.

5. If the mechanism proves robust and reliable, it could in the future be used to allocate other sources of development funding. For instance, at least part of the local allocations of royalty payments (and other “windfall” revenues) could be channelled into these funds.

6. Develop community investment vehicles sooner rather than later in order to ensure that they are consolidated before the revenue from oil (and mining) production starts flowing into them.

Immediate Actions

1. Conduct research and case study reviews of other funds – both successful and failed, in order to glean lessons learned and engage experts to design the fund, in consultation with key stakeholders.

Priority: MEDIUM Timing: 2013-18 Owner: County Government


1. Optimised investment of community development funds, including increased impact on local services.

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5.4. Kenya-regional strategic environmental and social assessments should be conducted


There are many different types of construction and development operations being considered across the country, including oil, gas, mining, pipeline, port and road projects.

Although projects require an environmental impact assessment, there has been no analysis undertaken to fully understand the bigger picture: the inevitable complementary and cumulative negative impacts that could damage water supply, flora, fauna, tourism and agricultural and pastoralist livelihoods, for example. Already, as noted in 4.1 above, in certain areas, dry-season grazing areas have been fenced off by oil companies, without free, prior and informed consent.

With regards to extractive industries issues, the Ministry of the Environment and NEMA have insufficient capacity and available resources.

A SESA was recently completed on land-use planning, however, a more general SESA has not been conducted (this will be a requirement for the World Bank KEPTAP support programme).

Some resource regions already have ongoing conflicts over resources and it will be important to understand the stage of the conflict cycle and the key issues/players. Apart from the issues of EI now sharing resources (land, water, etc.) with communities, benefit sharing that favors one group over another could exacerbate tensions. Furthermore, investigating security in the areas where extraction will be taking place is critical to answer questions such as, will EI bring new security actors to areas and how will they interact with the community?

Recommendations

1. Conduct Strategic Environmental and Social Assessments (SESAs) across resource-affected areas, taking into account existing extractives and construction projects.

2. A conflict analysis/assessment should be undertaken.

Immediate Actions

1. Engage support to commission advice on SESA granularity and tendering.

Priority: HIGH Timing: 2013 Owner: Ministry of Environment


1. Minimisation and mitigation of the negative environmental and social impacts of extractives projects.


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5.5. Environmental assessment and monitoring functions should be strengthened


The primary environment law covers all sectors and thus does not specifically address the extractives sector, nor does it have specific provisions for conducting Environmental and Social Impact Assessments (ESIAs) in the extractives sector. To date, the law has been poorly implemented. Capacity within NEMA is very limited, especially in terms of ESIAs in the extractives sector – private sector organisations further confirm this. NEMA officials estimate that they need an additional 700 staff to complement the existing 300 to provide adequate coverage across Kenya. ESIAs received by NEMA are typically delegated to district-level environmental committees. The ESIAs are very narrow in scope and paid for/coordinated by the concerned companies. Currently, there is often a lack of consultation with affected communities on ESIAs; for instance, some reports are not made available for questioning or concerns raised by the community. Environmental licences are currently not a pre-condition of obtaining a mining licence. ESIAs are not published on NEMA’s website because of capacity (skills and technology) challenges.

Mining, oil and gas industries require heavy water usage. There is a risk that water currently used for domestic purposes will be diverted for commercial use in mining. Pastoral livelihoods depend on tracking and moving around in search of water. There is also a risk of contamination of waste products (e.g. from tailings sites) into the water table and some have the perception (unsubstantiated) that this has already happened in Kwale. An important factor in avoiding local discontent will be a clear framework for how communities (including pastoral communities) will be compensated for loss of access to land, pasture, water and other natural resources.

Currently, oil and gas companies are not required to conduct hydrological testing while exploring for hydrocarbon deposits. In semi-arid regions such as Turkana, identifying underground water deposits and developing a plan for their extraction would go a long way in obtaining a social licence to operate. Providing a few small boreholes for local communities is a piecemeal and unsatisfactory approach, from the perspective of host communities.

A common economic implication often encountered by the communities is price inflation as a result of the extractive industries. For example, increased housing costs due to increased demand for accommodation by EI professionals. This can make life expensive for communities and result in them being forced to relocate It will be important to assess/prepare for price inflation in regions/districts/communities with EI.

The long term implications of any extractives project will need to be planned for in any ESIA to ensure that projects responsibly plan for the closing of mining sites and/other operations to ensure sustainable livelihoods.

Recommendations

1. An ESIA framework needs to be developed which is specific to the extractives sector and includes stronger provisions on community input.

2. NEMA’s effectiveness will need to increase significantly if environmental issues are to be managed. There should be a review of NEMA’s capacity-building and funding plans, including self-funding options whereby a proportion of environmental licence fees are withheld for investment in NEMA capacity building.

3. Conduct MoE and NEMA training needs assessments, and design consequent training programmes.

4. Conduct a review of current and planned NEMA funding.

Immediate Actions

1. Develop and implement a water plan for semi-arid regions which can exploit underground aquifers and provide a pipeline network that can be used for farming irrigation.



1. Adequate social and environmental assessments will ensure proposed extractive industry operations are well planned and involve extensive community consultation. Adequate environmental monitoring (through ideally a self-funded environmental agency) would help ensure that pollution and environmental disasters are minimised.

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5.6. There should be focus on artisanal mining development


Artisanal mining is a form of largely manual, low skilled mining that takes place in rural settings. Rural mining sometimes represents the only income opportunity available for local people. Some minerals such as gemstones and gold are currently entirely produced by artisanal mining. Gypsum, iron ore, clays and sand are also extensively mined on a small scale in Kenya. Artisanal mining if often negatively perceived, with issues such as child labour, environmental damage, health and safety, smuggling and tax avoidance, prostitution (and sexually transmitted diseases) often raised as serious concerns.

However, under favourable circumstances, artisanal mining has the potential to contribute significantly to the economic development of Kenya.

In counties such as Migori and Taita-Taveta where ASM is a livelihood source to a large population of the locals, the sector can be a significant actor in county development. There is a genuine intention to promote rights and access of ASMs in the current policy changes. Bearing in mind the current informal nature of the sector, Kenya must be careful not to establish regimes that will criminalise the sector based on the complex legalisation processes.

The team visited an artisanal iron ore mine in Taita-Taveta to fully understand the level of operational sophistication, the challenges, the expectations and the potential risks of an artisanal project. As one might expect, health and safety provisions are minimal and yet this particular operation was supported by heavy machinery. One of the key challenges raised by the miners was the lack of geological data available. Exploring without evidence is a costly undertaking and one which a small artisanal operation cannot afford. Increased data would allow such an operation to expand, increase revenue and thus provide more opportunities for development within their communities. Currently, the mining team reports to be breaking even – making enough money to cover costs and provide a minimal profit for the community.

Small-scale mining also deserves consideration.

It is estimated that currently 30,000 Kenyans are involved in small-scale and artisanal mining.

Under the draft mining legislation, the cabinet secretary is empowered to reserve areas for small-scale mining. Small-scale prospecting is defined as areas under 5km2, whereas small-scale mining is defined for areas under 0.05km2.

Recommendations

1. A package of measures to support small-scale and artisanal mining to be developed and implemented, including schemes which provide access to finance; provision of equipment (through pooling and leasing arrangements); access to markets; the formation of a special unit within the Ministry of Mines to provide cutting services at minimal rates and the organisation of marketing and trade fairs; the development of appropriate technology and training on techniques; and health and safety training;. Furthermore, measures to ensure that small-scale and artisanal miners are appropriately represented - but not disproportionately - within the Kenya Chamber of Mines is recommended, coupled with access to information on geology, mineral potential and inventories.

2. The formalisation of the sector needs to be looked at and recommendations made as to how best it can be supported in new policy and legislation.

Immediate Actions

1. Undertake an in-depth study on small-scale and artisanal mining which estimates the economic (and job creation) potential of small-scale mining and further develops the recommendations listed above.



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1. Small-scale and artisanal mining offers the potential for job creation and income for rural families. If effectively regulated, pollution, health and safety concerns and other issues associated with artisanal mining can be minimised and production maximised.

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6. Effective and efficient institutions 6.1. Establish a fit-for-purpose institutional framework


Kenya’s oil, gas and mining industries are in their early stages of development, and therefore existing Government institutions have not yet evolved to the best practice model of governance, which for example typically includes a separation of policy-making and regulation and clear investment mandates.

Kenya needs institutions with clear and robust legal mandates that are both exhaustive and mutually exclusive. Currently there is an array of institutions with sometimes ambiguous and overlapping mandates; this will inevitably lead to mismanagement of the extractive industries, with negative implications for revenue, economic development, job creation, among other things.

Recommendations

1. Map the existing natural resource management institutional roles, responsibilities, mandates and interdependencies, taking into account legal requirements and actual process.

2. Establish a best practice institutional framework to effectively, efficiently and sustainably manage, develop and regulate Kenya’s oil, gas and mining industries.

3. Conduct a review of the current legislated institutions, roles and responsibilities by international experts, with resulting recommendations to be considered, revised and progressed by the CEC.

4. This process required due consideration, and consequently will not be implemented immediately. Thus, it is important that the institutional review identifies existing gaps, risks and overlaps and interim measures to address these.

Immediate Actions

1. Engage international experts to conduct an extractive industries governance institutional review.



1 Efficient, effective, and diligent management, regulation and development of the extractive industries.

2. Mitigation of key risks, and avoidance of deterioration of security.

3. Optimisation of resource development outcomes, including sustainable economic growth, job creation, and government revenue mobilisation.


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6.2. Transform the capacity of key institutions and stakeholders


The extractive industry is complex, and the knowledge required to understand its functioning and to appreciate the challenges, issues, risks and opportunities it represents is deeply technical.

Kenya’s oil, gas and mining industries are nascent, hence it is not surprising that resource management capacity in terms of quantity and quality is extremely low in the key Ministries of Finance, Mining, Energy & Petroleum, the Kenya Revenue Authority, the Ministry of Education, the National Environment Management Agency, the Ministry of Industry and Enterprise Development (see Annex 3 for a list of all government stakeholders in the extractives sector).

The capacity gap is a common thread across a number of stakeholder groups, including the national legislature, county governments, community representative organisations and the media.

Unless this can be addressed, this lack of knowledge and understanding will lead to gross mismanagement of the extractive industries, and an inability to hold the government to account.

Recommendations

1. A single capacity transformation programme is required across Government, that is sustained over a number of years (note this is linked to other recommendations, e.g. the capacity building ‘primer’ that is recommended for all key stakeholders under the vision recommendation; also the recommendation related to environmental and revenue administration capacity).

2. Source support for capacity via various channels, including but not limited to technical assistance projects, knowledge transfer via seconded experts, scholarship programmes, study tours, consultative workshops, university partnerships, revised university curricula, international exchange programmes.

3. A training programme is similarly required for the groups listed above – national legislature, county Governments, community representative organisations and the media – although it is likely to be less technical or comprehensive in nature (note that this recommendation progresses from the recommendation of a primer course to be delivered to all key stakeholders as part of vision development).

Immediate Actions

1. Conduct a training needs assessment across all key Government ministries, agencies and authorities.

2. Design a Government-wide training programme, with the potential for separate components to be funded by different donor or other organisations.

3. Design and implement separate training programmes for parliamentarians, county Governments, community representative organisations and journalists.



1. Efficient, effective, and diligent management, regulation and development of the extractive industries.

2. Mitigation of key conflict risks.

3. Optimisation of resource development outcomes, including sustainable economic growth, job creation, government revenue mobilisation.

4. Objective and informed accountability pressure on government to ensure equitable and sustainable development of the extractive industries in Kenya.

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D. Annexes

1. List of stakeholders consulted The team is grateful to the following people who were consulted through one-to-one interviews or the stakeholder workshop held on 5th June 2013.

Organisation Name Position

Africa Oil Alex Budden VP External Relations

African Barrick Gold Philippa Hutchinson Country Manager

African Camp Solutions Robin MacAndrew Business Development Manager

African Development Bank Gabriel Negatu Regional Director, East Africa Resource Centre

African Development Bank Michel Mallberg Chief Economist

African Development Bank Patrick Karani Expert

Akiba Uhaki Foundation Fredrick Njehu Programme Assistant

Akide Elite Initiative Samuel Ariong CEO/Programme Coordinator

AusAID Michael Collins Second Secretary – Development Cooperation

AusAID Tom Onyango Program Manager, South Sudan and Mining Governance

Base Titanium Ltd Tim Carstens Managing Director

Base Titanium Ltd Joe Schwarz General Manager – External Affairs & Development

Base Titanium Ltd Colin Forbes GM – Environment and Community Affairs

Base Titanium Ltd Simon Wall External Affairs

British High Commission Vanessa Redmond Second Secretary-Prosperity/DPR to UNEP

British High Commission Veronica Oakeshott Political Officer

British High Commission Geoffrey Korir Prosperity Officer

British High Commission Njeri Gichuhi UN Focal Point

Canadian Cooperation Office John N. Kabutha Economic Growth and Trade Advisor

Canadian High Commission Tim Colby First Secretary-Development

CIDA Louise Holt Director

CIDA Maarten de Groot Environmental Engineer

Commission on Revenue Allocation Micah Cheserem Chairman Commission on Revenue Allocation Fatuma Abdulkadir Vice Chairperson Commission on Revenue Allocation Amina Ahmed Commissioner

Commission on Revenue Allocation Rose Osoro Commissioner

Commission on Revenue Allocation Sheila Yieke Director

Commission on Revenue Allocation Stephen Masha Director, County Fiscal Affairs


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Commission on Revenue Allocation Stephen Khadondi Research Analyst

Community Action for Nature Conservation

Hadley Becha Executive Director

Danish Demining Group Mads Frilander Country Director

DFID Alistair Fernie Head of DFID

DFID Jo Abbot Deputy Head of DFID

DFID Adrian Green Senior Private Sector Development Adviser

DFID Gitau Mburu Senior Programme Officer DFID Virinder Sharma Climate Change Adviser

DFID Mike Morris M&E Adviser

DFID Chris Porter Humanitarian and Resilience

DFID Liz Drake Senior Poverty, Hunger and Vulnerability Adviser

DFID Dr Bruce Lawson-McDowall Governance and Resilience

DFID Dan Silvey Conflicts Adviser

DFID/TMEA Rob Rudy TMEA Strategic Projects Adviser/DFID Uganda Oil/Gas Adviser

Econews Africa Edgar Odari Programme Officer

Econews Africa John Ochola Coordinator

Embassy of Japan Phyllis Ndungu Economic Cooperation Section

European Union Mita Manek Programme Manager

Fairtrade Africa Gonzaga Mungai Gold Network Coordinator

Former Minister of State for Northern Kenya and ASALs

Mohamed Ibrahim Elmi MP, Tarbaj constituency, Wajir County

Friends of Lake Turkana Joshua Angelei Co-Founder

HelpAge International Peter Ekunyuk Coordinator, Hunger Safety Net & Emergency Programmes

HelpAge International James Ekaale Assistant Social Protection Rights Coordinator

IMF Ragnar Gudmundsson Country Representative

IMF Kethi Ngoka Economist

Institute for Human Rights and Business Kelly Davina Scott Programme Support Manager (East Africa)

Institute of Economic Affairs (IEA) David Owiro Programme Manager, Regulation and Competition Policy

Kenya Chamber of Mines Monica Gichuhi CEO

Kenya Chamber of Mines Elaine Ngera Marketing Manager

Kenya Institute of Public Policy Research and Analysis (KIPPRA) Joseph Laichena

Environment and Natural Resources expert, Productive Sector Division

Kenya Oil and Gas Association Martin Mbogo Chairman, KOGA

Kenya Revenue Authority Anne Irungu Senior Assistant Commissioner, Large Taxpayers Office

Kenya Revenue Authority Francis Hiribae Principal Revenue Officer

Kenya Revenue Authority Caroline Gachiani Revenue Officer

Kenya Revenue Authority George Mutua Revenue Officer

Kwale County Government Salim Mvurya Governor

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Kwale County Government Fatuma Achani Deputy Governor

Kwale County Natural Resources Network

Dr. Mohamed Pakia Chairperson, Pwani University


Onesmus Macharia South Coast Residents Association-Secretary


Mohamed A. Salim Coordinator, Kwale County Natural Resources Forum


Nathaniel Mwangeka Lafarge Ecosystems


Charles Kamau Honey Care Africa


Matano Abdulrahman National Museums of Kenya, Kwale


Mishi R. Mwindia Kwale Community Green Initiative


Gabriel Rumba Mrimadzo

Landscape Surveyors Ltd Ibrahim Mwathane Executive Director

LAPSSET (Lamu Port and South Sudan Ethiopia Transport Corridor Development Authority)

Sylvester Kasuku CEO, LAPSSET

Ministry of Devolution and Planning Dr Edward Sambili Permanent Secretary

Ministry of Devolution and Planning Jamshed Ali Abubakar Head Macro Planning Division

Ministry of Devolution and Planning

Katherine Muoki Director, Infrastructure, Science and Technology

Ministry of Devolution and Planning

Prof. Michael Chege Development Policy Adviser

Ministry of Education, Science and Technology Samuel Wanyonyi DDTE

Ministry of Energy and Petroleum Davis Chirchir Cabinet Secretary

Ministry of Energy and Petroleum Eng. Joseph Njoroge Principal Secretary

Ministry of Energy and Petroleum Martin Heya Petroleum Commissioner

Ministry of Finance Esther Koimett Investment Secretary

Ministry of Finance Protus Sigei Deputy Director, Investments

Ministry of Mining Moses Masibo Commissioner of Mines and Geology

Ministry of Mining Shadrack Kimomo Chief Geologist

Ministry of Mining Raymond Mutiso Chief Inspector of Mines

National Economic and Social Council (NESC)

Julius Muia Secretary

National Environment Management Authority

Samuel Munene Chief Compliance Officer, Waste Management

National Environment Management Authority Oceanic Sakwa Head of Environmental Impact Assessment

National Oil Corporation of Kenya Sumayya Hassan-Athmani CEO

Oxfam Nigel Tricks Country Director, Kenya


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Oxfam Joost van de Lest Asal Coordinator

Petroleum Institute of East Africa Wanjiku Manyara General Manager

ProSource Bimex Bill Lay Oil and Gas Consultant

R. K. Sanghani Harjeet Singh Plant Mechanic

R. K. Sanghani Gilbert Bett Mining Engineer

SUNY-Kenya Alvin Amuyunzu Programme Assistant

Taita Taveta County Government Eng. John Mruttu Governor

Taita Taveta County Government Elijah Mwandoe Mining Minister

Taita Taveta Women Mining Group Edith Lewela Chair

The Senate Ekwe Ethuro Speaker of the Senate

Transparency International Kenya Samuel Kimeu Executive Director

Transparency International Kenya Jacob Otachi Orina Communications Climate Governance

Tullow Oil Martin Mbogo Country Manager

Turkana County Government Josphat Nanok Governor

Turkana Central Constituency John Lodepe Nakara Member of Parliament

Turkana East Constituency Nicholas Ngikor Nixon Member of Parliament

Turkana North Constituency Christopher Doye Nakuleu Member of Parliament

Turkana South Constituency James Lomenen Ekomwa Member of Parliament

Turkana West Constituency Daniel Epuyo Nanok Member of Parliament

UK Trade and Investment Greg Gibson Head of UKTI East Africa

UK Trade and Investment Eric Mwema Trade Development Manager

UNDP Christianna Pangalos Governance Specialist

Vision 2030 Secretariat Mugo Kibati Director General

Vision 2030 Secretariat Dr Mohamed Omar Director, Economic Pillar

Vision 2030 Secretariat Dr Gituro Wainaina Director

World Bank Lex Huurdeman Senior Petroleum Specialist

World Vision Kenya Thatcher Ngonga Nutrition Manager

WWF Elias Kimaru Project Executant, Kwale Forest Landscape Restoration Project

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2. The five principles of extractives sector governance (and associated programmes)

Governance Principles

Vision, Policy and Legislation

Revenue Management

Transparency & Accountability

Economic Development

Communities & Environment

Potential Programmes

Vision/master planning that is

collectively formed, long-term and inspirational

Develop a community investment

framework which pools operator CSR funds, sub-national

tax windfalls etc.

Facilitate the formalisation/registration of NGOs, CSOs

etc.

Comprehensive skills assessment of direct

industry requirements and

supply-service needs.

Create a community development

framework & local government development mechanisms

Communications strategy & roll-out

(at national and sub-national levels,

ensuring two-way communications,

crisis early-warning system etc.)

Develop a fiscal regime in line with contemporary best practice and train

government officials on contract negotiation

Commit to EITI (forming

national/sub-national Multi-

Stakeholder Groups, a work plan, definition of materiality,

removing potential constraints etc.)

Establish a long-term national skills

programme both for extractives and

extractives service industries

Ensure that extractive regions are assessed via a

Strategic Environmental and Social Assessment

(SESA)

Political economy analysis (to establish progressive/conservative institutions &

stakeholders)

Establish a tax bureaucracy to

administer extractives (including a

forecasting/modelling unit)

Commit to open and competitive bidding

(avoiding discretionary

decision-making on licensing)

Review/model opportunities for

regional cooperation/ integration

(infrastructure, trade, training,

processing, downstream sectors

etc.)

Ensure that Environmental and

Social Impact Assessments cater specifically to the extractives sector

Develop policy, legal and regulatory

framework

Design and implement a long-

term framework for managing resource

revenues

Commit to contract transparency,

ensuring all agreements are

available and accessible

Encourage private sector development (support to BMOs,

SME centres of excellence etc.)

Develop and inclusive policies on artisanal/small scale

mining


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3. Kenya’s Status in Relation to the 5 Principles

Vision

, Po

licy

& L

egislatio

n. Kenya is currently still in the “investment promotion” phase of developing its extractive sector, both in oil & gas and mining.

This means that a vision or master plan for sector growth in line with international best practice is required, to then be further developed in terms of specific policy frameworks for oil & gas and for the mining sector. Ideally, only when there is consensus on policy (developed through extensive consultation with the private sector and with civil society), should a legal and regulatory framework be drawn up. All too often, draft legislation becomes the battleground for policy disputes, which is an inefficient way to proceed. In drafting the vision, policy and legal framework, it is vital to ensure that both the private sector and communities’ expectations are aligned on the benefits the extractive sector will bring, and how to manage potential risks. In the context of the 2010 Constitution, which devolves governance in Kenya, it is also important that the vision is developed in partnership with county governments. Again, the East African regional context of potential economies of scale should be brought to bear on the vision-building work. Critical to the success of a vision, policy and regulatory framework is that it is effectively communicated and coordinated, that there is collective ownership and that there is sufficient capacity and understanding for effective implementation.

Reve

nue

Man

agem

ent

The growth of oil & gas and mining in Kenya will require careful macro-economic planning, to ensure that the economy is not cyclically linked to commodity prices and to avoid Dutch disease. This includes designing a competitive and effective fiscal regime, which balances national interests against investor-friendly strategies. The new fiscal regime must be supported by an efficient and well-capacitated tax administration system. In terms of macro-economic levers, smoothing practices will need to be implemented to avoid being adversely affected by commodity market price shocks, ensuring windfalls from high commodity prices are effectively managed (balancing the need for capital investment against savings) and that contracts between government and companies effectively balance investor interests against government revenues and community benefits.

Tran

sparen

cy a

nd

Acco

untability.

To attract high quality investors on a level playing field basis as well as facilitate a social-licence-to-operate on behalf of operating companies, the highest standards of transparency and accountability should be adopted. Bid rounds, licensing mechanisms, contracts and agreements, beneficial ownership status, pricing practices, the fiscal regime, operational cost structures and national geological information should all be as far as possible public domain information. Kenya may also wish to finally implement the EITI to keep in step with Tanzania and Mozambique, two other east coast countries currently undergoing a resource boom. Implementing EITI in Kenya is consistent with other transparency initiatives the Government of Kenya has already adopted, such as the Open Data Initiative and the Open Government Partnership. The new EITI 2013 standard requires significantly more contextual industry data, while encouraging contract transparency. In combination with the US Dodd Frank Act and European Transparency Directives, a mandatory requirement to disclose payments to government is fast becoming a global framework for the extractives sector.

Econ

omic

Deve

lopm

ent.

The returns created by the new extractive sector should be as fairly and sustainably distributed as possible. For example, resource revenues and benefits should be distributed across society, not only by spending more on basic services from royalty revenues but also by building infrastructure and developing skills that foster inclusive growth (“investing in investing”). In addition, linkages between the extractive sector and local markets should be progressively strengthened, supporting entry into higher value-added areas of production and diversifying the economy away from a reliance on primary commodities. The ideal however is to move beyond basic import substitution towards the development of new downstream sectors, with much stronger potential for job and wealth creation. The ultimate objective of economic development fuelled by extractive sector growth is to move “beyond oil”, rather than to simply plan for revenue distribution or some degree of value addition. This requires an investment led approach rather than a cash extraction approach.

Commun

ities

and

the

Env

ironm

ent. A key aspect of avoiding the resource curse is to ensure that companies engage effectively with their host communities.

Detailed guidelines and best practice for community engagement are vital, but must be substantiated by effective use of local knowledge: different areas in Kenya have different social and cultural situations and require a context-specific approach. Beyond engagement, communities must be empowered to, at the very least, participate in development planning (if not take full ownership). Development planning may be funded by a community investment model: rather than individual companies making payments to local government for social and infrastructure projects, revenues can be pooled and managed by the county government, provided there is a strong and inclusive monitoring and oversight body implemented alongside. In terms of environmental planning, critical is a holistic strategic assessment of the potential social and environmental impacts of planned extractive industry activities and subsequently monitoring operations across the extractive lifecycle, with an emphasis on public disclosure and public engagement, as well as the health, safety and social impacts on workers and host communities. Finally, artisanal mining is a significant issue for local communities, as it is often one of the only means of livelihood (especially for those who have been moved away from farming land). The government can play a supportive role in regulating the small-scale mining sector, ensuring that there are no resource, conflicts with larger-scale mining operations and that artisanal miners are trained on environmental management, health and safety and given access to finance and markets.

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4. Role of government institutions in the extractives sector in Kenya Agency Relevant Role(s) and Function(s)

Commission on Revenue Allocation (CRA) CRA’s role is to recommend the revenue allocation to the counties. The Director of Budget and the Auditor General then review this recommendation. CRA plan to hire an adviser on natural resources to review revenue sharing arrangements.

Kenya Pipeline Company (KPC) KPC manages the national pipeline trunk and storage depots.

Kenya Revenue Authority (KRA) Currently the KRA collects PAYE and withholding tax on services from extractive industry companies. Current Kenya tax laws do not take into account production sharing contracts and therefore need to be updated.

Ministry of Devolution and Planning (MDP) A new agency, which merges the Ministry of Planning and Local Government among others. The MDP spearheads public sector reforms in Kenya.

Ministry of Environment (MoE) Sets environmental policy for Kenya and fulfils various monitoring and conservation functions. NEMA is an agency under the MoE.

Ministry of Finance (MoF) The Ministry of Finance is the lead agency of the Inter-Ministerial Committee on the Policy and Legal Framework for Geology, Mining and Minerals

Ministry of Industrialisation and Enterprise Development (MIED)

The lead government agency for industrial development and the creation of a manufacturing base in Kenya.

Ministry of Labour (MoL) Oversees all labour issues in Kenya.

Ministry of Mining (MoM) The Ministry of Mining is a new government agency dedicated to governing the mining sector. Previously, governance of the mining sector was via the Ministry of Environment and Natural Resources.

Ministry of Petroleum and Energy (MPE) The MPE oversees all aspects of the oil and gas sector, including contracting with private sector operators.

National Environment Management Authority (NEMA)

NEMA conducts impact assessments for both exploration and operational mining.

National Fossil Fuels Advisory Committee (NAFFAC)

NAFFAC is named in the draft national energy policy as the body which negotiates with investors on the terms of their licences.

National Oil Corporation of Kenya (NOCK) NOCK is currently a state-owned enterprise under the MPE. NOCK is an integrated company that operates both upstream and downstream.

Vision 2030 In charge of developing the 7th sector (extractives) under the economic pillar of Vision 2030.


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5. References The analysis behind this report drew to different degrees on the following reports and presentations.

Author(s) Title Date

CIDA Kenya Oil and Gas Sector: a Preliminary Assessment 2013

Control Risks A New Frontier: Oil and Gas in East Africa 2013

NRC Kenya Petroleum Sector Scoping Study (draft report) 2013

EAC Communiqué of the 2nd EAC Heads of State retreat on Infrastructure 2012

Economist Intelligence Unit

Kenya Country Report 2013 2013

Ernst & Young Ernst & Young’s attractiveness survey: Africa 2013 2013

IHRB Avoiding the Resource Curse: Advancing Human Rights within the oil and gas sector in Kenya

2012

IHRB Nairobi Process: a pact for responsible business 2013

Jubilee Coalition Transforming Kenya: securing Kenya’s prosperity 2013-17 2013

Ministry of Labour Manpower Survey 2013

Office of the Prime Minister

Lapsset Corridor Project 2013

NOCK Stakeholder Session Opening Presentation 2013

PWC East Africa Oil and Gas Summit: Comparative Review of Tax Policy in East Africa 2012

Transparency International

The East African Bribery Index 2012 2012

United Nations Free Prior Informed Consent and Beyond 2005

Willy Olsen Kenya – New Challenges, New Opportunities 2013

World Bank The Growth Report: Strategies for Sustained Growth and Inclusive Development. 2008

World Bank Kenya’s Petroleum Technical Assistance Project (KEPTAP) draft project description 2013

World Bank Doing Business in the East African Community 2013 2013

World Bank /AusAID

Devolution without Disruption: Pathways to a Successful New Kenya 2012

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6. The consulting team The ASI team comprises Dr Jeremy Weate, Patrick Obath, Gareth O’Hagan, Robin George, Ikal Angelei and Elizabeth Mungai.

Dr Jeremy Weate is the Team Leader and is an expert in extractive industries governance, having worked with a wide range of public and private sector organisations throughout Africa and Asia on sustainable and transparent development of the minerals sector.

Patrick Obath is the immediate past Chair of the Kenya Private Sector Alliance (KEPSA) and a highly respected Kenyan extractive industry expert with thirty-five years experience in the oil and gas industry. He is currently applying his industry expertise to improving corporate governance of the energy, oil and gas industry, and focusing on sustainability and other advisory services.

Gareth O’Hagan leads Adam Smith International’s Extractive Industries practice and has extensive experience advising public sector organisations in developing and improving sustainable minerals sector governance.

Robin George is the Director of Adam Smith International Africa. Based in Nairobi, he has considerable experience overseeing and delivering complex multi-stakeholder projects in the region. He is currently Project Director on some of ASI’s major market development and livelihoods programmes in East and Southern Africa.

Ikal Angelei is active civil society member working on issues on the environment and raising community awareness and participation, particularly in Turkana. She is a founding member of the grassroots organisation, Friends of Lake Turkana, and is a member of the Kenya Civil Society Platform for Oil and Gas.

Elizabeth Mungai is a Manager at the ASI Africa office in Nairobi and has several years’ public sector consulting experience in trade, private sector development and public sector reform.

Julia Baxter is a Manager at the ASI London office and an extractive industries specialist. She has worked extensively with the private sector, including in Kenya and has an intimate knowledge of the challenges of mineral sector governance and development.

Adam Smith International’s Extractive Industries Governance Practice

Adam Smith International is a professional services business that delivers real impact, value and lasting change through projects supporting economic growth and government reform internationally.

Over more than 20 years, Adam Smith International has implemented some of the most complex solutions in many of the world’s most challenging environments. We apply professional standards, technical know-how and cultural sensitivity to every context. We’re proven to bring the best minds together and are known for turning policies into action. This requires the highest quality people on every project. People empowered to overcome challenges with a ‘can do’ attitude tempered with insight and pragmatism. Each team member is carefully selected, based not just on their technical ability, but on their proven experience. It is this combination that ensures we deliver real societal impact and measurable results beyond those anticipated.

Through our Extractive Industries Governance practice, Adam Smith International is a leading global adviser to clients seeking to improve governance of the oil, gas and mining sectors, and also helps clients leverage investments in these sectors for broader economic and social development. We are accredited as an official validator of the Extractive Industries Transparency Initiative (EITI), reflecting our strong commitment to good governance and transparent natural resource management. Our expertise in the extractive industries includes:

» Political economy and economic assessments; » Business linkages and economic development; » Sector strategy and policy; » Legal and regulatory assessments and reform;

» Taxation and the fiscal regime for mining; » EITI implementation and validation; » Institutional reform and development; and » Artisanal mining and rural livelihoods.

Contact [email protected] for further information.

mailto:[email protected]

Documents

FINAL DRAFT REPORT - Centre For Economic Governance€¦ · attention. Flagship projects like Base Titanium’s Kwale Mineral Sands project , and recent oil discoveries announced