Creating collateral security packagesTypes of collateral
What types of collateral and security interests are available?
Kenyan law recognises two types of securities, that is, movable property (including intangible assets such as intellectual property rights, goodwill, and book debts) securities and immovable (real) property securities.
Creating a security interest over immovable (real) property is regulated by the Land Act 2012 and the Land Registration Act 2012. These laws govern creation of charges (formal and informal) over land. Mortgages are no longer permitted. A charge does constitute a transfer of title to the lender but only serves as security of its interests.
The creation of security interests in movable property (including intangible assets) is regulated under the Movable Property Security Rights Act 2017 (MPSR Act).Collateral perfecting
How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?Securities over immovable (real) property securitiesPerfection of a formal and informal charge
Perfection of a security interest over land depends on whether the security is in the form of a formal or informal charge.
A formal charge is created by registration of a charge as an encumbrance and the registration of the person in whose favour it is created as its proprietor and by filing the instrument with the relevant authorities, that is, the land registry and other authorities such as the company’s registry, where applicable.
On the other hand, an informal charge may be created where:
- a lender accepts a written and witnessed undertaking from a borrower, the clear intention of which is to charge the borrower’s land or interest in land, with the repayment of money obtained from the lender plus interest as agreed by the parties; and
- the chargor deposits with the charge any of the following:
- a certificate of title to the land;
- a document of lease of land; or
- any other document that it is agreed evidences ownership of land or a right to interest in land.
There is no mandatory requirement to register informal charges hence the process of perfection is simpler and cheaper. However, informal charges can be registered too. A lender holding an informal charge may only take possession of or sell the land that is the subject of an informal charge, on obtaining an order of the court to that effect. This is one of the key disadvantages of informal charges.
A number of conditions have to be met before one can register a formal or informal charge over land. A search is conducted at the relevant registry to confirm ownership of title by the borrower and to identify any other third-party interests accruing on the land. A small fee of 500 Kenyan shillings is paid. The search also confirms details of the property including acreage. If the search results are positive, the formal charge is prepared by a qualified advocate and executed by the parties.
The relevant consents and approvals are obtained from various authorities including the Land Control Board at 10,000 Kenyan shillings (if the land is agricultural); the rent clearance certificate is at no cost; consent of the Commissioner of Land is approximately 2,000 Kenyan shillings (where the land is public land of leasehold tenure); the rates clearance certificate is 10,000 Kenyan shillings (where the land is located in an urban area); and spousal consent is at no cost (where the land is matrimonial property).
Once the relevant consents and approvals are obtained, the executed charge is assessed for stamp duty at the rate of 0.1 per cent of the debt amount. The stamp duty amount cannot be reduced. Once stamp duty is paid, the charge is lodged in triplicate together with the original title document, identification details of the lender and land owner, and the relevant consents, approvals and stamp duty receipts at the land registry for registration. Upon lodging, a daybook number is issued for purposes of aiding follow-ups. It takes an average of 14 working days to finalise registration. Registration is then verified by conducting another search to confirm the entry of the charge against the title document. The government is in the process of digitising the land registries in Kenya, which is expected to reduce registration time and increase cost efficiency.Priority of charges over immovable (real) property
Under section 81 of the Land Act, the rules of priority of charges are as follows:
- Unless otherwise provided in the charge instrument, charges rank according to the order in which they are registered.
- Informal charges rank according to the order in which they are made provided that a registered informal charge takes priority over any unregistered informal charge.
- If two informal charges are made on the same day or are registered on the same day, the charge that was first in time to be made or registered has priority.
With respect to second or subsequent charges, the general rule is that they do not rank in priority to any existing charge unless the provision for further advances is noted in the register in which the initial charge was registered; or the subsequent chargee has consented in writing to the priority of the further advance.Perfection of movable property securities
Perfection of movable property securities is governed by the MPSR Act. A security right in movable assets is created by the grantor and the lender executing a security agreement. The agreement will describe the movable asset issued as collateral. There is no mandatory requirement for registration of security agreements. However, an unregistered security right is not effective against third parties.
A security right in any movable asset is effective against third parties if a notice with respect to the security right is registered with the Registrar. There is an electronic Collateral Registry where notices of security rights are registered. Stamp duty is also assessed at 0.1 per cent of the borrowed amount. Registration fees charged are nominal and fixed. Similarly, before registration of security rights, a search is conducted to confirm the existence of any other security rights against the asset. Obviously, since registration is not mandatory, the search results will not indicate any unregistered security rights existing over the property hence it is more risky.Priority of movable property securities
Under the MPSR Act, priority is determined according to the time of registration with respect to security rights created by the same grantor in the same collateral. Accordingly, a party that registers its security interest in collateral secures a higher ranking for its security against any other party who registers its security interest in the same collateral at a later date or one that has a security interest in the same collateral but did not register it even if that interest came first (section 38 of the MPSRA Act).Security agent and trustee
There is no legal statute enabling or prohibiting agents or trustees to hold securities on behalf of project lenders. Accordingly, there is no statutory obligation for agents or trustees to obtain and maintain licenses. Agency and trusteeship is largely guided by the laws of contracts and trusts respectively.
However, the Land Act 2012, and the MPSR Act, restrict security enforcement to the lender itself unless the lender is subject to bankruptcy or insolvency proceedings in which case the official receivers and liquidators can realise the security.
Therefore, the concept of a security agent is based on both trust and contract law principles. In syndicated loan transactions, a security agent holds the transaction securities on trust for the lenders as a whole. Since Kenya recognises the concept of trusts, the use of a security agent to hold transaction securities is available to the participants. How the arrangement will be structured, or operated, or what the duties of the security agent will be depends on the contract negotiated by the participants. Care must be taken by each party to the syndicate.Assuring absence of liens
How can a creditor assure itself as to the absence of liens with priority to the creditor’s lien?
A lien is a possessory right that allows one to retain possession of an asset belonging to another until present and accrued claims of the person in possession are satisfied (Republic v Lucas M Maitha Chairman, Betting Control Board & another Ex Parte Interactive Gaming & Lotteries Limited & Three Others  eKLR. Where the lien is exercised purely through physical possession, it is difficult for third-party creditors to assure themselves of absence of higher ranking liens over the asset involved.
However, the MPSR Act permits security rights (eg, liens) to be created vide a security agreement. Although not mandatory, a security right may be registered. In this case, it would be possible for creditors to confirm the existence of higher ranking liens by conducting a search at the electronic collateral registry.Enforcing collateral rights
Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral?Enforcement of a charge over land
In the event of default of the obligations of the borrower and subject to necessary notices, the Land Act allows creditors to enforce their security in the following ways:
- by suing the borrower for the money due where the borrower is personally liable to repay the amount borrowed and the security is insufficient;
- by appointing a receiver of the income of the charged land;
- by leasing or subleasing the charged land by a receiver of income;
- by entering into possession of the charged land; and
- by selling the charged land.
Section 72(1) of the MPSR Act authorises a secured creditor, after the borrower’s default, to sell, lease, or license the collateral. This law also allows the secured creditor freedom to select the method, manner, time, place and other aspects of the sale, lease or licence, including whether to sell, lease or license collaterals individually, in groups or as a whole. The secured creditor may also acquire the collateral in partial or total fulfilment of the secured obligations.Enforcing collateral rights following bankruptcy
How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral? Are there any preference periods, clawback rights or other preferential creditors’ rights with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?Effect of bankruptcy on a secured project lender
When a project company is bankrupt, a secured creditor may do the following under section 226 (2) of the Insolvency Act:
- recover money borrowed by selling the collateral provided the creditor is entitled to do so under the terms of the security;
- have the property valued and prove in the bankruptcy as an unsecured creditor for the balance due (if any) after deducting the amount of the valuation; and
- surrender the charge to the bankruptcy trustee for the general benefit of the creditors and prove in the bankruptcy as an unsecured creditor for the whole debt.
Therefore, bankruptcy should not affect a secured creditor as the Insolvency law recognises the right of the secured creditor to sell the collateral to recover their security without participating in bankruptcy proceedings. However, a secured creditor may participate in bankruptcy if its collateral is not enough to satisfy the debt.Priority rights in bankruptcy
The Insolvency Act under section 247 and the Second Schedule list preferential creditors’ rights and the order they should be satisfied:
- the expenses of the bankruptcy or liquidation have first priority;
- the amount outstanding to employment remuneration to employees or person who have performed services for the bankrupt before the commencement of the bankruptcy or liquidation have second priority; and
- the claims in respect of taxes that remain unpaid at the commencement of the bankruptcy or liquidation have third priority.
There are no entities excluded from the ambit of the Insolvency Act. Section 3(2) says that the Insolvency Act applies to natural persons, partnerships, limited liability partnership, companies and other corporate bodies established by any written law. Section 106 of the Insolvency Act vests property held by a bankrupt person in trust for another person in the bankruptcy trustee who then assumes control of the property and deals with it for the benefit of the beneficiaries of the trust.Other processes enabling a lender to seize assets in enforcement
See question 4.
Foreign exchange and withholding tax issuesRestrictions, controls, fees and taxes
What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?
The government repealed the Exchange Control Act in 1995. There are no foreign exchange controls applicable in Kenya at present, and foreign currency is freely transferable. Section 32 of the Finance Act 2018 imposes an excise duty rate of 20 per cent on fees charged by financial institutions and fees charged for money transfer services by banks, money transfer agencies and other financial service providers. The charges levied by banks vary from bank to bank.Investment returns
What are the restrictions, controls, fees and taxes on remittances of investment returns (dividends and capital) or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?Controls and restrictions
The government repealed the Exchange Control Act in 1995. As such there are no restrictions or controls on remittances of investment returns or payments of principal and interest or premiums on loans or bonds to parties in other jurisdictions. However, the Central Bank of Kenya maintains a number of procedural controls on the inflow and outflow of foreign currency.
The Foreign Exchange Guidelines of 2002 allow the exportation and importation of currency in accordance with the Central Bank of Kenya (Declaration of Currency) Regulations 1998, which in turn authorises any person to take out of or bring into Kenya not more than 500,000 Kenyan shillings in foreign currency. Currency exceeding this limit must be declared to customs at the point of entry or departure.
Guideline 5.3 allows Kenyan residents to borrow offshore and, in respect of that borrowing, to maintain (1) financial agreements duly executed between the borrower and the foreign lender, (2) funds transmission instruments confirming receipt of loan proceeds, and (3) loans amortisation schedule.
The Central Bank of Kenya Act requires every payment made in Kenya to a person outside Kenya, or outside Kenya to a person in Kenya to be effected through a bank or a microfinance bank. Guideline 4.1 of the Foreign Exchange Guidelines requires foreign exchange dealers to obtain and retain documents for transactions above US$10,000.Taxes and fees
The Income Tax Act imposes a withholding tax rate of 15 per cent on interest payments to offshore lenders. Legal Notice 91 of 2015 exempts withholding tax payment on interest paid on loans from foreign sources invested in the energy or water sectors, in roads, railways, or aerodromes. Further, payments made to a non-resident person on account of services rendered under a Power Purchase Agreement are also exempt from withholding tax under Legal Notice 165 of 2015.
Section 32 of the Finance Act charges an excise duty of 20 per cent on fees charged by financial institutions and fees charged for money transfer services by banks, money transfer agencies and other financial service providers. The charges levied by banks vary from bank to bank.Foreign earnings
Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?
There is no legal requirement under Kenyan law requiring project companies to repatriate foreign earnings or convert foreign earning to local currency.
May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?Foreign currency accounts in other jurisdictions
Yes. Project companies are not prohibited from establishing and maintaining foreign currency accounts in other jurisdictions.Foreign currency accounts within Kenya
Yes. Project companies may establish and maintain foreign currency accounts within Kenya.
Foreign investment issuesInvestment restrictions
What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?RestrictionsOwnership of land
The Constitution of Kenya prohibits foreign nationals or foreign controlled companies from owning a freehold interest in land. Foreigners may hold land on leasehold tenure up to a maximum of 99 years. A project company is regarded as a citizen if it is wholly owned by one or more citizens. Even property held in trust is regarded as held by a citizen if all the beneficial interest of the trust is held by persons who are citizens.Joint venture construction projects
Regulation 16(1) of the National Construction Authority Regulations, 2014 restricts ownership in a joint venture for construction works between a local and foreign company. The local company should own at least 30 per cent of the construction works with the profits being shared along the same rationing.Ownership in the mining sector
The Mining (Local Equity Participation) Regulations 2012 condition every mining licence on a local equity participation of at least 35 per cent of the mineral right. Under section 164 of the Mining Act, a mineral dealer’s permit is issued to Kenyan citizens and in the case of a company, to one in which 60 per cent of the shareholding is held by citizens of Kenya.Ownership in the energy sector
The Energy Act 2019 and the Petroleum Act 2019 do not currently place restrictions on the ownership of companies involved in these industries.Ownership in the insurance industry
The Insurance Act prohibits the registration of an insurer unless at least one third of the controlling interest, is held by citizens, a partnership whose partners are, or a body corporate whose shares are held by citizens of a partner state of the East African Community or the government, or a combination of them.Fees and taxes
Share purchases are subject to stamp duty at 1 per cent of the value of the shares. The charges payable to the Registrar of Companies to effect these changes are nominal. Taxes are charged in accordance with the Income Tax Act, the Tax Procedures Act, the Value Added Tax Act and other tax legislation in the ordinary course of business.
Kenya has entered into and ratified several bilateral treaties towards easing investment restrictions to promote foreign direct investments.Insurance restrictions
What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?
The law permits foreign insurance companies to insure project assets but only if they are registered to operate in Kenya and licensed by the Insurance Regulatory Authority. Even so, at least 25 per cent stake in the company must be reserved for citizens.
Insurance policies may be payable to foreign secured creditors. Payment of insurance premiums to foreign companies is subject to withholding tax and value added tax.Worker restrictions
What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?
There are no such restrictions in Kenya against foreign workers. However as administrative policy, the Immigration Department requires businesses to bring in foreign staff only if their expertise, skills and qualifications are not available locally.Equipment restrictions
What restrictions exist on the importation of project equipment?
There are no restrictions on the importation of project equipment in Kenya. However, customs duty is payable under the Customs and Excise Act. If the Local Content Bill is adopted, locally produced equipment will be given preference.Nationalisation laws
What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?
The Foreign Investment Protection Act protects foreign companies and assets from nationalisation or expropriation. This protection is supplemented by bilateral and multilateral investment treaties, which offer protection to foreign companies.
Fiscal treatment of foreign investmentIncentives
What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?Tax incentives
The government offers favourable tax arrangements to investors as provided under the Income Tax Act.Tax deduction incentives
The law provides tax incentives in the form of capital deductions including investment deductions, wear and tear deductions and capital deductions in the mining and petroleum sectors.Preferential tax rates for newly listed companies
There are preferential tax rates for newly listed companies depending on the percentage of listed shares available to the public through the Nairobi Securities Exchange.Special Economic Zone incentives
Companies licensed under the Special Economic Zones Act, 2015 enjoy tax incentives under the Income Tax Act including lower corporate tax rate for the first 10 years from the date of first operation.Tax exemptions on investments
The Income Tax exempts from income tax dividends received by a registered venture capital company, special economic zone enterprises, developers and operators licensed under the Special Economic Zones Act.Taxes on foreign investments, loans, mortgages or other security documents
Where a Kenyan resident company receives an interest free loan from a foreign source, the loan is deemed to be interest bearing at rates specified by the Commissioner resulting in withholding tax at 15 per cent on the computed deemed interest on a monthly basis.Taxes on security documents
The Stamp Duty Act imposes duty at a nominal rate on charges, debentures and guarantees relating to loans. For more on this, see question 2. However, pursuant to the Legal Notice 106 of 2015, instruments executed in respect of transactions relating to loans from foreign sources received by investors in the energy sector, roads, ports, the water sector, railways and aerodromes are exempt from stamp duty.Double taxation agreements
The government has double taxation agreements (DTAs) with several countries, including Denmark and Norway. DTAs help in alleviating double taxation where business is conducted in different tax jurisdictions.
Government authoritiesRelevant authorities
What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?Kenya Investment Authority
The Kenyan Investment Authority (KIA) is established under the Investment Promotion Act 2004 to promote and facilitate investment by assisting investors obtain licences necessary to invest and by providing other assistance and incentives. This agency’s role is facilitative and works across all sectors.National Construction Authority
The National Construction Authority (NCA) is established under the National Construction Authority Act with several functions, for example, to prescribe the qualifications required for registration as a contractor. A project company in the construction industry must register with the National Construction Authority.County governments
Development projects need developmental approvals from county authorities. County governments have authority to approve construction projects, license businesses operating within their jurisdictions. For example, section 30 prohibits developments within the area of a local authority without a development permission granted by the local authority.National Environment Management Authority
The Environmental Management and Co-ordination Act (EMCA) requires an environmental impact assessment and strategic Environmental Assessments report to the National Environment Management Authority (NEMA), in the prescribed form, giving a summary description of the project, the place where the project is to be carried out, and its impact on the environment and accompanied by the prescribed fee.Department of Occupational Health and Safety
The Directorate of Occupational Safety and Health Services (the Directorate) administers the Occupational Safety and Health Act (OSHA), the Work Injury Benefits Act (WIBA) and all matters concerning employees in a workplace. OSHA secures the safety, health and welfare of persons at work and protects third parties against risks to safety and health arising out of, or in connection with, the activities in the workplace by laying out a myriad of obligations an occupier of a workplace ought to comply with. WIBA, however, has a more narrow focus: building framework in which employees who suffer injury or certain diseases named in the legislation during the course of their employment are compensated.
The two pieces of legislations are complementary in dealing with matters relating to the occupational safety and health of the employees and a project company would need to comply with them.Energy sector government authorities
A project company investing the energy sector will encounter and work with a number of entities as follow:
- The Energy and Petroleum Regulatory Authority with authority to issue, renew, modify, suspend or revoke licences and permits for all undertakings and activities in the energy sector.
- The Energy and Petroleum Tribunal, which hears and determines disputes and appeals arising from matters regulated under the Energy Act.
- The Rural Electrification and Renewable Energy Corporation whose roles include providing an enabling framework for the efficient and sustainable production, conversion, distribution, marketing and utilisation of biomass, solar, wind, small hydros, municipal waste and promoting the development of electricity generation through co-generation by sugar millers.
- The Nuclear Power and Energy Agency whose goals are to implement and promote the development of nuclear electricity generation in Kenya and carry out research, development and dissemination activities in the energy and nuclear power sector.
- The National Upstream Petroleum Advisory Committee established under the Petroleum Act, which advises the Cabinet Secretary responsible for petroleum on: upstream petroleum operations; negotiations of petroleum agreements; and suspension, revocation or termination of petroleum agreements or the recall of a security given under the terms and conditions of a petroleum agreement; and assists the Cabinet Secretary to develop criteria for the negotiation of petroleum agreements between the Cabinet Secretary and a contractor.
A project company in the mining sector will deal with the following:
- The National Mining Corporation established under the Mining Act as the investment arm of the national government in respect of minerals and may therefore acquire or hold interests in any undertaking, enterprise or project associated with the exploration, prospecting and mining or acquire shares or interest in any firm engaged in the mining, prospecting, refining, grading, producing, cutting, processing, buying, selling or marketing of minerals.
- The Minerals and Metal Commodity Exchange with the sole purpose of facilitating efficiency and security in mineral trade transactions;.
- The Mineral Rights Board, which advises the Cabinet Secretary on, among others, the grant, rejection, retention, renewal, suspension, revocation, variation, assignment, trading, tendering, or transfer of mineral rights agreements.
A project company in the PPP arena will deal with a number of government authorities. These include the following:
- The PPP Committee, whose roles include ensuring each project agreement is consistent with the provisions of this Public Private Partnership Act, formulating policy guidelines on PPPs, ensuring all projects are consistent with the national priorities specified in the relevant policy on PPPs, and approving project proposals submitted to it by the contracting authority.
- The PPP Unit, which serves as the secretariat and technical arm of the Public Private Partnership Committee and provides technical, financial and legal expertise to the Public Private Partnership Committee and any PPP Nodes at state contracting entities.
- The PPP Nodes, which are units within a state department responsible for PPP projects with a responsibility to identify and prioritise projects, prepare and appraising project agreements, ensure compliance with the PPPA, undertake tendering, monitor implementation, and maintain project records, among others.
- The National Treasury, which plays a significant role in the PPP field and is responsible for formulating policy on public procurement and asset disposal.
Regulation of natural resourcesTitles
Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?The state-owned natural resources
The Constitution of Kenya and the Mining Act vest minerals within Kenyan territory in the national government in trust for the people of Kenya. Similarly, the Petroleum Act vests all petroleum existing in its natural condition within Kenya and its continental shelf in the government in trust for the people of Kenya. This is equally true for all unexploited renewable energy resources under the Energy Act.Mineral rights and obligations of a mineral rights holder
Private parties may acquire a mineral right vide a prospecting licence, a retention licence, a mining licence, a prospecting permit, a mining permit, or an artisanal permit on application to the Cabinet Secretary under the Mining Act.
The Mining Act imposes the following obligations on the holder of a mineral right:
- section 43(1) prohibits engaging in wasteful mining or treatment practices;
- section 44 obliges a mineral right holder to exercise its rights reasonably, responsibly and in a manner that does not adversely affect the interests of any other holder of a mineral right, or the owner or occupier of the land over which the mineral right extends;
- section 46 requires the mineral right holder to ensure skills transfer and training of citizens. For this purpose, a detailed programme for the recruitment and training of citizens of Kenya is submitted to the Cabinet Secretary;
- section 47 requires the mineral right holder to give preference in employment to members of the community and citizens; and
- section 50 requires a mineral rights holder to give preference to the maximum extent possible to materials and products made in Kenya, services offered by members of the community and Kenyan citizens, and to companies or businesses owned by Kenyan citizens.
An entity interested in generating, exporting, importing, transmitting, distributing and retail supply of electricity, may apply for one of the several licences and permits under the Energy Act authorising it to undertake those regulated activities. It is an offence to carry on any of these activities without a licence. The holder of any licence under the Energy Act:
- has a duty to comply with all environmental, health and safety laws,
- is liable under tort and contract laws; and
- must pay all necessary fees associated with the licence on a timely basis.
The following licences are available under the Energy Act:
- transmission licences;
- distribution licences;
- retail licences; and
- licences for electrical contractors.
A company in the petroleum sector may by permit acquire the following rights from the Energy and Petroleum Regulatory Authority under the Petroleum Act:
- a non-exclusive exploration permit for a company intending to carry out a non-exclusive exploration survey;
- an operational permit, which authorises drilling wells, developing and producing petroleum and constructing petroleum gathering systems in the field, among others for a company that wishes to conduct upstream petroleum operations applies;
- a production permit for undertaking petroleum production;
- a licence for petroleum business for a company interested in refining, importing, exporting, bulk storing or transporting of petroleum crude or products, selling petroleum in bulk to another person for the purpose of export or for retail sale, using a vehicle for the purpose of transporting petroleum in bulk, driving a vehicle, or engaging a driver, for the purpose of transporting petroleum in bulk by tanker; and
- a construction permit for a company intending to construct a pipeline, refinery, bulk storage facility, retail dispensing site, centralised gas reticulation system or designated parking place for petroleum tankers.
Holders of these licences are required, in addition to complying with environmental, safety, planning, maritime laws and county government laws, to also comply with local content requirements including employment and procuring of local services and to report any accident or incident causing loss of life, personal injury, explosion, oil spill, fire or any other accident or incident causing harm or damage to the environment or property which has arisen in Kenya.
Foreigners may acquire rights to natural resources.
Mining rights may be granted to foreigners as long as their companies are registered and established in Kenya and the directors demonstrate the required technical capacity, expertise, experience and financial capacity.Royalties and taxes
What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?Royalties in the mining sector
The holders of mineral rights are required by the Mining (Prescription of Royalties on Minerals) Regulations 2013 to pay the following revenue-based royalties:
- 12 per cent of the gross sales value for diamonds;
- 10 per cent of the gross sales value for rare earth elements and radioactive minerals;
- 10 per cent of the gross sales value for niobium;
- 10 per cent of the gross sales value for titanium ores and zircon;
- 8 per cent of the gross sales value for coal;
- 5 per cent of the gross sales value for gold, silver, platinum and other platinoid group metals;
- 5 per cent of the gross sales value for gemstones;
- 8 per cent of the gross sales value for metallic ores, iron ores, manganese ore, chromium ore, nickel ore, bauxite and other ores;
- 5 per cent of the gross sales value for fluorspar, diatomite, natural carbon dioxide gas and all other minerals;
- 1 per cent of the gross sales value for industrial minerals, including gypsum, limestone and silica sand; and
- 2 per cent of gross sales value for construction materials.
The Energy Act imposes a royalty at the wellhead of the geothermal resources extracted:
- 1 per cent to 2.5 per cent of the value of geothermal energy produced during the first 10 years of production; and
- 2 per cent to 5 per cent of the value of the geothermal energy produced during each year after such 10-year period.
The Petroleum Act imposes annual fees as may be prescribed by a petroleum agreement and regulations. These annual fees include: surface fees; training fees; and such other fees as may be prescribed.
These fees are charged under the Petroleum (Exploration and Production) Regulations, 1984.Taxes
The Income Tax Act imposes income tax on natural resource income sourced in Kenya. Any payment of natural resource income by a resident person or person having a permanent establishment in Kenya is deemed sourced from Kenya provided it is incurred in the production of income or in connection with any business carried on in Kenya.
However payments of natural resource income made by a permanent establishment in Kenya of a non-resident person to that non-resident person or other offices of that non-resident person are excluded.Tax on petroleum operations
Companies in the petroleum industry are charged an income tax rate of 30 per cent for resident companies and 37.5 per cent for non-resident companies under the Income Tax Act. A non-resident subcontractor is charged a withholding tax of 5.625 per cent of the gross service fee.Withholding tax for mining and petroleum operations
The Income Tax Act charges witholding tax on payments of natural resource income to a non-resident person, permanent establishment of non-resident person and resident person for both mining operations and petroleum operations as follows:
- dividends: 10 per cent of the gross amount of the dividend payable;
- interest: 15 per cent of the gross amount of the interest payable;
- royalties or a natural resource income, 20 per cent of the gross amount of the royalty payable or natural resource income; or
- management, training or professional fees: 12.5 per cent of the gross amount of the management or professional fee payable.
Service fees paid by a contractor (oil and gas) to a non-resident subcontractor attracts witholding tax at 5.625 per cent while that on service fees paid by a licensee (mining) to a non-resident subcontractor attracts witholding tax at 20 per cent.Export restrictions
What restrictions, fees or taxes exist on the export of natural resources?Requirement of a licence to export natural resources
A company looking to export a natural resource requires a licence. Further, under the Energy and Petroleum Regulatory Authority Energy Act, a company which wishes to export electricity or petroleum crude or products must apply for a licence from the Energy and Petroleum Regulatory Authority. The licence may be granted with or without conditions.Taxes on export of natural resources
The Mining (Prescription of Royalties on Minerals) Regulations, 2013 impose the following royalties on the exportation of minerals:
- 2 per cent of the gross sales value of the gold to be exported;
- 5 per cent of the gross sales value of the industrial minerals including gypsum, limestone and silica sand to be exported;
- 5 per cent on the export value of raw gemstones; and
- 1 per cent on the export value of value-added gemstones.
Legal issues of general applicationGovernment permission
What government approvals are required for typical project finance transactions? What fees and other charges apply?
A project developer must procure an environmental impact assessment license from NEMA at a fee of 0.05 per cent of the total project cost.
Under the Physical Planning Act, development permission must be obtained from the local authorities (now counties). Each county determines its prescribed fees.
PPP projects are approved by the Public Private Partnership Committee and the PPP Unit established under the Public Private Partnership Act (the PPP Act).
Approval from the Kenya Airports Authority (KAA) under the Kenya Airports Authority Act is required where a development is located in the vicinity of land controlled by KAA and is anticipated to cause any obstruction or is otherwise hazardous to aircraft operations.
Other approvals may be required, including approvals from the Kenya Civil Aviation Authority, if a development is anticipated to obstruct gazetted flight paths.Registration of financing
Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?
Financing and project documents are contracts and must therefore comply with the laws and formalities of formation of contracts.
Registration of financing and project documents is not a legal requirement. However, the agreements are required to be stamped under the Stamp Duty Act.Arbitration awards
How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?
The Arbitration Act recognises as binding and enforceable international arbitration awards as par the New York Convention.
Kenya is a member of the International Centre for Settlement of Investment Disputes and has enacted the Investment Disputes Convention Act.
Most contractual or commercial disputes are arbitrable save where expressly exempted by statute such as criminal cases.
There are no disputes subject to automatic domestic arbitration.Law governing agreements
Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?
Project agreements with government or governmental agencies are governed by Kenyan law and all project agreements entered into pursuant to the Public Private Partnerships Act must be subject to the laws of Kenya. Private project agreements are typically governed by the contracts concluded between the participants and are subject to the jurisdiction elected by the parties.
Financing agreements are typically governed by the preferred law of the lender, ordinarily English law or New York law.
Land matters, permit or licence laws and government financial guarantees are subject to domestic law.Submission to foreign jurisdiction
Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?
Yes. Talaso Lepalat v Embassy of the Federal Republic of Germany & Two others  eKLR recognised as trite law that when a government enters into an ordinary commercial transaction with a trader, it must honour its obligations like other traders and if it fails to do so, it should be subject to the same laws and answerable to the same tribunals as they are. Therefore, a waiver of immunity is implied in commercial transactions and can indeed be lawfully performed.
Environmental, health and safety lawsApplicable regulations
What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?Environmental law
The EMCA establishes the legal and institutional framework for the management of the environment. It requires a project company to cooperate with state organs to protect and conserve the environment and to ensure the ecological sustainable development and use of natural resources.
The EMCA is administered by NEMA established under section 7. NEMA exercises general supervision and coordination over all matters relating to the environment and is the principal instrument of the government in the implementation of all policies relating to the environment.Health and safety laws
The OSHA and the WIBA deal with health and safety. They are administered by the Directorate.
Section 3 (2) states the purpose of OSHA as to secure the safety, health and welfare of persons at work and to protect third parties against risks to safety and health arising out of, or in connection with, the activities in the workplace. OSHA lays out the obligations of an occupier of a workplace and what the occupier needs to do to comply with them. WIBA has a more narrow focus: building a framework under which employees who suffer injury or certain diseases during the course of their employment are compensated.
Project companiesPrincipal business structures
What are the principal business structures of project companies? What are the principal sources of financing available to project companies?Principal business structures
The principal business structures for project companies in Kenya are limited liability companies incorporated under the Companies Act or limited liability partnerships under the LLP Act.Principal sources of financing
Projects are typically funded on a limited recourse through government viability gap funding, commercial loans and equity investments. Project companies more often than not obtain financing from local and offshore banks (syndicated loans are more common), private financial institutions, and international development finance institutions such as the African Development Bank and International Finance Corporation.
The domestic public securities market has not yet been utilised to finance projects in Kenya.
Public-private partnership legislationApplicable legislation
Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?
The PPP Act was enacted by the government to provide for the participation of the private sector in the financing, construction, development, operation, or maintenance of infrastructure or development projects through concession or other contractual arrangements. The PPP Act establishes institutions to regulate, monitor and supervise the implementation of project agreements on infrastructure or development of projects. The Act permits PPP projects at the national and county levels.
The PPP legislation is not industry-specific.
PPP - limitationsLegal limitations
What, if any, are the practical and legal limitations on PPP transactions?
Corruption presents a significant challenge in the implementation of PPP projects as it raises costs significantly and introduces inefficiencies that delay and sometimes lead to the collapse of projects. On this front however, Kenya is currently investigating corrupt practices in a bid to curb corruption.
The procedural steps a project has to go through from the initiation, through feasibility studies, approval and implementation are many and time consuming. The time it takes to move a PPP transaction through its life cycle under the current legal framework is significant. Presently, only one PPP project has attained financial close.
The procurement regulations governing PPPs are not comprehensive, especially with respect to privately initiated proposals.
There is limited involvement of county governments in PPP governance despite the fact that counties have a lot of potential in taking up PPP projects.
PPP - transactionsSignificant transactions
What have been the most significant PPP transactions completed to date in your jurisdiction?
Under the current legal framework, only one project has attained financial close, that is, construction of the roads from Ngong to Isinya and from Kajiado to Imaroro.
Prior to this, the most significant PPP transactions in Kenya were as follows:
- the Mtwapa and Nyali Bridges Concessions signed in 1959;
- the 75MW Tsavo Independent Power Project tendered in 1995; Olkaria III (48MW geothermal plant), lberafrica (56MW thermal power plant), Mumias (34MW power plant);
- the Port of Mombasa Grain Terminal on a build-own-operate awarded in 1998;
- the Concession of Kenya Railways Corporations freight services for 25 years and passenger services for five years in 2006; and
- the 90MW Rabai Independent Power Project in 2006.
UPDATE & TRENDSRecent developments
In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?Key developments of the past year30 In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?
The government recently introduced an ambitious five-year development programme known as the ‘Big 4 Agenda’ focusing on four pillars: manufacturing, affordable housing, universal health coverage, and food security.Manufacturing
There are opportunities in agroprocessing, that is, in local value addition for tea, coffee, meat, dairy, fruits, nuts and oils; warehousing and cold chain sites; aquaculture, fish feed mills and fish processing industries. There are also opportunities in the textile, apparel and leather, that is, cotton processing and ginning industries, Tanneries, leather products and apparel manufacturing within existing and planned Special Economic Zones (SEZs). Finally, there are also opportunities in heavy industries (oil and gas, mining and iron and steel), for example, the exploration, exploitation and production of coal, oil and gas, and minerals deposits in joint ventures with the government, and the refining and beneficiation of oil and gas, and minerals.Affordable housing
The government hopes to build 500,000 affordable homes for Kenyans, reduce the cost of home ownership by 50 per cent, create 300,000 new jobs in the construction sector, reduce the average cost of construction by 30 per cent, double the construction sector’s contribution to GDP and reduce the low income housing gap by 60 per cent. This presents opportunities for direct investment in the construction of affordable homes and provision of social services, the financing of affordable homes, and provision of low cost construction products and services.Universal health coverage
The government is also implementing universal health coverage with the aim of achieving 100 per cent cost subsidy on essential health services and reducing medical out-of-pocket expenses by 54 per cent as a percentage of household expenditure. There are opportunities for low-cost health insurance products and schemes, construction of private healthcare facilities and services, and provision of pharmaceuticals and basic medical supplies for example, the manufacture of generics and own brand pharmaceuticals and local manufacture, distribution and direct sales of medical supplies such as, sutures, drip stands and trolleys.Food security
Last, the government is looking to ensure 100 per cent increase in nutritional advancement by increasing the average daily income of farmers, reducing malnutrition among children under five years of age, creating 1,000 agroprocessing SMEs and 600,000 new jobs, reducing the number of food-insecure Kenyans by 50 per cent, increasing the agriculture sector’s contribution to GDP by 48 per cent, while reducing the cost of food as a percentage of income by 47 per cent. This presents opportunities for both local and foreign investors. Large-scale commercial enterprises will be established and financed; agricultural mechanical equipment will be needed to drive the sector. Opportunities are available in leasing, direct sales and operation of warehousing, cold store chains, driers, storage and handling equipment, and leasing and direct sales of tractors, transplanters, combined harvesters, weeders and irrigation equipment