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Capitalising on Extractive Resource Endowments to Improve Human Development Outcomes – A Review of Existing Literature on Extractive Resources in Tanzania

Helen NewcombeMPhil. BSc (Economics)

Capitalising on Extractive Resource Endowments to Improve Human Development Outcomes – Literature Review29.03.2014

ABSTRACT

This literature review has been commissioned by the Revenue Watch Institute-Natural Resource Charter (RWI-NRC) to map existing research on extractive resource management and human development in Tanzania. The country is currently leading a benchmarking exercise based on the Natural Resource Charter, out of which will be developed an action plan with detailed policy recommendations. This review summarises the country-focused literature on key aspects of the extractive resource management process and identifies areas where additional research could support the benchmarking exercise and the formulation of Tanzania’s extractive industries’ strategy. The review finds that much of the Tanzania specific literature merely summarise opinions on topics or reports incidences. There is a lack of technical analysis on Tanzania-specific extractive resource attributes. The report recommends a number of areas for further research.

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Table of Contents

INTRODUCTION..................................................................................................................4KEY AIMS OF THE REVIEW..........................................................................................................4STRUCTURE..............................................................................................................................4SCOPE OF THE REVIEW...............................................................................................................4REVIEW METHODOLOGY............................................................................................................5

CONTEXT............................................................................................................................6THE TANZANIAN ECONOMY.........................................................................................................6EXTRACTIVE RESOURCE ENDOWMENTS..........................................................................................6HUMAN DEVELOPMENT IN TANZANIA...........................................................................................6

OVERARCHING ISSUES OF RESOURCE GOVERNANCE (PRECEPTS 1&2).................................8NATIONAL STRATEGIES...............................................................................................................8EXTRACTIVE RESOURCE POLICY & LEGISLATION...............................................................................9TRANSPARENCY AND ACCOUNTABILITY TO AN INFORMED PUBLIC.....................................................11

DISCOVERY AND DECISION TO EXTRACT (PRECEPT 3)........................................................13GEOLOGICAL UNCERTAINTY.......................................................................................................13TRANSPARENT LICENSING REGIMES............................................................................................13

GETTING A GOOD DEAL (PRECEPTS 4,5&6).......................................................................16ASYMMETRIC INFORMATION IN NEGOTIATIONS.............................................................................16FISCAL REGIMES......................................................................................................................17CREATING JOBS.......................................................................................................................19RELOCATION & COMPENSATION................................................................................................20ENCOURAGING DOWNSTREAM ACTIVITIES & ENFORCING LOCAL CONTENT POLICIES............................21STATE EQUITY........................................................................................................................21CORPORATE SOCIAL RESPONSIBILITY (CSR)..................................................................................22ENVIRONMENTAL DEGRADATION & MITIGATION..........................................................................22

MANAGING THE REVENUES (PRECEPTS 7&8)....................................................................23MANAGING REVENUES.............................................................................................................23SUB-NATIONAL REVENUE TRANSFERS FOR MINING REGIONS...........................................................23REPLACING AID WITH RESOURCE REVENUES.................................................................................24AVOIDING DUTCH DISEASE.......................................................................................................25

INVESTING FOR DEVELOPMENT (PRECEPTS 9&10)...........................................................26DIVERSIFICATION.....................................................................................................................26VOCATIONAL EDUCATION.........................................................................................................26EXPORT VERSUS ENERGY FOR NATURAL GAS EXTRACTION...............................................................27

CREATING AN ENABLING INTERNATIONAL ENVIRONMENT (PRECEPTS 11&12).................28TRANSFER PRICING & TAX EVASION...........................................................................................28INTERNATIONAL CORRUPTION LAW............................................................................................29

CONCLUSIONS..................................................................................................................30

BIBLIOGRAPHY.................................................................................................................32

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INTRODUCTION

RWI-NRC Initiative BackgroundRWI-NRC1 is supporting the government of the United Republic of Tanzania (Tanzania) to improve the management of its oil, gas and mineral resources using the Natural Resource Charter framework2. The programme will involve diagnosing gaps and opportunities in the current management of oil, gas and mineral wealth and using this to build a national extractive resource strategy and action plan to improve resource revenue management in order to achieve human development outcomes.

Key Aims of the ReviewThe literature review is one of the first steps in synthesizing existing knowledge on extractive resource issues in Tanzania and brings together previous publications and the discussions of sector best practises to better inform the natural resource charter benchmarking process going forward. The Key aims of the Literature Review are:

To summarise the existing literature on the proposed themes To draw out implications for capitalising on extractive resource endowments to

achieve human development outcomes. To identify frontier areas of research in this field and suggest topics for additional

research.

StructureThe structure will follow that of the Natural Resource Charter Precepts categorised into their six themes:

Overarching issues of resource governance (precepts 1&2) Discovery and decision to extract (precept 3) Getting a good deal (precepts 4,5&6) Managing the revenues (precepts 7&8) Investing for development (precepts 9&10) Creating an enabling international environment (precepts 11&12)

Within each of these themes the focus is on issues that link extractive resources and human development. This transfer may occur through direct channels from extraction activities - job creation, income opportunities, relocation and compensation…etc. or it may occur through indirect channels - increasing resource revenues and investing these wisely for improvements in human development.

Scope of the ReviewDue to the time constraints and broad structure of this task, the report has reviewed only literature with specific references to Tanzania. A large volume of best practise and case study literature exists on the themes that are dealt with in the paper but these are not featured in this review.

1 Revenue Watch Institute – Natural Resource Charter2 available at http://www.naturalresourcecharter.org. The NRC framework gives guidance on the chain of economic decisions that have to be made in order to transform extractive wealth under the ground into sustainable development above the ground

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Review MethodologyTo begin a number of papers and sources were provided by RWI, additional literature was then sourced using a ‘systematic review’ search methodology. This included:

1. Identifying key themes for the review, in conjunction with RWI.2. Undertaking computer searches. A combination of academic literature searches,

snowballing and grey literature capture was used.3. Downloading documents and filing these according to the NRC precepts in an

electronic library.4. Creating a spread sheet cataloguing the literature and categorizing reports according

to source, author, date, title, subject, theme, and application.5. Screening literature to identify further search channels.

The subsequent library of literature was read and evaluated by the consultant and the review was then compiled using a narrative synthesis method.

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CONTEXT

The Tanzanian economyThe United Republic of Tanzania is one of the world’s poorest economies with average per capita income levels of US$609 (2012) (World Bank) and extremely low levels of development. The country has been experiencing stronger economic performance over the past decade with GDP levels rising and growth rates projected to remain at around 7% over the medium term. Inflation continues to exhibit a downward trend, reaching an average of 7.9% in 2013 down from 19.8% in December 2011 (National Bureau of Statistics 3 (NBS)) and other macroeconomic fundamentals are looking strong. GDP growth is driven largely by advances in the service sector, which makes up 48% of GDP (CIA. 2012 4). The agricultural sector, while contributing to only 27% of GDP, employs around 80% of the population. Mining accounts for just 2.8% of GDP (Tanzania Chamber of Minerals and Energy5).

The business environment in Tanzania remains weak, ranking only 145th out of 189 countries in the World Bank ‘Doing Business 2014’ report. Government effectiveness is also ranked relatively poorly with Tanzania coming in at 135th out of 212 countries in the World Bank’s Governance Indicator. Transparency and corruption in governance remain significant challenges with Tanzania ranked 90th out of 140 countries (Transparency Initiative Corruption Perceptions Index).

Extractive Resource endowmentsDespite its low level of development, Tanzania is richly endowed with extractive natural resources. The third largest gold producer in Africa (Thomson Reuters GFMS 20116), Tanzania is estimated to posses around 45million ounces of gold, worth US$39 billion (Curtis & Lissu 2008). In the last five years alone Tanzania has exported more than US$2.5 billion worth of gold. Recent discoveries of natural gas off the eastern coast of the country now put estimates of natural gas reserves up to 43 trillion cubic feet (0.64% of total world reserves), valued at US$430 billion (ESRF No.50 2013). Tanzania is also rich in a number of other valuable mineral deposits including diamonds, coal, iron, titanium, uranium, nickel and copper.

Human Development in TanzaniaDespite rising levels of GDP and stronger economic performances, Tanzania is still one of the poorest countries in the world, ranked 152nd out of 182 countries on the Human Development Index (2012). 28.2% of the country’s population lives below the basic needs poverty line7 and 9.7% below the food poverty line8 (HBS 2011/2012). Tanzania relies heavily on assistance from donors with aid financing approximately 30% of the government budget (Ministry of Finance, Government of Tanzania Budget 2010/11). Unemployment levels are at 10.7% (2011), life expectancy at birth is only 51 years (2012) and development indicators such as under-five mortality and HIV prevalence are extremely poor (NBS).

3 National Bureau of Statistics in Tanzania – available at http://www.nbs.go.tz4 Available at https://www.cia.gov/library/publications/the-world-factbook/geos/tz.html5 Available at http://www.tcme.or.tz/mining-in-tanzania/industry-overview/6 Available at http://www.goldfacts.org/en/economic_impact/countries/7 The basic needs poverty line is set at TSh36,482 per adult equivalent per month and this is based on the cost of a food basket that delivers 2,200 calories per adult and making an allowance for basic non-food necessities like clothing, health and education.8 The food poverty line is set at Tsh 26,085 per adult equivalent per month- the level at which households total spending on all items is less than they need to spend to meet their needs for food.

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In such a poverty stricken, aid dependent nation, the investment impact from the extractive industry has the potential to transform the Tanzanian economy and the lives of its citizens, but managing extractive resources and their revenues is not an easy task. Many other African countries have fallen foul to what has become known as the ‘resource curse’ - natural resource abundance associated with increased levels of corruption, a decline in competitiveness of other sectors, volatility of revenue streams and low economic growth. Effective management and a strong governance framework will be needed to ensure that this will not be the fate for Tanzania.

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OVERARCHING ISSUES OF RESOURCE GOVERNANCE (PRECEPTS 1&2)

PRECEPT 1: Resource management should secure the greatest benefit for citizens through an inclusive and comprehensive national strategy, clear legal framework and competent institutions.

PRECEPT 2: Resource governance requires decision makers to be accountable to an informed public

National StrategiesTanzania is in the process of developing a comprehensive national strategy for managing their extractive resources. The framework is a benchmark based on the Natural Resource Charter and will be led by a panel of experts drawn from the civil service, academia, private sector and civil society organizations.

Existing national documents already identify extractive resource management as a key component in achieving growth and development but there is a notable divergence between strategies and actual project implementation. MKUKUTA II, Tanzania mainland’s national strategy for growth and poverty reduction (2010-2015) refers to the need for equitable allocations and improved governance of national resource wealth and suggests broad interventions for implementation that include strengthening institutions, earmarking revenues and resource rent sharing to leverage increased returns on natural resources and improve value addition. Zanzibar’s equivalent national strategy for growth and poverty reduction (MKUZA II) is less tailored to extractive resources, but still refers to the need to ensure petroleum and natural gas security for Zanzibar’ as well as placing importance on assessing resource endowments and encouraging community participation in natural resource management. MKUKUTA and MKUZA are very broad strategy documents with a large list of ‘priority’ areas and unrealistic expectations for implementation. In the process of developing a national strategy for extractive resources, there should be a recognition of the limitations that Tanzania faces in terms of prioritising resources and capacity and put forward an achievable and tangible strategy for resource management.

Tanzania’s Five Year Development Plan, an accompanying document to MKUKUTA II, in the main text, discusses the implementation of projects to enhance fiscal management including domestic resource mobilization, reducing tax exemptions and maximizing rents. It also offers strategic interventions to improve human capital development and infrastructure in key industrial sectors, namely mining. There is a mismatch, however, between the main text and Annex I, which lists the actual projects put forward for implementation by all ministries over the five-year period from 2011 to 2016 (the same period governed by both the national growth strategy and sector strategic plan). Under the project allocation, TZS 3.9 billion (US$2.4 million) will be spent on geological surveying, TZS 255 billion (US$157 million) on strengthening the state mining corporation (including a significant recapitalisation program), TZS 1.1 trillion (US$678 million) will be spent on the development of mines and procurement of mining equipment and TZS 1.2 trillion (US$740 million) on developing natural gas pipeline infrastructure. Only TZS 750 million ($463,000) is allocated to research and capacity building in the Natural Gas sector over the 5 years, no funding allocations are made for projects to improve revenue management and fiscal regimes, just TZS 500 million (US$309,000) is allocated to improving government transparency across all ministries and no other human development orientated projects around the extractive industry are proposed. This suggests a gap exists between national level strategies and the design and allocation of funding to projects at the sector level.

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The Strategic Plan for the Ministry of Energy and Minerals (2011-2015) broadly reflects the strategies laid out in the national plan and discusses addressing issues of corruption within the ministry, low capacity levels and managing small-scale mining operations. Strategic objectives include increasing value addition and revenue capture from mineral operations as well as improving capacity levels in the ministry and improving compliance and ensuring transparency and accountability. A clear set of outputs and indicators are laid out in order to mark progress in achieving department outcomes but specific projects are not identified. Regular monitoring of these indicators should be made to ensure that the ministry is effectively implementing projects that target these outputs and that sector strategies are closely linked to project design and funding prioritisation.

While the policy recommendations within the national strategy documentation are aligned, well intentioned and draw on best practice objectives and interventions, one unified strategy for extractive resources is not apparent across the documentation. Recommendations remain too broad without specific targets and prioritised project planning to meet these targets. There is a significant gap between national level strategies and project planning and implementation at the sector level. Other than the Annual budget, the Five Year Development Plan is the only National Level planning document that contains specific project details as well as prioritisation and funding allocations submitted by sectors.

Under the extractive resource strategy, planning at the national and sector level needs to be connected and sector activities should be aligned completely with national level extractive sector strategies. Clear targets, indicators and monitoring & evaluation procedures should be laid out in the strategy.

Extractive Resource Policy & LegislationMiningA number of policy reforms have occurred in the mining sector over the last 20 years. Structural reforms throughout the 1990s, supported by the World Bank and with the intention of shifting mining operations away from state ownership and into private hands, reflected the desire to upscale mining operations and privatize operational capacity. The Mineral policy of 1997 pushed for the promotion of private investment in the sector and in turn increased contributions of the sector to GDP levels. Coupled with the Mining Act of 1998 the framework was successful in its objectives and Tanzania saw increased levels of exploration and mining activities. Unfortunately these achievements were not translated into significant domestic revenue flows. Critics have since argued that the kind of investment incentives and promotion packages offered under the 1997 policy were at the expense of mineral countries’ revenues and allowed a disproportionately large share of profits to go to international mining companies. (Lange 2011)

In light of this critique the Mineral Policy of Tanzania was updated in 2009, the new objective- to create a mineral sector that contributes ‘significantly to the acceleration of socio-economic development’ by 2025. This new policy recognises a number of challenges in the mineral sector including low integration with other sectors, low contributions of sector growth to GDP as well as capacity and value addition inadequacies. Policy statements cover the themes of investment, integration, enforcement of laws, institutional capacity, participation, land compensation & relocation, value addition, transparency, environment, and women and children. The ‘Strategies & Implementation Status’ document created in

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February 2013 (URT 2013) suggests that Tanzania has made good progress in implementing best practise domestic policies (as recommended by the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development).

A revision of the Mining Act followed in 2010 to reflect Mineral Policy changes and incorporate new rules on licensing regulations and requirements. While some citizen groups and a number of MPs remain disappointed with aspects of this bill, suggesting it didn’t go far enough to secure benefits to the Tanzanian people9, the consensus is that at the least this Mining Act takes necessary steps along the path to effective extractive resource management. Royalty rates have risen from 3% of netback value to 4% of gross value, additional requirements have been written into legislation referring to local content use, employment, exit plans and a requirement to pay 0.3% of annual turnover to the government, up from a capped maximum of USD$200,000 a year.10

As you would expect, resource investors are less happy with this legislature change and oppose the increased conditions it imposes on their operations. In a joint statement issued through the Tanzania Chamber of Minerals and Energy after the bill was released, investors described the legislation as "distorted" saying it would curtail future mining projects in east Africa's second biggest economy (Ng'wanakilala 2010). Writing in 2013 however, OECD (2013) found that the Mining Act revision has had no deterrent effect on investment projects and advocates that the revisions bring “additional clarity and transparency” to the sector.

Natural GasThe foundation legislation for the upstream industry is the Petroleum (Exploration and Production) Act which was passed in 1980. The Act allows the government to enter into agreements with any company for the purpose of granting the Company licences for the exploration and production of petroleum. All licences for exploration and production are issued to Tanzania Petroleum Development Corporation (TPDC) and it then authorises the company under a Production Sharing Agreement (PSA) to carry out the petroleum operations on its behalf, by granting it exclusive rights over the licence area.

A Natural Gas Policy was formulated and approved in 2013. While not legally binding, the policy represents the first step taken by the Government of Tanzania in the development of a new legal and regulatory framework intended to prepare the country to become a major natural gas producer. The policy addresses only mid and downstream segments and upstream issues will be dealt with under a separate policy. The suggested intention is to have separate fiscal regimes across activities. These will be outlined in the future revisions of the Natural Gas Act and Natural Gas Revenue Management Act.

The five pillars of the Natural Gas policy include:1) Strategic participation, interventions and equitable benefit sharing;2) Development and strengthening of institutional frameworks and human capacity.3) Ensuring a transparent and accountable system is in place for revenue management.4) Ensure adequate disaster management systems are in place to prevent adverse

impacts and to protect people’s health & safety and the environment.

9 Principally that conditions put forward under the new Act would not be applicable to existing contracts and contract disclosure would remain.10 Note that the Mining Act refers specifically to the prospecting for minerals and mining products. Matters related to petroleum products are dealt with separately under the Petroleum Act 2008.

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5) Integration of the natural gas industry into other economic sectors in order to accelerate broad based growth and socio-economic transformation.

The policy lists a number of deliverables including, a natural gas act and regulations, natural gas utilisation master plan, national gas company and subsidiary companies, natural gas revenue fund and a communication strategy.

An article by Ng'wanakilala (2013) commenting on the draft policy released in 2012 described the policy as “tough” on foreign companies and believes it will ensure the domestic market gets priority over exports but a briefing by Clyde & Co (2013) on the published gas policy suggests that a number of “investor friendly” changes have been added since the dissemination of the draft. The policy makes a clear distinction between the gas supply for local consumption and supply for export and maintains that the domestic market will get first priority on supplies as well as including recommendations for sector linkages, corporate social responsibility, conservation and transparency.

A review of the current governance mechanism (for both mining and gas) would be valuable at this stage. This exercise should look at parliamentary inputs, PSA’s, the legislation development process, and planning and implementation procedures.

Transparency and Accountability to an Informed PublicIn developing countries where citizens are often untaxed and public service provision is low, citizens place lower expectations on the government and exhibit a lower level of demand on state services. Amplified in countries where resource revenues keep government finances buoyant, governments can become less accountable to their citizens and can get away with acting in the interests of other parties (discussed in Moshi 2013). In order to ensure that resource revenues are utilised by the government to maximise the long term outcome for Tanzania, it is important that the government is held accountable by the public.

In mining, the revisions to the Mineral Policy stipulated a requirement for an auditing institution and the Tanzania Minerals Audit Agency was established to improve monitoring and auditing activities. Every year TMAA publishes an Annual Report which records quantity and qualities of minerals produced and exported, their value and royalties due, capital investment and operating expenditures as well as environmental management tracking. While the literature does not discuss the quality of TMAA reports, it is suggested that capacity levels within the auditing agency are low (OECD 2013 p119). OECD finds that, while progress has been good, stronger and more coordinated efforts for tracking the revenue foregone through tax incentives are needed. They suggest that this should come in the form of an annual, publicly released statement detailing all tax expenditures.

In relation to the Natural Gas sector, the Gas Sector Scoping Mission Report (2012) suggests that lessons should be learnt from the stakeholder inclusion in policy design for the Mining Policy and that stakeholders should participate in new gas legislation design. It also commits to disclosure and publication of gas sector data and continued regular auditing of TPDC.

In 2009 Tanzania signed up to the Extractive Industries Transparency Initiative, a global standard for revenue transparency and a global coalition of governments, companies and civil society organisations with the aim of increasing transparency over payments and revenues in the extractive sector.

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Global EITI conditions require a country to undertake:1. Effective oversight by a multi-stakeholder group2. Timely publication of EITI Reports3. EITI Reports that include contextual information about the extractive industries.4. The production of comprehensive EITI Reports that include full government disclosure

of extractive industry revenues, and disclosure of all material payments to government by oil, gas and mining companies

5. A credible assurance process applying international standards6. EITI Reports that are comprehensible, actively promoted, publicly accessible, and

contribute to public debate.7. The multi-stakeholder group to take steps to act on lessons learned and review the

outcomes and impact of EITI implementation.

The first TEITI report in 2011 raised a number of issues in the mining sector and found an accounting discrepancy of US$36 million (TEITI, 2011). Mining companies reported having paid US$84.4million in 2008/09 but the government had only recorded receiving US$48.3million of this. The figures released also showed that extractive industries contributed only 1.5% to the Government revenues for the fiscal year 2008/2009 and that these were largely collected through workers' statutory contributions and royalties and not through taxation of companies (PWYP 2013). The Validator for EITI also reported that the first TEITI report had failed to meet indicators 9, 11, 13, 14, and 15 of the EITI conditions. This included ensuring all extractive companies complied, requiring that reports should be based on accounts audited to international standards, comprehensive disclosure by companies and the government according to EITI templates. These conditions have since been discussed in a report by PWYP (2013) analysing reconciliation reports I & II and it is suggested that revised conditions have been agreed with EITI and compliance has now been reached by Tanzania.

The government has also committed to mining information disclosure to the public through The Ministry of Energy and Minerals’ Client Service Charter published in 2010. This document commits to a high level of service delivery to clients, including license and audit processing times, as well as a broad commitment to communication and information sharing with the media, civil societies and communities, academic institutions and development partners. It should be noted that the commitments in this document may be viewed as somewhat superficial as no specified actions for information delivery are given.

Sources outside of the government, suggest that information transfers are not as open and accessible as claimed. Writing in August 2012 about East African Oil & Gas, Thembi Mutch, a journalist in Tanzania, talks about a gap between those making decisions and those affected by them. “There is a marked absence of information...No one really knows what’s going on”(Mutch 2012). A report by Curtis & Lissu (2008) on mining suggested that information sharing should not be limited to revenue capture but also to revenue spending and also emphasised a need for translations of important transparency information to be made into Kiswahili (the mother tongue in Tanzania) for maximum dissemination. Moshi (2013) advocates a need for full transparency for the Natural Gas industry. He recommends that those countries that do not comply with disclosure requirements should be banned from operations, suggesting that where there is secrecy, there will often be bad behaviour.

Currently Tanzania scores just 50 out of 100 on the Resource Governance Index (RWI) ranking only 46th out of 58 countries according to the institutional & legal setting in Tanzania.

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DISCOVERY AND DECISION TO EXTRACT (PRECEPT 3)

PRECEPT 3Government should aim to reduce geological uncertainty under a transparent licensing regime that allocates rights efficiently.

Geological UncertaintyDue to the nature of subsurface resources, it is not possible to accurately evaluate the size and value of reserves under a specific land area prior to extraction. Prospecting licenses are awarded to allow interested investment companies to investigate potential stock levels; but the highly technical nature of this process, the sunk costs and the value of this information once extracted means that the government can often find themselves in a position where they know less about the value of the resource rights that they are selling than the extraction company does about what they are buying. This puts governments in an inferior position from which to negotiate a fair price for resource extraction (see discussion in Moshi 2013).

Reports by Publish What you Pay (2011), Deloitte (2013) and Ledesma (2013) give a reasonable summary of the exploration activity, key actors and the confirmed quantities of gas and mineral findings in areas where licenses have already been awarded and prospecting begun. Little discussion is given in the literature to the availability of information prior to the awarding of licenses but sources from inside the country suggest that the geological capacity in Tanzania has improved greatly in recent years, especially in the Natural Gas industry. TPDC has undergone a number of intensive capacity improvements in relation to geological information and are now in a more adequate position to inform negotiation processes. This is an area that can always benefit from capacity support and technological advancements but is not an area requiring specific research support at this time.

Transparent Licensing RegimesMiningAfter a series of reviews, the Mining Act 2010 introduces the latest legislation for mining licensing. The aim is to promote transparent criteria for license awarding and to set conditions for maximising the benefits to Tanzanian citizens from the decision to extract resources. Separate licenses can be granted for prospecting, retention, special mining, mining, gemstone mining, primary prospecting and primary mining, each with different conditions such as domestic ownership, local content...etc. (see Mining Act 2010 for details)

Some important conditions featured in the new Mining Act 2010 that focus on capturing benefits for Tanzanians include:

Small-scale mining licenses for all minerals being exclusively reserved for majority Tanzanian owned companies.

The Government can negotiate with any mineral right holder to gain state participation in operations.

A proposed plan for relocation, resettlement and compensation of people within the mining areas must be included with applications.

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A procurement plan of goods and services available in the United Republic must be submitted.

A proposed plan set out for the Employment and training of citizens of Tanzania and succession plan for expatriate employees as required by the Employment and Labour Relations Act.

Little attention is given in the literature to the licensing process for mining, the focus is on the conditions that are then negotiated into contracts such as fiscal regimes and exemptions (see discussions on p18). This is where the focus should remain.

Natural GasFor Natural Gas licensing, the procedure for allocation in Tanzania is by way of a bidding process. The Government announces through TPDC a bidding round for a number of offshore or onshore blocks, a well data package is made available to interested parties at a cost and then applications for bids must be made. The bids will be considered by TPDC, taking into consideration the technical and financial capabilities of the applicants, and recommendations for successful bids will be made to the Minister for Energy and Minerals, who will award the license to TPDC, in conjunction with a Production Sharing Agreement (PSA) between TPDC and the winning company. The PSA should set out conditions on CSR commitments, local content requirements, procurement & employment plans and training initiatives.

The Gas Sector Scoping Mission Report (2012) finds that, while Tanzania’s 25 current PSA contracts are strong and “favourable” for the Government, they were designed with a focus on oil rather than gas and so the report recommends that further modification of the contracts may be needed for PSA’s to properly work for gas. They propose a three phase process required for negotiation of contracts and licensing. The first phase is an advance preparation phase ahead of the actual negotiations, during which the Government needs to review existing PSA gas terms, during the second phase negotiations should be carried out with the relevant companies being offered the PSA and the third phase requires diligent follow up through the implementation phases to ensure that contractual parties fulfil agreed obligations.

Further research should look at the effectiveness of Tanzania’s current natural gas bidding process compared to other models and best practices for licensing. On recommendation from the Gas Sector Scoping Mission, PSA and contract composition should be reviewed and recommendation for modifications for a gas specific focus should be given. This work could contribute to the development process for a Natural Gas Act and upstream natural gas policy.

Contract DisclosureWhile this existing regulation lays out good conditions that, if adhered to, could secure reasonable benefits to Tanzanian citizens, concerns are expressed throughout the literature over the binding nature of the legislature and the compliance of contracts with these conditions. Contract disclosure would promote transparency and accountability in the licensing process and ensure that the interests of Tanzanian citizens are being pursued. Until now all contracts remain confidential and previous efforts to undercover contract conditions have been met with hostility. Lange (2011) refers to an incident where a large-scale mining contract was signed in a London hotel room, “away from the public eye” and according to Curtis & Lissu (2008), even parliament and the auditing committee have been denied access

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to contracts signed by the administration. In 2003 the Tanzanian Permanent Secretary for the Ministry of Energy and Minerals stated that investment agreements that the government had signed were “not for public consumption” (qtd. in Lange 2006).

On the international scene more and more countries are now supporting and undertaking contract disclosure as part of their commitment to transparency. The International Council on Mining and Metals requires that its members “engage constructively in appropriate forums to improve the transparency of…contractual provisions” and all International Finance Corporation backed oil, gas and mining contracts ‘must be disclosed’. The Tanzania Gas Scoping Mission Report (2012) discusses a number of case studies where contract disclosure has been written into domestic EITI commitments and Tanzania announced in September 2013 that they will be following suit and making mining contracts and oil and gas production sharing agreements in the future public. Unfortunately due to legal conditions, this will only apply to new contracts signed. It should be noted that under the New Mining Act of 2010, Clause 25 still forbids contract disclosure unless full consent by the mineral rights holder is given.

25.-(1) Subject to subsection (2), no information furnished, or information in a report submitted, pursuant to section 100 by the holder of a mineral right shall, for so long as that mineral right or another mineral right granted to the holder has effect over the land to which the information relates, be disclosed, except with the consent of the holder of the mineral right. (Mining Act 2010 p25)

A lack of transparency and accountability in the awarding of contracts and conditions that are negotiated can also be associated with increased levels of corruption. Rumours of corruption, within the Government of Tanzania and specifically within the Ministry of Energy & Minerals, are rife (Reginald Mengi, PWYP 2011) and Curtis & Lissu (2008) suggest that allegations of dismissal, threats and arrest surround a number of people who are pursuing contract disclosure, suggesting that transparency and accountability is not in the interests of all agents involved in the contract process.

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GETTING A GOOD DEAL (PRECEPTS 4,5&6)

PRECEPT 4Tax regimes and contractual terms should enable the government to realize the full value of its resources consistent with attracting necessary investment, and should be robust to changing circumstances.

PRECEPT 5Opportunities for local benefits should be pursued, and the environmental and social costs of resource projects should be accounted for, mitigated and offset.

PRECEPT 6Nationally owned resource companies should be accountable, with well-defined mandates and an objective of commercial and operational efficiency.

Once the decision to extract has been made, the next important step is to negotiate a deal with the extraction company. This will include using the various tools of tax rates, incentives, exemptions and conditions to come to a fair agreement for sharing the potential value of extracted resources between the extraction company and the Tanzanian government. This process should also involve encouraging additional means of maximising benefits through employment, local procurement and downstream activities while managing the potential risks that may arise through environmental deterioration or relocation requirements.

Asymmetric Information in NegotiationsExtraction companies will often have highly skilled personnel on the negotiating panel with a breadth of experience and detailed sector understanding. Comparatively, domestic negotiating teams are often much less qualified; capacity internally is low and, particularly in a sector’s infancy, knowledge of domestic asset values and understanding of bargaining powers are weak. This leads to a problem of asymmetric information at the negotiating table. Fair and efficient contracts may be difficult to achieve in such a biased situation.

In relation to mining contacts, Andrews (1988) suggests that it is this imbalance that results in ‘tax leniancy’ (qtd in Lambrechts 2009, p44). Tanzania’s Commissioner for Minerals suggested that mining companies take advantage of this asymmetry. He was quoted saying “…the contracts are difficult. I think the mining companies exploit our weaknesses in law and capacity.” Tanzania could benefit from research on negotiation procedures in the mining sector. Specifically looking at where they have gone wrong in the past and detailing the true nature of negotiation procedures in order to learn from past mistakes. Where confidentiality is an issue, a confidential review may be required.

The Tanzanian Gas Sector Scoping Mission in 2012 raised the problem of asymmetry in negotiations for gas contracts and suggested narrowing the scope of negotiations, reducing the portfolio of objectives, utilising expert advice where possible and creating workable contracts which are flexible to changes in circumstances in order to condense the negotiating framework. The Tanzanian government could have access to expert advice through the African Legal Support Facility or another institution providing similar services.

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Fiscal RegimesSetting effective fiscal regimes are the major means of extracting resource revenues from private extractive operations. Fiscal regimes for extractive resources typically feature a combination of royalty rates and corporation tax and may include other payments such as windfall profit taxation.

On mining operations, Tanzania currently charges a royalty rate of 4% on the gross value of mineral extraction and corporation tax on company income at 30%. They also give a number of exemptions on tax liability, particularly in the first 5-10 years of operations; tax losses can be carried forward and imports are subject to wavered or reduced taxation. Since 2010 ring fencing has been put in place for the mining industry.

For oil and gas operations, the PEP Act and the PSA provide for the taxation of revenues generated from petroleum operations. Taxes levied include corporation tax on all income derived from the petroleum operations at 30% and royalties to be paid on any petroleum that is recovered from a development area or delivery of 12.5% of the total crude oil/natural gas from production to the government. The 2010 Finance Act introduced ring fencing for mining projects but no provision has been made for this in the case of oil & gas under current law, this means that profits recorded by one PSA may be offset by losses from another, owned by the same holding company.

Discussions around the setting of appropriate fiscal regimes are featured heavily in the literature on extractive resources but for the Tanzanian literature the focus has been on the mining and mineral extraction industry. This is understandable given the concentration of activities in the mining sector over the past 20 years.

Across the literature, the consensus is that resource revenue capture from mining is too low. Opinions vary on whether this is a result of low tax rates, low revenue capture or an ineffective combination of taxation and exemptions allowing too many opportunities for tax avoidance.

Data from PwC (2010) (qtd in Lundstøl, Raballand & Nyirong. 2013) broadly compares taxation and exemption rates across the mining sectors in a number of resource rich countries. It shows that comparing current rates, Tanzania demands tax rates at the lower end of the spectrum and has comparatively generous exemptions but this comparison is basic and further detailed comparisons of regime compositions across similarly endowed countries could be valuable.

The Bomani Commission (qtd in Policy Forum 2009) estimated that the government has foregone revenue worth US$24.5 million in 2006/2007 and US$ 36.4 million in 2007/2008 as a result of fuel levy exemptions granted to the six large mining companies, and put cumulative revenue losses from exemptions in 2008-2010 at US$1.4 billion.

Curtis & Lissu (2008) found that AngloGold Ashanti has paid taxes and royalties totalling US$ 144m in 2000-07 and over the same period has sold around US$ 1.55bn worth of gold. This is equivalent to only 9% of export value being paid in remittance to Tanzania. They argue that exemptions and incentives are too high, eroding revenue capture. Other discussion papers with similar assertions include Lange 2006, Bevan 2012, NORAD 2012 and Magai & Marquez 2011.

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Neema Mrema, Commissioner for the Large Taxpayers Department in the Tanzania Revenue Authority did admit to ‘flaws’ in the fiscal regime applied to the mining industry. She cites the fact that the first large gold mining company only started paying corporation tax 10 years after commencement of activities (NORAD 2012).

A Mining Sector Taxation report on Tanzania was conducted by ICTD in 2012, (Muganyizi 2012). This paper looks at the various components of mining revenue and discusses the rates and legislation surrounding these. Unfortunately, what is still missing is the analysis required to show the effects that these rates and exemptions have on resource revenues. Again, this paper discusses key features in the topic of fiscal regime design but does not include technical analysis of the data and structure of regimes in Tanzania.

Despite the pressure pushing for higher fiscal revenue capture, the government is reluctant to raise rates. They are concerned that higher taxation rates will deter investors from choosing to operate in Tanzania. Investor warnings do imply that higher rates will make operating costs in Tanzania prohibitively high. Magui & Marquez (2011) refer to hidden expenses in what they refer to as “nuisance taxes” – minor taxes and fees such as dealer’s license fees, mining license fees, prospecting license fees, primary mining license fees and primary processing license fees. They suggest that the complex design of these taxes coupled with cumbersome and bureaucratic tax administration makes Tanzania already less favourable from the perspective of mining investors.

Many of the papers that have been reviewed in this section could be described as ‘discussion papers’. These make references to low rates, high exemptions and low revenue capture but do not include any technical analysis of causality, scale and nature of the problem. This is an area of the literature that could benefit from further studies.

Recommendations are that these studies should be in form of rigorous analysis looking at the current fiscal regime and revenue data for mining in Tanzania. Analysis should include modelling the potential effects of an increase in rates or cut in exemptions as well as discussion around an efficient ‘combination’ of taxation and incentive measures to balance encouraging investment and extracting revenues.

Discussing oil & gas exploration in Tanzania, Deloitte (2013) finds that, “although Tanzania has had modest hydrocarbon production since 2004, the tax framework of law and practice is not well developed”. They suggest that the current fiscal regime for upstream processes does not sufficiently addresses all situations (e.g. farm-in agreements, development carries, or other sorts of M&A activities).

The Gas Scoping Mission (2012) suggests that a new fiscal regime will be designed for application in the gas sector. This should be laid out in the Natural Gas policy referring to upstream processes (still to be developed) and by revisions to the Natural Gas Act and Natural Gas Revenue Management Act as discussed on p10.

Ledesma (2013), discussing the natural gas export potential for Mozambique and Tanzania, warns that it is important that Tanzania does not seek to over-leverage the revenues from gas export projects. He suggests that, while it is critical that Tanzania establishes investment conditions that protect their domestic position, he recommends that such measures must not slow down the development of the proposed LNG export projects. “Getting the first project up and running is key and the government may need to assist investors through fiscal incentives, provision of infrastructure and clear planning and regulations to ensure that

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the first project starts producing revenues as fast as possible.” He suggests that only once this first project is under construction, then fiscal regimes can be tightened.

A report by Oxford Policy Management (2013) conducts a macro impact assessment for a hypothetical deep-water offshore natural gas project. This is one of the few technical papers that exists across the Tanzanian literature on extractive resources and gives a comprehensive assessment of the potential benefits from a hypothetical natural gas project in Tanzania. The report hypothesizes the revenue capture that could be created through the current fiscal regime at US$1-2 billion a year and equivalent to 2-3% of GDP.

The scoping mission suggests that the government should conduct a review of the fiscal regime for gas, and particularly should incorporate issues of transfer pricing, tax system versus production sharing, state participation and neutrality amongst gas uses, to guide development of a new fiscal regime. The OPM (2013) report comprehensively tackles the analysis of predicted benefits from current regimes and therefore further should focus on comparing and contrasting Tanzania and its situation and fiscal regime with other case studies and best practices. Modelling the predicted effects of alternative regimes would be extremely valuable to the upstream natural gas sector policy development and regulatory revisions.

Other suggestions for increased revenue capture in both mining and oil and gas regimes include the addition of a windfall tax on company profits as well as a change in the calculation of commodity prices.

Working with the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development, the IMF has been pushing for the introduction of a windfall tax for mining operations in Tanzania (also supported by a paper by Lundstøl, Raballand & Nyirong 2013) and the Gas Scoping Mission (2012) advocates for capturing a fair share of windfall profits in Natural Gas operations. A windfall tax is a tax levied on company profits where large ‘windfalls’ are being made. It provides a mechanism for the government to tap into company revenues when higher than expected profits are being achieved but the downside is that it can reduce companies' incentives to seek out profits or increase incentives to hide them, as well as reducing the potential for reinvestment of these profits back into operations.

Additionally, taxes could be calculated based on the prices set by international commodity exchange markets rather than the price that companies claim they are receiving from overseas buyers. This measure would reduce the problem of transport pricing and more effectively capture the value of exported products.

Both of these measures could be incorporated into the further research papers on fiscal regimes in mining and natural gas.

Creating JobsThe potential for employment creation in the extractives sector is widely debated. Some sources refer to promising opportunities. According to data from the Bank of Tanzania (BoT) and the Tanzania Chamber of Minerals and Energy, the mining sector now directly employs over 15,000 people, up from just 1,781 mining jobs in 1997. Kibendela (2013) says that expectations for job creation within the natural gas sector is high with “thousands of direct, indirect and induced jobs of various skills” being generated over the next 20 years (although

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he does clarify that there will be a need for educational improvements in order to reach these expectations). Other studies suggest that skills levels are fundamentally too low and technological requirements too high to expect generous employment creation in the short-medium term from the extractives industry.

Studies by UNCTAD (qtd in Curtis & Lissu) found that employment effects in the mining industry were very low. Magui & Marquez (2011) quoted that ‘the employment impact of large scale mining is largely negligible’, mainly attributed to the capital-intensive nature of the industry. They find that employment levels may actually fall as the mining industry develops and larger companies take over the rights for areas where artisanal mining was previously present.

While ICMM (2007) states that 90% or more of direct employment by mining companies is Tanzanian, they do clarify that the biggest employment effect from mining is associated with the artisanal (ASM) sector. ICMM suggests that 8000 direct jobs will be created by the mining sector and somewhere between 30,000 and 60,000 indirect employment.

Results of a survey undertaken by the Offshore Petroleum Industry Training Organisation revealed a significant skills shortage in operators and contractors in the oil and gas industry. This will mean that companies rely heavily on expatriate staff, particularly in the first 5-10 years of operations, and significant investment will need to be made in education and vocational skills in order for Tanzanians to take advantage of employment opportunities created by growth in the medium-long term. The report by OPM (2013) hypothesises that gas operation could create thousands of jobs through the construction phase but that direct job creation in operations will be limited to the hundreds. The report suggests that significant numbers of indirect jobs could be created if investment is made in improving capacities.

In conjunction with the review of educational investment needs on p26, I would advise that facilitation of discussions between education departments, labour authorities, civil societies and mining and gas companies is the way forward for identifying the skill gaps and potential opportunities for job creation in Tanzania. The available data on skill levels in Tanzania will be poor, and combined with the need to meet the specific requirements for employment by extractive companies, the cause will be better served through an active discussion over realistic benefits. Discussions should focus on achievable outcomes over designated time periods, making sure that while the achievement of potential benefits from job creation should be facilitated, realistic expectations over employment should be understood and disseminated.

Relocation & CompensationThe discussions around the relocation of citizens in order to allow large-scale mining practises to take control of land contain many stories of corruption E.g. Lange (2006) the case of compensation embezzlement by local authorities as well as numerous other newspaper claims. Lange (2011) argues that the Mining Act does not give enough protection to local communities. Poorly functioning local democracy leads to low or zero levels of compensation paid to those displaced by mining activities and allows embezzlement of funds to become commonplace. Wenzala Nambiza (qtd in Lange 2011) argues that involuntarily displaced people in Tanzania complain about low and unfair compensation levels, not about the displacement itself.

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While a survey and research paper on relocated citizens and the compensation levels that they received could provide further insight into whether basic compensation levels are adequate and if funds are subject to high levels of corruption, enforcing increased transparency and accountability on local governments, specifically monitoring any funds for compensation purposes should be the primary focus. Over the medium term analysis of the data produced from monitoring should provide further insight into compensation levels.

Encouraging Downstream Activities & Enforcing Local Content PoliciesThe literature only touches lightly on the difficulties in enforcing local content policies and encouraging downstream and multiplier growth opportunities on the back of extractive sector development. A report by ICMM (2007), despite arguing that mining has so far been successful for Tanzania, admits that there are few trickle down effects occurring. Direct local procurement of goods and services is still limited (ICMM 2007) and local content requirements are weak. According to Campbell (2008) the Mining Act of 1979 included provision for a local procurement plan during licensing applications, but this was then removed in the revised act of 1998. The 2010 Act has reinstated this requirement but requires no accountability for adhering to the procurement plan at the implementation phase of operations.

Moshi (2013) suggests a further structure of incentives for gas sector investors should be provided to build linkages with domestic suppliers and other industries as well as supporting domestic skills development.

Research consolidating the information on current and potential downstream activities as well as procurement potential for extractive industries is recommended.

State EquityMagui & Marquez (2011) call for an increase in the national ownership shares of mineral resources. They cite the case of Norway and suggest that increased state ownership would give a greater ability to supervise processes and audit revenues.

ICMM (2013) suggests that the current situation of minority ownership in mining is not successful and that without the financial, technical and managerial capacity then Tanzania would be better off focusing on creating a more effective tax regime with a high level of investment in audit and control capacity rather than investing time and energy expanding state ownership interests for the short-medium term.

Additional analysis looking at best practise alternatives in other countries and their potential application and benefits to Tanzania could provide some insight here. Particularly comparisons should be made to countries within similar capacity levels in both the gas and mining sectors and attention should be given to any additional burdens that any policy changes would require. The research may support ICMM’s suggestion that attention should be focused elsewhere at this stage of development or it may highlight policy reforms that should be considered.

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Corporate Social Responsibility (CSR)In terms of mining operations, almost all large-scale, foreign-owned mines are involved in CSR programmes aimed to improve conditions within the immediate vicinity of their activities. ICMM (2007) suggests that international mining investors are “adopting sound and helpful approaches to difficult issues such as gender empowerment and the mitigation of environmental side effects” and other papers (e.g. URT 2013c) cite significant investment by mining companies in education and health in local districts. There is some discussion around whether CSR programmes are ‘token efforts’ made by mining companies to meet their social obligations.

Due to the early stages of natural gas industry development, the CSR commitments of gas companies have not been discussed in existing literature.

CSR programmes have also been subject to reports of corruption. Lange (2006) finds at least one incidence of funds being ‘lost’ and projects being ‘relocated’ to villages or sites where council staff had personal interests within the Geita region in Tanzania and a case of local government embezzlement of significant levels of AFGEM (African Gem Resources Limited) CSR funds was reported in Mererani. Again, improved transparency and accountability of local government funding receipts could impact the incidence of corruption.

Research in this field could look at the commitments and impact of CSR efforts. What is the current scale of impact and what could be done to improve this? Will imposing mandatory commitments bring added value and what are the international best practices?

Environmental Degradation & MitigationA small mention is made to environmental degradation & mitigation measures in the literature. ICMM (2007) refers to the negative impact that ASM has on the natural resource base including abandoned pits, significant deforestation and vegetation loss and some brief references are made to CSR efforts by mining companies in reforestation and the education of local regions about environmental awareness (E.g. environmental education campaign by DFID and AngloGold Ashanti). However, little attention is given in the literature to identifying the scale of environmental degradation caused by large scale extraction activities as well as policies and measures that need to be put in place to ensure adequate protection of the environment for future generations. This is particularly important as offshore natural gas operations are coming into play.

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MANAGING THE REVENUES (PRECEPTS 7&8)

PRECEPT 7Resource revenues should be invested to achieve optimal and equitable outcomes for both current and future generations.

PRECEPT 8Domestic spending of resource revenues should be smoothed to take account of revenue volatility.

Managing RevenuesManaging resource revenues after their capture is a topic of much discussion on the global level. Volatility of revenues and the choice between spending and saving resources is widely debated amongst the international discussions and best practises. Unfortunately the coverage of these topics in the literature specifically referring to Tanzania is largely inadequate. Below is a briefing of any notable mentions.

When discussing saving versus spending of resource revenues Professor Toby Venables of the Oxford University, in a Seminar on Harnessing the Gains from Natural Gas in Tanzania in December 2012, recommended that resource revenues should be largely invested in the domestic economy. He suggests that investment levels should be high in the near term to address the current shortage of physical and human capital in the Tanzanian economy rather than feeding these revenues into offshore funds (IGC Seminar 2012).

Moshi (2013) discusses the major sources of volatility in extractive resource revenues including the variation over time in the rate of extraction, any changes over time in conditions under the contract agreements (e.g. fixed period exemptions), and the highly volatile nature of world prices (averaging plus or minus 5-10%). ICMM (2007) points out the fact that existing donor aid flows exhibit the same year-on year volatility. Their report suggests that developing coping mechanisms to deal with aid volatility should be the first priority.

The Gas Scoping Mission Report 2012 discusses creating two funds for storage of resource revenues for gas sector wealth. Policy Actions include the creation of a ‘stabilisation fund’ to minimise the effects of revenue volatility on spending and the adoption of a ‘Sovereign Development Fund’ (Gas Scoping Mission Report 2012). The Natural Gas Policy 2013 discusses a ‘Natural Gas Development Fund’ but gives no further details and suggests that guidelines for this fund will be developed through national dialogue.

Given the disjointed discussions in the existing research, further studies are needed on the subject of managing resource revenues for Tanzania. Case studies and best practises should be discussed in relation to Tanzania’s structure, economy, governance and revenue composition. This should include the relative benefits of offshore versus internal funds and the balancing of mining and gas revenues, stabilisation funds and the best design and size for Tanzania, as well as suggested savings versus investment figures for predicted revenue flows over an extended time period.

Sub-National Revenue Transfers for Mining RegionsTanzania has so far taken the decision not to provide sub-national transfers to mining regions. The justification for transfers revolves around two arguments, the first,

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compensation for damaging or disruptive effects of mining operations in the vicinity and secondly, to support development in mining communities in conjunction with investment inflows and sector growth. Unfortunately, the mention of sub-national transfers in the literature is mostly anecdotal and no rigorous analysis has been undertaken to quantify the benefits or costs to communities from extractive operations as well as the potential benefits that could be achieved from increased investment in growing extractive regions.

A discussion paper by Magui & Marquez (2011) supports the justification for sub-national transfers in the mining industry. They suggest that “settlements in the vicinity of mining sector operations are extremely poor. Living conditions in these areas are manifestly substandard, lacking even the most basic necessities for human health.” There is additional concern that social conditions are likely to deteriorate in traditional mining regions as unemployment amongst artisanal miners increases but ICMM (2007) argues that despite complaints from disgruntled former artisanal miners, “communities in general in mining areas are materially better off than the equivalent rural communities in areas without mines”, in particular citing “very significant” rises in employment levels. They agree with the government’s reasoning not to return proportions of mining incomes to mining districts, arguing that the local populations already enjoy “better than average opportunities”.

A study of the effects of mining in Geita (Lange 2006), also argues that local authorities as well as local citizens benefit greatly from mining activity in the region. They find that very few direct jobs are created for the local community due to a basic requirement for a minimum level of secondary education, but find that the value of housing and room rent in the region has increased significantly as well as demand for basic products and food. This has provided income opportunities for the local area. When enquired about the benefits, there was a unanimous agreement from citizens that the establishment of the mine had been positive for the town.

Western positions on this subject often suggest there should be some form of compensation for ‘environmental disruptions’ caused by mining. In fact, the ICMM report found that the populations close to mines in Tanzania attach much greater importance to economic impacts associated with the mines and much less to environmental ‘disruptions’. The report also indicates that the “fairly unusual” dismantling of traditional political administration structures that elsewhere compete with the local councils means if some form of sub-national transfers were awarded, that there would be a “better than normal opportunity for a more rapid development of sub-national structures to effectively manage development of the local communities.”

Additional research is needed to guide further discussions around sub-national transfers in Tanzania. This should include a cost-benefit analysis of extractive industry operations to local settlements and districts as well as well as a study of international best practices.

Replacing Aid with Resource RevenuesWhen discussing the potential for a significant increase in government revenues through the extractive resources it is important to consider the effect that this will have on the current large flows of foreign direct investment through international aid in Tanzania. There is not yet any literature than looks at the effect that resource revenues will have on the volume of international aid receipts as well as the changing composition of spending that may result (e.g. priorities for international donors in terms of social service provision may diverge from

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those of the government authorities who may choose to focus on growth sectors). This is an area of the literature which requires further research in the long term, although may not be an immediate priority. Studies could include:

forecasting resource revenues and aid flow composition potential effects on spending of a reduction in aid being replaced by resource

revenues the prioritisation or funds to replace aid spending and investing for future revenue

streams

Discussions should also be facilitated between the government and international donors to manage the transition between an aid and resource revenue funded budget.

Avoiding Dutch Disease‘Dutch Disease’ refers to the problem where increased revenues from the sale of extractive resources cause a rapid appreciation of the real exchange rate and leads to other domestic exports becoming uncompetitive on a global market.

Magai & Marquez (2011) look at the period of booming gold extraction in Tanzania from 1999-2009 and suggest that the lack of inflation and the trend of depreciation of bilateral real exchange rates is an indication that ‘dutch disease’ has not been a problem in Tanzania. Their explanation included the mechanism that mining companies use for repatriating profits, imports financed by international aid avoiding the market mechanism, the fact that full employment has not yet been reached and the reserve accumulation strategy put in place by the Bank of Tanzania to combat the recent commodity boom.

Of course currently high levels of liquidity already exist in authorities funded through the medium of foreign aid flows. A paper by ICMM (2007) suggests that a possible Dutch Disease effect stemming from foreign aid flows (E.g. Collier and Gunning 1999) should be of much more concern for Tanzania than traditional arguments related to mining. The balance of this argument may change as resource revenues grow

The Tanzania Gas Sector Scoping Mission 2012 puts forward the following measures to avoid ‘dutch disease’ occurring from increased natural gas revenues.

Closely monitoring debt, fiscal and monetary indicators Conducting appropriate monetary and fiscal policy to counteract overheating Managing debt actively

In conjunction with the Gas Sector Scoping Mission recommendations, a benchmark report could follow to begin the monitoring of debt, fiscal and monetary indicators in respect to dutch disease concerns. On the back of monitoring work, further studies may become necessary as and when Dutch Disease is identified as a concern for Tanzania.

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INVESTING FOR DEVELOPMENT (PRECEPTS 9&10)

PRECEPT 9Government should use revenues as an opportunity to increase the efficiency of public spending at the national and sub-national level.

PRECEPT 10Government should facilitate private sector investments for the purposes of diversification, as well as for exploiting the opportunities for domestic value added.

Due to the non-renewable nature of extractive resources and the fact that their value will hold or likely increase if left below the ground, Moshi (2013) suggests that we should view any consumption of revenues as a “consumption of capital rather than consumption of income”. He suggests that a country is not wealthier as a result of resource extraction, “it has just changed the composition of its asset base.” It is what a country decides to then do with that liquid wealth that determines whether wealth is created or lost through the extraction process.

DiversificationIn a Seminar discussing harnessing gains from natural gas extraction, Professor John Page from Brooking Institute cautioned that ‘gas in itself is not likely to transform the Tanzanian economy’. He suggests that investment should focus on a broader array of activities that are capable of generating high value added per worker and recommends a need for reform in investment climates across all sectors and suggests creating a diversification strategy based around agriculture, manufacturing and non-polluting industries (IGC Seminar 2012).

Currently no studies have focused on the subject of diversification from extractive resource in Tanzania. A paper looking into the detail of current investment climates across sectors, the potential for sector overspills as well advising strategies and reforms to encourage beneficial diversification could feed into the natural resource charter benchmarking process.

Vocational EducationIn order to take advantage of the employment opportunities that the extractive sector can create, investment in skills and education needs to be made an immediate priority. 50% of oil and gas companies consider skills shortages their biggest challenge in developing countries (Berkhamsted 2011 qtd in Kibendela 2013)

NORAD (2013) maps and analyses the needs for petroleum related education in Tanzania. They find that all existing education at the university level focuses on upstream skills in the gas industry. Midstream, transportation, storage and distribution are areas not currently featured. The report suggests holding a joint forum led by the Ministry of Education and Vocational Training to establish a clear structure for improving industry education.

Lessons can be learnt from the low levels of local employment seen in Angola, despite high volumes of capacity investment. Angola invested heavily in the un-skilled and mid-skilled capacity levels but had very few higher skilled workers. This meant that they reached a limiting skill constraint for employment levels in the oil sector and cannot compete with

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international skill requirements for higher-level posts (The Gas Sector Scoping Mission Report (2012))

Basic levels of teaching also need to improve to meet the standards demanded of companies even at a basic skill requirement level. In Nigeria, as an example, basic science and technology teaching within the education system is not yet meeting the basic standards required for employment or further training by oil and gas companies (Neftegaz 2009 qtd in Kibendela 2013).

Moshi (2013) suggests that countries in general underestimate the need for a skilled workforce to take advantage of opportunities created through the extraction process. This will become more apparent as the share of capital intensive activities shifts and economies realise the need for diversification. He suggests this should be recognised at an early stage and a strong commitment made to investment in relevant skills now. Recommendations also include ensuring that industry training mechanisms become embedded in domestic institutions. This will ensure full retention and transfer of knowledge, even if principal agents relocate.

The Vocational Education and Training Authority in Tanzania (VETA) has already launched an oil & gas employability scheme in conjunction with British Gas and VSO. The objective is to improve the employability of locals from the Mtwara and Lindi regions of Tanzania but further efforts are still needed to improve employability across the country.

In conjunction with the review of job creation (p19), I would advise that facilitation of discussions between education departments, labour authorities, civil societies and mining and gas companies is the way forward for identifying the educational investment needs for capitalising on job opportunities from extractive industries. Discussions should focus on achievable outcomes over designated time periods and with funding allocations, making sure that while the achievement of potential benefits from job creation should be facilitated, realistic expectations over employment should also be shared and investment levels reflective of those expectations.

Export versus Energy for Natural Gas extractionTanzania has pledged, under the Big Results Now (BRN) initiative, to increase per capita electricity consumption from 135kWh to 236kWh by 2015 as an “essential ingredient” for rapid development. A large proportion of this increase in energy supply is expected to come from Natural Gas. The Natural Gas Policy 2013 makes a clear distinction between the gas supply for local consumption and supply for export and maintains that the domestic market will get first priority.

OPM (2013) suggests that shallow water and onshore fields in Tanzania are suitable and sufficient to cover likely domestic energy demand for the short term, leaving deep water gas reserves for export. Professor Toby Venables, in discussions at the IGC Seminar 2012, suggested that the trade-off between export and domestic energy use was not a cause for concern. He recommended that investors needed to be offered sufficient export quantities to justify operations but that the scale of discoveries suggests that there are large enough quantities to meet both needs. (IGC Seminar 2012). The technical report by OPM (2013) addresses key questions with regards to balancing export quantities and the potential impacts of natural gas, but in addition, further research could discuss the various options for pricing structures, extraction rates and export quantity ratios to satisfy investor returns as

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well as meeting the domestic demands for energy production. This would complement the report by OPM (2013).11

CREATING AN ENABLING INTERNATIONAL ENVIRONMENT (PRECEPTS 11&12)

PRECEPT 11Companies should be committed to the highest environmental, social and human rights standards and to contributing to sustainable development.

PRECEPT 12Non-host governments as well as international institutions and organizations should promote an upward harmonization of standards to support sustainable development.

Transfer Pricing & Tax EvasionExamples of illicit capital flows are featured heavily in the literature on extractive resources in Tanzania. A number of cases of tax avoidance, tax evasion and transfer pricing by international extraction companies are cited as justification for low levels of revenue capture (E.g. Magui & Marquez (2011), Moshi (2013) Shariffe (2009))

A 2008 World Bank study estimated that firms report only 69 per cent of their sales for tax purposes and total illicit capital flows from Tanzania are estimated at between US $94 – 660 million per year. Of that estimate, transfer pricing alone amounts to $109 – 127 million a year (Curtis et al 2012).

Shariffe (2009) cites the case of tax evasion by Barrick Gold and AngloGold Ashanti. Despite continued investment they were consistently claiming zero annual profit making them ineligible for corporation tax (charged at 30% of profits), this has been a tactic for extractive companies across the board and TMAA found unresolved outstanding revenues of US$251 million from over-declaration of capital allowances and operating expenditures in an audit of 12 extraction companies in 2010. Magui & Marquez (2011) refer to “aggressive tax avoidance strategies” by international companies and suggest that mining companies have “failed to obey the laws and regulations” of Tanzania.

Lambrechts (2009) and Moshi (2013) suggest that the tax avoidance is a consequence of a lack of transparency and Moshi and the OECD both advocate for an international stand on these issues. Tanzania’s Commissioner for Minerals was quoted saying that “we have no capacity to look at their books. [The companies] can write the books so that third world countries cannot regulate. Even the contracts are difficult. I think the mining companies exploit our weaknesses in law and capacity”.

Concerns were raised by Jingu (2013) that international organisations sometimes collaborate with counterpart donor agencies to gain control over the “rules of the game” in order to safeguard their interests and maximise their potential gains from a deal (qtd in Moshi 2013) but no evidence in Tanzania supports this suggestion of collusion.

Additional research could be conducted to find means of reducing tax evasion and transfer pricing as well as providing recommendations to guide the extractive resource strategy on managing illicit capital flows in Tanzania.

11 Consult with agents from the World Bank Gas Sector program to ensure that research does not conflict.

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International Corruption LawA number of international laws now make companies accountable to their domestic authorities if committing unlawful and corrupt behaviour abroad.

The OECD Convention on Combating Bribery of Foreign Public Officials (1997) makes it a crime for companies and individuals to pay bribes to foreign public officials.

UN Convention against Corruption (2003) addresses bribery both at home and abroad and includes private sector corruption.

The FCPA established criminal and civil penalties for unlawful payments or bribes (or promises of payments) to foreign officials for the purpose of obtaining or keeping business and applies to foreign companies listed on a US exchange or required to file accounts with the SEC, as well as by US corporations or US nationals.

The UK Bribery Act holds UK firms accountable for bribery, whether committed directly and on their behalf, in the UK or overseas.

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CONCLUSIONS

The literature gives varied opinions on the impact that the extractives sector is having on human development in Tanzania. It is widely confirmed that the sector has the potential to bring about opportunities for development but capitalising on these opportunities is not a straightforward process. In the mining sector, papers produced by those involved in the industry or acting on behalf of extractive companies tend to have the more optimistic views on mining contributions, but even a paper by the International Council on Mining and Metals (2007) found only ‘cautious optimism’ about the growth impact they are having. Much of the literature refers to cases where potential opportunities are not being captured under the current regime and suggest numerous policy, legislature and attitude changes required to maximise the benefits for Tanzania. The discussions around the impact of natural gas findings are largely speculatory at this stage due to the infancy of the industry. There is some weight to the argument that extraction processes for further mining and natural gas should be delayed until a full set of efficient revenue capture systems are in place. Due to the finite nature of resource stocks, any loss of revenue (whether through inefficient tax regimes, illicit capital flows or missed employment/business opportunities) cannot be recaptured again by Tanzania. These will be forfeited.

When reviewing the literature specific to Tanzania this report finds that much of the literature merely summarise opinions on topics or reports incidences. There is a distinct lack of technical reports and analytical studies using Tanzanian data and country specific scenarios that model, analyse and produce specific findings related to extractive resource issues. The report summarises the main findings of the Tanzanian literature on each theme, while also identifying gaps in the existing work and recommending issues for future research. Identified research areas include:

i) A review of the current governance mechanism (for both mining and gas). This exercise should look at parliamentary inputs, PSA’s, the legislation development process, and planning and implementation procedures.

ii) The effectiveness of Tanzania’s current Natural Gas bidding process compared to other models and best practices for licensing.

iii) Negotiation procedures in the mining sector. Specifically looking at where they have gone wrong in the past and detailing the true nature of negotiation procedures in order to learn from past mistakes. Where confidentiality is an issue, a confidential review may be required..

iv) Rigorous analysis looking at the current fiscal regime and revenue data for mining in Tanzania. Analysis should include modelling the potential effects of an increase in rates or cut in exemptions as well as discussion around an efficient ‘combination’ of taxation and incentive measures to balance encouraging investment and extracting revenues.

v) A review of the fiscal regime for gas, incorporating issues of transfer pricing, tax system versus production sharing, state participation and neutrality amongst gas uses.

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vi) Further research to look at the effects of the introduction of a windfall tax and changes in export value pricing in Tanzania. This could form part of the fiscal regime analysis or specific analysis could be conducted separately.

vii) A survey and research paper on relocated citizens and the compensation levels that they received.

viii) Research consolidating the information on current and potential downstream activities as well as procurement potential for extractive industries is recommended.

ix) Additional analysis looking at best practice alternatives for state equity in other countries and their potential application and benefits to Tanzania.

x) The commitments and impact of CSR efforts. What is the current scale of impact and what could be done to improve this? Will imposing mandatory commitments bring added value and what are the international best practices?

xi) Identifying the scale of environmental degradation caused by large scale extraction activities as well as policies and measures that need to be put in place to ensure adequate protection of the environment for future generations. Focus should fully cover the three phases – design, implementation and closure of sites.

xii) The relative benefits of offshore versus internal funds and the balancing of mining and gas revenues, stabilisation funds and the best design and size for Tanzania, as well as suggested savings versus investment figures for predicted revenue flows over an extended time period.

xiii) Further research to guide discussions around sub-national transfers in Tanzania. This should include a cost-benefit analysis of extractive industry operations to local settlements and districts as well as potential opportunities from increased regional investment levels.

xiv) Aid-Resource Revenue relationship-forecasting resource revenues and aid flow composition, potential effects on spending of a reduction in aid being replaced by resource revenues, prioritisation or funds to replace aid spending and investing for future revenue streams.

xv) A benchmark report could follow to begin the monitoring of debt, fiscal and monetary indicators in respect to dutch disease concerns.

xvi) Current investment climates across sectors, the potential for sector overspills as well advising strategies and reforms to encourage beneficial diversification.

xvii) Various options for pricing structures and export quantity ratios to satisfy investor returns as well as meeting the domestic demands for energy production to complement OPM (2013) technical report.

xviii) Means of reducing tax evasion and transport pricing as well as providing recommendations to guide the extractive resource strategy on managing illicit capital flows.

All areas of further research should be country-specific and technical in nature.

In addition support should be given to the following activities: Facilitation of discussions between education departments, labour authorities, civil

societies and mining and gas companies is the way forward for identifying the educational investment needs for capitalising on job opportunities from extractive industries.

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Enforcing increased transparency and accountability on local governments, specifically monitoring any funds for compensation purposes should be the primary focus. Over the medium term analysis of the data produced from monitoring should provide further insight into compensation levels.

BIBLIOGRAPHY

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Kabwe, Z 2013. Transfer Pricing in Tanzania: My experience in tackling tax avoidance/evasion through Parliament - Zitto Kabwe, MP. Tax Justice Network, Transfer Pricing Seminar. Dar es Salaam

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