Kenya hires McKinsey to develop mining sector strategy

24 August 2015 4 min. read

The Kenyan government is cracking down on the low royalties it gains from mining within its borders. As part of the move to strengthen the financials of the mining industry, the country’s policy makers have developed a code that sets expected royalties for different kinds of minerals, and have hired McKinsey & Company to design a 20 year horizon strategy and plan for the sector as a whole.

The Kenyan mining industry has in recent years delivered little in tax value to government coffers. Kenya, the largest economy in East Africa, is lagging considerably behind neighbours like Tanzania when it comes to income from its mining industry – with World Bank data showing that the Kenyan government’s GDP intake from mining is 1%, compared to Tanzania’s 4%.

To create a more equitable system for the benefit of the people, the Kenyan Government is aiming at introducing new legislation that will increase the royalty take it receives from the extraction of precious metals and stones located within its ground. The new code will see royalty rates in terms of gross sales value 1% for industrial minerals such as gypsum and limestone, 5%% for gold, 10% for coal, titanium ores, niobium and rare-earth elements, and 12% for diamonds.

Mining - Diamonds

The plan to introduce a more strict code for royalties, and thereby prevent exploitation of its natural wealth, has been partly funded by the UK Department of International Development, with little known about their exact involvement in the code. The new rules are expected to be approved on August 27 and passed into law by January 2016 – with a forecasted win for the coffers of the Kenyan Government of 1.5 billion Kenyan shillings ($15 million) next year, up from the paltry sum of 21 million shillings in 2012.

McKinsey & Company
As part of the development of the mining industry, the Government of Kenya has hired global management consulting firm McKinsey & Company to design a 20 year strategy for the sector. The strategy will present an overview of Kenya’s current competitiveness – across a range of economic, political and geographical factors – and provide insights in how competitiveness can going forward be elevated. “This national strategy will actually position Kenya properly,” says Najib Balala Kenya’s Mines Secretary. “We want to have Kenya as a regional hub.”

A recent study from Roland Berger reveals that globally the mining industry by no means is cash-strapped. According to the consultants, major players currently sit on a pile of cash the size of $90 billion. In Kenya’s case, finding cash has turned out a challenge, and as a result policy makers have turned to international players for the costing and implementation of the study. The Kenyan Government has for instance been in discussion with Chinese companies, with the research to be partly funded by the Export-Import Bank of China – to the tune of $67 million – and to be carried out by China-controlled Geological Exploration Technical Institute over as many as three years.

McKinsey & Company - More ideas per square inch

The deal with the Export-Import Bank of China however, looks like it may not proceed. The Bank has been sending mixed messages about the project, causing the Kenyan Government to next month decide whether “it’s on or it’s off”. According to Balala, the government is considering private-bank loans or funding from the Treasury instead.

McKinsey in Kenya
In September last year McKinsey opened its office in Nairobi, Kenya. Since then the consultancy has enjoyed serving a range of large clients in the country – besides the recent deal with the Government, McKinsey has advised amongst others the National Bank, Kenya Airways, KCB and the Kenya Revenue Authority (KRA).