Capitalising on Extractive Resource Endowments to Improve
Human Development Outcomes – A Review of Existing
Literature on Extractive Resources in Tanzania
Helen Newcombe
MPhil. BSc (Economics)
Capitalising on Extractive Resource Endowments to Improve Human Development Outcomes – Literature Review
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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 ............................................................................................................... 4
KEY AIMS OF THE REVIEW ........................................................................................................... 4
STRUCTURE............................................................................................................................... 4
SCOPE OF THE REVIEW................................................................................................................ 4
REVIEW METHODOLOGY ............................................................................................................. 5
CONTEXT ......................................................................................................................... 6
THE TANZANIAN ECONOMY ......................................................................................................... 6
EXTRACTIVE RESOURCE ENDOWMENTS .......................................................................................... 6
HUMAN DEVELOPMENT IN TANZANIA ........................................................................................... 6
OVERARCHING ISSUES OF RESOURCE GOVERNANCE (PRECEPTS 1&2) ................................ 8
NATIONAL STRATEGIES ............................................................................................................... 8
EXTRACTIVE RESOURCE POLICY & LEGISLATION ............................................................................... 9
TRANSPARENCY AND ACCOUNTABILITY TO AN INFORMED PUBLIC ..................................................... 11
DISCOVERY AND DECISION TO EXTRACT (PRECEPT 3) ...................................................... 13
GEOLOGICAL UNCERTAINTY ....................................................................................................... 13
TRANSPARENT LICENSING REGIMES ............................................................................................ 13
GETTING A GOOD DEAL (PRECEPTS 4,5&6) ...................................................................... 16
ASYMMETRIC INFORMATION IN NEGOTIATIONS ............................................................................ 16
FISCAL REGIMES ...................................................................................................................... 17
CREATING JOBS ....................................................................................................................... 19
RELOCATION & COMPENSATION ................................................................................................ 20
ENCOURAGING DOWNSTREAM ACTIVITIES & ENFORCING LOCAL CONTENT POLICIES ........................... 21
STATE EQUITY ......................................................................................................................... 21
CORPORATE SOCIAL RESPONSIBILITY (CSR) .................................................................................. 22
ENVIRONMENTAL DEGRADATION & MITIGATION .......................................................................... 22
MANAGING THE REVENUES (PRECEPTS 7&8) .................................................................. 23
MANAGING REVENUES ............................................................................................................. 23
SUB-NATIONAL REVENUE TRANSFERS FOR MINING REGIONS .......................................................... 23
REPLACING AID WITH RESOURCE REVENUES ................................................................................. 24
AVOIDING DUTCH DISEASE ........................................................................................................ 25
INVESTING FOR DEVELOPMENT (PRECEPTS 9&10) .......................................................... 26
DIVERSIFICATION ..................................................................................................................... 26
VOCATIONAL EDUCATION .......................................................................................................... 26
EXPORT VERSUS ENERGY FOR NATURAL GAS EXTRACTION ............................................................... 27
CREATING AN ENABLING INTERNATIONAL ENVIRONMENT (PRECEPTS 11&12)................. 28
TRANSFER PRICING & TAX EVASION ............................................................................................ 28
INTERNATIONAL CORRUPTION LAW ............................................................................................ 28
CONCLUSIONS ............................................................................................................... 30
BIBLIOGRAPHY............................................................................................................... 32
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INTRODUCTION
RWI-NRC Initiative Background
RWI-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 Review
The 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.
Structure
The 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 Review
Due 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 Charter
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
2
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Review Methodology
To 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 economy
The 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 Statistics3 (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. 20124). 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 endowments
Despite 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 Tanzania
Despite 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).
National Bureau of Statistics in Tanzania – available at http://www.nbs.go.tz
Available at https://www.cia.gov/library/publications/the-world-factbook/geos/tz.html
5 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.
3
4
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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 Strategies
Tanzania 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 & Legislation
Mining
A 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
February 2013 (URT 2013) suggests that Tanzania has made good progress in implementing
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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 Gas
The 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.
5) Integration of the natural gas industry into other economic sectors in order to
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.
9
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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 Public
In 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.
Global EITI conditions require a country to undertake:
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1. Effective oversight by a multi-stakeholder group
2. Timely publication of EITI Reports
3. 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 standards
6. 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 3
Government should aim to reduce geological uncertainty under a transparent licensing
regime that allocates rights efficiently.
Geological Uncertainty
Due 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 Regimes
Mining
After 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.
 A procurement plan of goods and services available in the United Republic must be
submitted.
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
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 Gas
For 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 Disclosure
While 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
to contracts signed by the administration. In 2003 the Tanzanian Permanent Secretary for
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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 4
Tax 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 5
Opportunities for local benefits should be pursued, and the environmental and social costs of
resource projects should be accounted for, mitigated and offset.
PRECEPT 6
Nationally 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 Negotiations
Extraction 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 Regimes
Setting 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
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that 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 Jobs
The 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
he does clarify that there will be a need for educational improvements in order to reach
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these expectations). Other studies suggest that skills levels are fundamentally too low and
technological requirements too high to expect generous employment creation in the shortmedium 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 & Compensation
The 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 Policies
The 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 Equity
Magui & 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 & Mitigation
A 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 7
Resource revenues should be invested to achieve optimal and equitable outcomes for both
current and future generations.
PRECEPT 8
Domestic spending of resource revenues should be smoothed to take account of revenue
volatility.
Managing Revenues
Managing 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 Regions
Tanzania 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 subnational 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 Revenues
When 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
those of the government authorities who may choose to focus on growth sectors). This is an
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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 9
Government should use revenues as an opportunity to increase the efficiency of public
spending at the national and sub-national level.
PRECEPT 10
Government 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.
Diversification
In 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 Education
In 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
international skill requirements for higher-level posts (The Gas Sector Scoping Mission
Report (2012))
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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 extraction
Tanzania 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
well as meeting the domestic demands for energy production. This would complement the
report by OPM (2013).11
11
Consult with agents from the World Bank Gas Sector program to ensure that research does not conflict.
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CREATING AN ENABLING INTERNATIONAL ENVIRONMENT (PRECEPTS 11&12)
PRECEPT 11
Companies should be committed to the highest environmental, social and human rights
standards and to contributing to sustainable development.
PRECEPT 12
Non-host governments as well as international institutions and organizations should
promote an upward harmonization of standards to support sustainable development.
Transfer Pricing & Tax Evasion
Examples 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.
International Corruption Law
A 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.
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


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.
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.
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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.
 Enforcing increased transparency and accountability on local governments,
specifically monitoring any funds for compensation purposes should be the primary
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focus. Over the medium term analysis of the data produced from monitoring should
provide further insight into compensation levels.
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