THE ECONOMIC HISTORY OF THE MINING SECTOR IN TANZANIA: AN INTERVIEW WITH HONORABLE ZITTO KABWE, MEMBER OF PARLIAMENT, TANZANIA

Amne Suedi:
I caught up with Honorable Zitto Kabwe, Member of Parliament of Kigoma Town last week. He wanted to add his perspective on the mining law changes in Tanzania, understanding where Tanzania came from (Pre – 2010), where we were (2010 – 2017) and the current reforms. A sitting Member of Parliament since 2002, Honorable Zitto Kabwe is strongly associated with the passage of the Mining Act, 2010, Cap 123. He was involved in cross-party negotiation and consultation with civil society as the law was drafted and considered. My first question to Hon. Zitto was:

When we think of the Tanzanian Mining Act, we think of three years – 1998, 2010 and 2017. Can you talk to us briefly about these 3 years in your experience as a sitting Member of Parliament and being known best for how vocal you are on the ownership of resources by the Tanzanian people?

Hon. Zitto Kabwe,MP:
Since 1998 when the mining code was enacted, Tanzania has overhauled the latter twice; in 2010 with a complete new law and in 2017 whereby two new legislations were enacted known as the Natural Wealth and Resources Contract (Review and Re-negotiations of Unconscionable Terms) Act, 2017 and the Natural Wealth and Resources (Permanent Sovereignty) Act 2017, which states that all natural resources belong to Tanzanians. In these new laws the mining Act 2010 was totally overhauled tantamount to enacting a new law. The 2017 reforms were passed unanimously with a belief that they are the best for the people, the government and to a certain extent the mining operators.

Amne Suedi:
The laws during these periods reflect the national policy and foreign policy of Tanzania, but equally highly dependent on outside countries’s foreign policy towards African countries, for example the USA’s foreign policy towards Tanzania.

Hon. Zitto Kabwe,MP:
Well, the Mining Act of 1998 was enacted under extreme pressure of the Bretton Woods institutions and under the shadow of liberalization as conditions for being a Highly Indebted Poor Country (HIPC) in order to enjoy debt reliefs. The reforms then were informed by The Africa Mining Strategy developed by the World Bank. There was minimal debate in the country and in the Parliament. As a result, the law was skewed to multinational corporations investing in the country giving away massive tax exemptions and make all deals in shrewd of secrecy.The period leading to the reform of the mining sector through the adoption of the Mining Act 2010, there were major issues that raised complaints for example the mineral sector’s little contribution to the Tanzanian government’s revenue. The sector accounted for nearly half of the country’s exports and yet ordinary Tanzanians have seen little benefit, massive tax avoidance and low level of linkages to other sectors of the economy.The reforms of 2017 were publicly accepted by the people of Tanzania and some other African countries followed suit. They were seen as a transformation led by an African leader. It was unprecedented on the continent. Hopes were raised as people started to see that the country is going to benefit from its mineral resources. Resource nationalism became the national policy.

Amne Suedi:
Barrick Gold, African Barrick Gold to the now Acacia, have served as a trigger to the reforms in Mining in Tanzania if you look at our history when it comes to mining reforms and how they came about.

Hon. Zitto Kabwe,MP:
In 2010, I had drawn large attention on the then new mining contract by the now Acacia company  at the Buzwagi area in Kahama district. The motion led to the formation of the Presidential Mining Review Committee that recommended massive reforms in the sector, led to Tanzania’s participation in Extractive Industry Transparency Initiative and eventually writing of the new mining law. Similarly in 2017, Tanzanian President John Pombe Magufuli took a year into presidency before embarking on major reforms of the highly criticized mining sector and the events leading to the reforms involved Acacia Mining. In March 2017 he ordered a stop on exportation of mineral sands arguing that inside the containers there are gold and other minerals worth billions of shillings. The truth is the time when the  order came was when Acacia Mining, the largest gold miner in the country, was negotiating a sale to a Canadian company. Had the sale been successful Tanzania would have pocketed around USD 880M as a capital gains tax, that is nearly the amount that was collected from various taxes since 1997. Despite this, the President formed a team to investigate first the content of the containers and then later revenues loss from the time that large scale mining started in the country. So you can say that all reforms were triggered mainly by one company.

Amne Suedi:
How would you describe the growth of the mining sector over the decades to date? Do you feel like the mining reforms that have occurred at intervals coincide with higher revenue collection by the government or higher growth rate of the sector?

Hon. Zitto Kabwe,MP:
When the 2010 Mining Act was enacted, the sector was the fastest growing sector in the economy at 15.2%, but its contribution to GDP was only 3.8% and together with tourism contributing 80% of the foreign exchange to the country. It is crucial to note in the outset that since Tanzania started large scale mining, gold exports are worth USD 22.5 billion (2007-2018) while government revenues worth only USD 980 million. Regardless of massive benefits in balance of trade, the public revenues is just at 4.3% of the total value of gold exports. Henceforth, the country was yet to benefit from 2010 reforms as such.By the time President Magufuli came into power, mining companies had started paying corporate taxes  (though not significantly) but no new mines were opened since 2008 apart from the fact that a number of projects were in the offing. A project like Nyanzaga, which would employ more than 3000 people in Sengerema district was postponed.  The reason for the latter being supposed poor investment climate as provided for by the Mining Act of 2010. Nevertheless, President Magufuli demanded further reforms especially on linkages and value addition. A year on benefits are not seen, gold exports are going down and mines closing.

Amne Suedi:
Would you say that the mining sector has not seen growth because of the reforms in the mining laws of Tanzania? Is there a correlation?

Hon. Zitto Kabwe,MP:
The mining sector was tipped to be a key driver of Tanzanian economy to middle income status by 2025. It was designed to contribute 10% of GDP and support other sectors through linkages. The actions taken by the President, though they address one fundamental issue of ownership, have negatively impacted the growth of the sector. Today, FDI into the mining sector is at an all time low from USD 1.5 billion a year to almost zero by the end of 2017. After the start of closure of Buzwagi mine, Bulyanhulu the second biggest mine is laying off its workers and slowing down operations. For the first time in two decades mineral exports are below USD 1 billion. However, thanks to lower prices in petroleum and low levels of imports of capital goods, foreign reserves would have been under intense pressure. The new legislations have sent a negative message to investors in other areas of the extractive industry sector. The number one risk for foreign investors is that arbitration is to be done in local courts rather than a neutral place. This is a matter of trust. If our courts become fair in rendering justice, the place of arbitration shall not be a matter of concern. It takes time to build that trust, hence a more friendly approach must be adopted to encourage mining investors to invest in Tanzania. President Magufuli’s reforms brought hope. However, results are yet to be seen.

Amne Suedi:
A lot of countries start with mining base metals like copper, iron ore and coal rather than precious metals first, like gold diamonds and gemstones. Tanzania started with the latter but this is not what really builds an economy or gives a country a large economic base to build off of.

Hon. Zitto Kabwe,MP:
Coal mining and graphite are bringing new hope to the country as we see investors are interesting in this area. Maybe, we shall start thinking of these alternatives products in narrating the success of the reforms instead of a single story of gold. With world standard largest iron ore and coal deposits in the country and increasing discoveries of graphite in various parts of the country, diversifying the sector is plausible. Cobalt mining is opening new opportunities as the world is going towards electric cars and the like. It is my hope that new laws enacted in 2017 would bring investors in non precious metals and stones.

Amne Suedi:
In conclusion, the economic history that Honorable Zitto Kabwe has given us is very useful since it gives a lot of context as to how the mining industry in Tanzania started in the first place. It seems incredible that the value of the exports in relation to the revenue collection of the government was extremely low. The mining industry is still processing the new reforms and the law needs time to be processed by all stakeholders in the industry, which is what we are observing now. The amendments in the Mining Act are trying to promote value addition and creation of supply chains within the mining industry. This is very ambitious and will take time to implement, but if done correctly, adding these industries and creating linkages would create huge opportunities for investment and also impact massively the economy in Tanzania.

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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WHO IS WHO IN THE MINING SECTOR IN TANZANIA: THE INSTITUTIONAL FRAMEWORK AND HOW IT WORKS

THE PRESIDENT OF THE UNITED REPUBLIC OF TANZANIA.

The President of the United Republic has been given a key role through the new section 5 (a) of the Mining Act which vests the entire property and control of minerals to the President who holds this in trust of the citizens of the United Republic. The same is reiterated under section 4 (2) and 5 (2) of the Sovereignty Act. Previously, the minerals were vested in what I consider to be a lose term of the “United Republic”. Section 5 (b) of the Mining Act gives the Government lien over the minerals and this was briefly discussed in “Shikana Mining Series No.1”).

This provision of empowerment has really given the President the force and legal right to protect the minerals in its control and property, this is perhaps explaining the actions so far by the president who has commissioned investigations as well as summoned individuals in the mining industry to the State House for queries and discussions. Considering the current President’s efforts to fight corruption and the numerous corruption scandals associated to the energy and natural resource sector, it would make sense to concentrate such a responsibility as holding the resources in trust by the President.

The President also has the power to declare any area which is subject to mining operations a “controlled area”. The
procedure is that the President consults with the Minister responsible for Local Government Authorities and that the controlled area is also gazette. Special conditions will be prescribed to the “controlled area” and contravention of these conditions will constitute an offence.

THE MINISTER OF MINERALS

Part III of the Mining Act which was entitled “Administration” was repealed and replaced by new provisions which specifically define the role of the Minister of Minerals, unlike the previous Act. Section 19 of the Mining Act provides that the Minister is responsible for preparing policies, strategies and legislative framework for the exploration and exploitation of mineral resources and monitoring the implementation of the same. The Minister further has the responsibility of monitoring all establishments with responsibility of the Ministers for minerals and report to the Cabinet.

The Minister also has the duty to promote mineral resources in Tanzania for research and exploitation. The Minister’s powers are removed with regards to Special Mining Licenses, whereby the new Mining Commission is the entity that compiles the application and submits the same to the Minister who is responsible to present this to the Cabinet of Ministers for approval. Furthermore, the old section 10 of the Mining Act empowered the Minister to enter into Mining development agreements (MDAs) Development Agreements however, this has now been repealed.

THE NATIONAL ASSEMBLY.

The National Assembly, also known as The Parliament of the United Republic of Tanzania, in accordance with section 12 of the Sovereignty Act and section 4 of the Contract Review Act, has the authority to review all mineral agreements and can also renegotiate any existing or future agreements.

Section 5 of the Contract Review Act provides that all mineral agreements have to be submitted to the National Assembly. This provision, particularly giving the power to the National Assembly to approve future agreements was heavily debated by parliament again under certificate of urgency back in September 5, 2017. It was suggested that the powers of the National Assembly to approve future contracts that dealt with natural resources generally
should be removed since power of the National Assembly will be extended ultra vires. It therefore followed that the Written Laws (Miscellaneous Amendments) Act No. 3 of 2017 amended section 47 (5) of the Petroleum Act which removed the power of the National Assembly to approve future Production Sharing Agreements as well as other similar agreements under the Petroleum Act, however the same was not made for the mineral agreements although it is understood that the intention was strongly present.

Previously, agreements entered into by the Minister were shrouded under secrecy therefore these provisions that empower the National Assembly to ensure checks and balances are met as well as the added procedure of the approval of licenses by the Cabinet of Ministers for strategic
investments, such as those under Special Mining Licenses, are is a real positive step towards transparency and reducing certain irregularities on the whole.

Section 6 of the Sovereignty Act states that it is unlawful to make any arrangement or agreement over natural resources except where the interests of Tanzanian citizens are approved by the National Assembly and fully secure.

MINING COMMISSION

This is a new institutional body that is created by the amended Mining Act. In reading the Mining Act and in particular the interpretation clause (section 4 of the Mining Act), it would seem that the Mining Commission has taken over the functions that were previously the responsibility of the Mining Advisory Board,the Commissioner of Minerals, the Zonal Mines Offices and the Tanzania Minerals Audit Agency. The Mining Commission is composed of the Chairman, Treasury, Ministry of Lands, Ministry of Defense, Ministry responsible for Local Governments, Attorney General, Federation of Miners Association in Tanzania and two individuals who possess knowledge on the mining industry.

There is exclusion of the small – scale miners and mineral dealers, the ministry of environmental protection and institution for higher education. The Ministries are represented by Permanent Secretaries and equally the Federation of Miners is also represented by its Secretary.

The Mining Commission’s responsibilities are enumerated under section 22 (a) to (v) of the Mining Act. The functions are extensive and wide-ranging. The Mining Commission’s functions include the review of special mining license applications before submission to the Cabinet; granting of prospecting and primary mining licenses; suspension and revocation of licenses; the monitoring of the mining operations (including then assessment of the quantity and quality of minerals produced); the audit of expenditures for tax purposes; the assessment of local content performance and investment in the local economy and the monitoring of environmental management. In the next week’s article, We will elaborate more on this as we will examine the environmental impact assessment in relation to Mining industry. Other duties include to make regulations for the industry.

THE ATTORNEY GENERAL’S OFFICE.

The Written Laws (Miscellaneous Amendments Act (No.3) 2017 that was passed on September 15, 2017 provides that the Attorney General shall have the right to intervene in any suit or matter instituted by or against the Mining Commission. This provision was added after and provides protection to the Mining Commission where it is suing or being sued. In this event, the Government Proceedings Act provisions shall apply to the proceedings of the suit or matter that is instituted against the Government.

MINISTER OF CONSTITUTIONAL AFFAIRS.
The gatekeeper of the Natural Wealth and Resources Permanent Sovereignty Act of 2017 is the Minister of Constitutional Affairs. It is important to point out that the Written Laws Miscellaneous Amendments Act No. 3 of 2017 amends section 3 of the Sovereignty Act to include under the definition of “natural resources”, mineral resources.

As such, the Minister of Constitutional Affairs has the duty to of making regulations that will prescribe the code of conduct for investors in natural wealth and resources. The Minister also has to develop the minimum guidelines for inspection, monitoring and evaluation of investments in natural wealth and resources; and create regulations that are incidental or conducive to the effective implementation of this Act.

The Minister of Constitutional Affairs also has the power to make regulations for the implementation of the Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act, 2017.

THE JUDICIARY OF TANZANIA.

Typically, the jurisdiction clause in contracts governing minerals and natural resources generally provided for foreign international arbitration in the event of dispute resolution.

Section 11 (2) of the Sovereignty Act formally provides that for disputes arising from extraction, exploitation or acquisition and use of natural wealth and resources will be adjudicated by judicial bodies or other organs established in the United Republic and in accordance with laws of Tanzania. Section 11 (3) of the Sovereignty Act goes further in providing that all contractual arrangements should include such provision regarding dispute resolution.

COMMISSIONER FOR MINERALS.

Previously, the Commissioner for Minerals had extensive powers to administer the Mining Act, however the new Mining Act, section 20 reduces the functions of them Commissioner for Minerals to advising the Minister of Minerals on matters related to the mining sectors. In practice though, the Minister delegates the duty of foreseeing policy implementation to the Commissioner for Minerals as well as the role for promotion.

MINES RESIDENT OFFICERS.

The Mines Resident Officers are responsible for the day to day monitoring and reporting of mining activities at mining sites and they are to be stationed at every mining site. The Mines Resident Officers have the task of also verifying records, information and production reports kept by the holder of mineral rights and they also have an oversight over the mineral storage facility at the mine as well as the mineral transportation to the Government Minerals Warehouse (section 27 of the Mining Act).

GEOLOGICAL SURVEY OF TANZANIA.

Section 27A establishes the Geological Survey of Tanzania (the “GST”), which is responsible for all matters related to geological activities other than prospecting, exploration and mining activities. In particular, the GST shall;
(a) advise the Minister on geological matters;
(b) undertake the geological mapping of Tanzania, and may for that purpose, engage contractors;
(c) provide data concerning the geology and mineral resources of Tanzania, and generally assist                                           members of the public seeking information concerning geological matters.

It has other extensive responsibilities such as promoting investment in the mining sector through the use of data, acquiring Geo-scientific data and information that will assist the Minister of Minerals in making its decisions, etc. The GST has the responsibility to establish the National Mineral Resources Data Bank.

Mining data is extensively regulated whereby the Mining Act explicitly states that the mineral data generated by the Mining Act, whether it is from the GST or the mining operators, is owned by the government (section 27F (2) of the Mining Act). Furthermore, the data which is submitted by the mineral rights holder is given free of charge to the GST (section 27F (4) of the Mining Act). The Mining Act provides however that the GST can allow the mineral right holders to market the use of data “on terms to be agreed” (section 27F (5) of the Mining Act).

Seeing as mining data makes up the value of the project, it is difficult to see how mineral right holders can be comfortable with such an arrangement.

A major change in the new mining act is the question of Indemnity. Previously all officers discharging duties under the mining act were exempt of liability. The new law provides that all officers are liable. This is encouraging and in line with the Government’s fight against corruption.

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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THE MINING INDUSTRY IN TANZANIA: A COMPETITIVE MARKET?

His Excellency President John Pombe Magufuli of the United Republic of Tanzania took a gamble and dared what few sovereign nations in Africa dared to do. A little over a year ago, the government of Tanzania boldly took legislative and policy measures that are supposed to put Tanzanians at the heart of ownership of its natural resources, but also to allow the government as representatives of the Tanzanian people to benefit more from revenues generated from natural resources and just get a more equitable deal.

The debate on the sovereignty of a state over its natural resources along with the subtleties of tax evasion and avoidance was opened in the country through the creation of “special commissions”. These were tasked initially with investigating best practices of beneficiaries of Special Mining Licenses such as “Acacia Mining” and “Tanzanite One” and subsequently, many other beneficiaries of mining licenses and even artisanal miners with primary mining licenses were also investigated.

As we know, Tanzania is rich in a diverse array of minerals, gemstones, gold, uranium, copper, gas, to mention a few. The reality is that these natural resources have not been the catalyst for positive change of the economy. It would be easy to blame operators and government officials from the standpoint of supposed endemic corruption.

So, with the current government’s “zero tolerance on corruption” policy, do the mining laws that exist since July 1, 2017 and the ensuing regulations that were released in 2018, guarantee a conducive mining environment that can foster development and real benefits for Tanzania as a whole or have these laws made the Tanzania market for mining uncompetitive (compared to say Cote d’Ivoire, Zambia, Kenya, Ghana, South Africa, etc.)?

From a global point of view, the mining industry has been riding the wave of an uncharacteristically long down cycle. For example, the global market price for uranium is still at its historical low, to a point that most companies exploring and developing uranium have slowed down their operations dramatically or just stalled to venture and take off. In July of 2017, ROSATOM, which was due to start mining uranium in 2018 in southern Tanzania, postponed the Mkuju River uranium mine Project due to a depressed uranium market and prices being very low. It decided to postpone the development of the Project until the demand for uranium is restored, if it is ever restored.

The result of the slowdown is twofold: mining projects are being carried on, but the reserves are being depleted. The topical themes in mining are Financing and Operational Efficiency on the one hand and global reduction of supply on the other. Operational budgets have become reduced and more money is invested in research and development / technologies. Current global markets dictate that survival of the fittest and the one to win is the one who can produce with lowest costs.

Erik Richer La Flèche, Editor of “The Mining Law Review”,(The Mining Law Review, Edition 5, Published on December 2016) explains that from an international stand point, the mining industry generally is adopting concepts such as good governance, transparency, social license, ‘know your client’, and even more recently ‘tell what you pay ’.

These concepts are now commonly accepted and applied in the world’s major mining financial centres such as Geneva, New York, London. This means greater disclosure of the business affairs of mining companies. There is greater scrutiny over directors’ reports, financial audited accounts, operational accounts, etc. Stakeholders have the information necessary to challenge governments and mining companies, question the social acceptability of projects and demand greater revenue sharing at the local level.

Hence, the adoption of Tanzania’s legislations and the spirit of these legislations aligns with international law and global policy and trends, although some provisions specifically are problematic in light with existing national legislations as well as bilateral investment treaties. The laws that were adopted are:

-The Natural Wealth and Contracts (Review and Re-negotiation of Unconscionable Terms) Act of 2017(the “Natural Wealth Act”);

-The Natural Wealth and Resources (Permanent Sovereignty) Act 2017 (the “Natural Resources Act”);

-The Tanzania Extractive Industries (Transparency and Accountability) Act of 2015.

The global discourse alongside dialogues around competitiveness of mining is the question of sustainability and equity. These legislations in Tanzania basically put at the center of mineral policies the principle of sovereignty of a nation over its natural resources and the principle of equality which ultimately leads to a better distribution of benefits of natural resources particularly in the local context. But at what cost? This question can be answered from so many angles however, I will look at the financing of the mining projects in Tanzania and the general competitiveness of the market.

At Shikana Law Group, we have been caught up in the last year advising and counselling foreign investors from Australia, Kenya, Uganda, United Kingdom, Hong Kong, USA, etc on legitimate commercial and tax structures that meet the conditions of international financiers. This has proven challenging due to a number of legislative prerogatives in Tanzania. Many prospective and actual foreign investors have been curious and asked us about the following provisions:

  1. Section 10 of the Mining Act, which proposes government free – carried interest of 16 percent non – diluted shares. To be clear, free carried interest is essentially the government of Tanzania getting a share in the profits of the mining company irrespective of any capital contribution. On the one hand, the thing about this provision is that if the government is a shareholder and expects a cash out, you can bet that the government will make the mining environment conducive since it has an interest in the company doing well. The bad thing is that the carried interest is not guaranteed outright since mining companies are capital intensive and profits can be paid sometimes even 10 years later. However, since the government will be getting 16 percent carried interest on all mining and special mining licenses, similar to private equity, the government will have a portfolio of good, neutral and bad investments so it will spread its risks and make its money eventually.
  2. Section 10 of the Mining Act further gives the government an option of acquiring up to 50 percent shares equivalent to the total tax expenditure. Tax expenditures is defined in the Mining Act to be the tax incentives offered to the mining company. There has been a considerable reduction in tax incentives over the years for the mining sector. To date, the tax incentives that exist are expenditures, both capital and revenue based, are wholly deducted when calculating the taxable income. More significant tax incentives could be given if a mining company benefits from the Export Processing Zone Authority incentives. However, this supposes that the mining company is processing and adding value in the form of industry.

One can wonder whether these tax incentives can really amount to 50 percent of a companies’ shares assuming that the company has a high valuation. It is also a difficult sell to mining companies that these tax incentives are actually paid for by giving up more shares to the government. It is unrealistic for the government at this current juncture to operationalize this law.

  1. Regulation which was published as GN 286 of 7 October 2016 requires that an investor with a special mining license (“SML”) must enlist 30 percent of their shares on the Dar es Salaam Stock Exchange. Therefore, for strategic investors holding an SML this means 46 percent of their shares is owned mandatorily by either the government or a local/foreign buyer on the DSE.

This is on top of the option that the government has of acquiring a further 50 percent in the Company. There seems to be a very poor value proposition here for the investor. Furthermore, companies that are publicly listed might not even have those shares “to give” to the government. They will have to issue new shares however is that realistic to issue new shares just to comply with legislative requirements of one jurisdiction?

  1. The Mining Act provides that the companies still continue to pay royalty on the gold produced as well as other metals which has increased from 4 percent to 6 percent and on Gemstones and Diamonds from 5 percent to 6 percent. The law also introduces a 1 percent fee labelled as an inspection fee on the gross value of all mineral exports.
  2. Section 5 (2) of the Mining Act provides that the government will have lien over all minerals extracted from the mining operations or mining processes. In global markets today, investment bankers and financiers who provide financing to mining companies would need a guarantee of securely and rapidly recovering their investment in the event of default from the mining company. It is unclear whether or not the government can somehow cede, transfer or rent out the lien to third parties who have vested interests in the mining companies.

All in all, dividend cash out is not going to be as big as it was before the enactment of these laws and these laws do affect the competitiveness of the market in Tanzania. That being said, since the new regulations in Tanzania, the government has also made a point to approve 7,000 licenses that were comprising of priming mining licenses, prospecting licenses, special mining and dealer license. The government has encouraged the mining companies and entrepreneurs as well as signaled to the mining industry at large that it is more relaxed. Perhaps the next step will be to amend some of the provisions in the legislation so as to create a better investment climate for mining companies.

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Continue Reading

MINING INDUSTRY IN TANZANIA

His Excellency President John Pombe Magufuli of the United Republic of Tanzania took a gamble and dared what few sovereign nations in Africa dared to do. A little over a year ago, the government of Tanzania boldly took legislative and policy measures that are supposed to put Tanzanians at the heart of ownership of its natural resources, but also to allow the government as representatives of the Tanzanian people to benefit more from revenues generated from natural resources and just get a more equitable deal.

The debate on the sovereignty of a state over its natural resources along with the subtleties of tax evasion and avoidance was opened in the country through the creation of “special commissions”. These were tasked initially with investigating best practices of beneficiaries of Special Mining Licenses such as “Acacia Mining” and “Tanzanite One” and subsequently, many other beneficiaries of mining licenses and even artisanal miners with primary mining licenses were also investigated.

As we know, Tanzania is rich in a diverse array of minerals, gemstones, gold, uranium, copper, gas, to mention a few. The reality is that these natural resources have not been the catalyst for positive change of the economy. It would be easy to blame operators and government officials from the standpoint of supposed endemic corruption.

So, with the current government’s “zero tolerance on corruption” policy, do the mining laws that exist since July 1, 2017 and the ensuing regulations that were released in 2018, guarantee a conducive mining environment that can foster development and real benefits for Tanzania as a whole or have these laws made the Tanzania market for mining uncompetitive (compared to say Cote d’Ivoire,  Zambia, Kenya, Ghana, South Africa, etc.)?

From a global point of view, the mining industry has been riding the wave of an uncharacteristically long down cycle. For example, the global market price for uranium is still at its historical low, to a point that most companies exploring and developing uranium have slowed down their operations dramatically or just stalled to venture and take off. In July of 2017, ROSATOM, which was due to start mining uranium in 2018 in southern Tanzania, postponed the Mkuju River uranium mine Project due to a depressed uranium market and prices being very low. It decided to postpone the development of the Project until the demand for uranium is restored, if it is ever restored.

The result of the slowdown is twofold: mining projects are being carried on, but the reserves are being depleted. The topical themes in mining are Financing and Operational Efficiency on the one hand and global reduction of supply on the other. Operational budgets have become reduced and more money is invested in research and development / technologies. Current global markets dictate that survival of the fittest and the one to win is the one who can produce with lowest costs.

Erik Richer La Flèche, Editor of “The Mining Law Review”,(The Mining Law Review, Edition 5, Published on December 2016) explains that from an international stand point, the mining industry generally is adopting concepts such as good governance, transparency, social license, ‘know your client’, and even more recently ‘tell what you pay ’.

These concepts are now commonly accepted and applied in the world’s major mining financial centres such as Geneva, New York, London. This means greater disclosure of the business affairs of mining companies. There is greater scrutiny over directors’ reports, financial audited accounts, operational accounts, etc. Stakeholders have the information necessary to challenge governments and mining companies, question the social acceptability of projects and demand greater revenue sharing at the local level.

Hence, the adoption of Tanzania’s legislations and the spirit of these legislations aligns with international law and global policy and trends, although some provisions specifically are problematic in light with existing national legislations as well as bilateral investment treaties. The laws that were adopted are:

   -The Natural Wealth and Contracts (Review and Re-negotiation of Unconscionable Terms) Act of 2017(the “Natural Wealth Act”);

   -The Natural Wealth and Resources (Permanent Sovereignty) Act 2017 (the “Natural Resources Act”);

   -The Tanzania Extractive Industries (Transparency and Accountability) Act of 2015.

The global discourse alongside dialogues around competitiveness of mining is the question of sustainability and equity. These legislations in Tanzania basically put at the center of mineral policies the principle of sovereignty of a nation over its natural resources and the principle of equality which ultimately leads to a better distribution of benefits of natural resources particularly in the local context. But at what cost? This question can be answered from so many angles however, I will look at the financing of the mining projects in Tanzania and the general competitiveness of the market.

At Shikana Law Group, we have been caught up in the last year advising and counselling foreign investors from Australia, Kenya, Uganda, United Kingdom, Hong Kong, USA, etc on legitimate commercial and tax structures that meet the conditions of international financiers. This has proven challenging due to a number of legislative prerogatives in Tanzania. Many prospective and actual foreign investors have been curious and asked us about the following provisions:

  1. Section 10 of the Mining Act, which proposes government free – carried interest of 16 percent non – diluted shares. To be clear, free carried interest is essentially the government of Tanzania getting a share in the profits of the mining company irrespective of any capital contribution. On the one hand, the thing about this provision is that if the government is a shareholder and expects a cash out, you can bet that the government will make the mining environment conducive since it has an interest in the company doing well. The bad thing is that the carried interest is not guaranteed outright since mining companies are capital intensive and profits can be paid sometimes even 10 years later. However, since the government will be getting 16 percent carried interest on all mining and special mining licenses, similar to private equity, the government will have a portfolio of good, neutral and bad investments so it will spread its risks and make its money eventually.
  2. Section 10 of the Mining Act further gives the government an option of acquiring up to 50 percent shares equivalent to the total tax expenditure. Tax expenditures is defined in the Mining Act to be the tax incentives offered to the mining company. There has been a considerable reduction in tax incentives over the years for the mining sector. To date, the tax incentives that exist are expenditures, both capital and revenue based, are wholly deducted when calculating the taxable income. More significant tax incentives could be given if a mining company benefits from the Export Processing Zone Authority incentives. However, this supposes that the mining company is processing and adding value in the form of industry.

One can wonder whether these tax incentives can really amount to 50 percent of a companies’ shares assuming that the company has a high valuation. It is also a difficult sell to mining companies that these tax incentives are actually paid for by giving up more shares to the government. It is unrealistic for the government at this current juncture to operationalize this law.

  1. Regulation which was published as GN 286 of 7 October 2016 requires that an investor with a special mining license (“SML”) must enlist 30 percent of their shares on the Dar es Salaam Stock Exchange. Therefore, for strategic investors holding an SML this means 46 percent of their shares is owned mandatorily by either the government or a local/foreign buyer on the DSE.

This is on top of the option that the government has of acquiring a further 50 percent in the Company. There seems to be a very poor value proposition here for the investor. Furthermore, companies that are publicly listed might not even have those shares “to give” to the government. They will have to issue new shares however is that realistic to issue new shares just to comply with legislative requirements of one jurisdiction?

  1. The Mining Act provides that the companies still continue to pay royalty on the gold produced as well as other metals which has increased from 4 percent to 6 percent and on Gemstones and Diamonds from 5 percent to 6 percent. The law also introduces a 1 percent fee labelled as an inspection fee on the gross value of all mineral exports.
  2. Section 5 (2) of the Mining Act provides that the government will have lien over all minerals extracted from the mining operations or mining processes. In global markets today, investment bankers and financiers who provide financing to mining companies would need a guarantee of securely and rapidly recovering their investment in the event of default from the mining company. It is unclear whether or not the government can somehow cede, transfer or rent out the lien to third parties who have vested interests in the mining companies.

All in all, dividend cash out is not going to be as big as it was before the enactment of these laws and these laws do affect the competitiveness of the market in Tanzania. That being said, since the new regulations in Tanzania, the government has also made a point to approve 7,000 licenses that were comprising of priming mining licenses, prospecting licenses, special mining and dealer license. The government has encouraged the mining companies and entrepreneurs as well as signaled to the mining industry at large that it is more relaxed. Perhaps the next step will be to amend some of the provisions in the legislation so as to create a better investment climate for mining companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Success in Africa Requires Local Experts

Investing Success in Africa Requires Local Partners with Legal and Regulatory Expertise

Success will require local expertise.  written by Amne Suedi. Photo credit unknown.
Success will require local expertise. written by Amne Suedi. Photo credit unknown.

Sub-Saharan Africa is experiencing unprecedented change in it’s economy.  This will undoubtedly continue as countries are taking notice.  Many investors are now hurrying to claim spots in the African landscape.  Their success will depend on help from local professionals.

Africa has with it, many unique challenges.  Success in this country will mean you have to employ partners.  Hiring them for their legal and regulatory expertise. Africa is a tricky vista that truly only local expertise will help bridge that gap.

Local experts will help in your sucess

From the internet to technology to natural resources, growth is seen and will continue to be a trend.  Africa’s prospects have global economic experts enthusiastic about its potential.  Involving African partners into your overall business plan will mean a higher success in the venture.

Local expertise like Shikana Law Group is a trusted partner that will help with the goodwill in your plan. Professionals like us can help create a trusting and good-willed environment.  Investing in Africa takes a unique approach and experts will help you tackle this.

The full article can be found here on USAHerald.com.

 

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