THE LOCAL CONTENT REGULATIONS APPLICABLE TO THE MINING SECTOR IN TANZANIA AND ITS COMPATIBILITY TO THE WORLD TRADE ORGANISATION LAWS.

Mineral extraction and revenues in Tanzania have made very little positive impact on the lives of most Tanzanians. The government of the United Republic of Tanzania has taken the honorable and bold initiative through the enactment of the Local Content Regulations GN 3 of 2018. It reflects a strong will to foster diversification and linkages to the local economy, create jobs through the use of Tanzanian expertise, goods and services, businesses and financing in the mining value chain. It maximizes on value addition. Not only does it force licensees and contractors to use indigenous Tanzanian companies for the procurement of goods and services, but also requires a physical presence in Tanzania. Tanzania is embarking a new direction in the mining sector with a big chance to transform the economy if the regulations are well implemented and quick to adapt to a changing market.

Tanzania’s local content regulation with regards to the mining sector has the following objectives:

  1. To develop local employment and the domestic labor market
  2. To transfer skills, technology and know-how
  3. To create local value, increase local linkages and develop domestic industry
  4. To diversify economically
  5. To promote innovation, technology, research and development, enhancement of technology transfer and creation/increase of local technological capabilities
  6. To ensure local ownership of the mining industry
  7. To increase revenue streams from minerals
  8. To develop local community projects

I will summarise the key points here that will serve as a purpose to discuss whether or not these are compliant with Tanzania’s commitments under the World Trade Organisation (WTO).

Local Content Regulations applicable to the mining sector in Tanzania

Salient feature of these regulations in relation to their compliance with the WTO rules are as follows:

  1. An indigenous Tanzanian company should be given first preference in the grant of a mining license. Tanzanian company is defined as majority + 1 percent equity participation by citizens and local content requirements are introduced in terms of composition of board of directors and management.

 

  1. Where a foreign company qualifies for a mining license, it must have at least 5% equity participation of an indigenous Tanzanian The Minister of Minerals has the power to waive this requirement on condition.

 

  1. Regarding trade in goods and services in Tanzania, a foreign investor must enter in venture with a Tanzanian Company through equity participation amounting to minimum 20 %.

 

  1. A Licensee/ Contractor must incorporate a project office in the district they intend to carry the project before any activities commence.

 

  1. Contractor must submit a local content plan for approval by the Mining Commission prior to commencing the mining project. For the purposes of this article, the local content plan must ensure that: first consideration is given to services provided within the country and goods manufactured in the country and guarantee to use locally manufactured goods. It is also stated that a local content plan must also contain 5 sub plans on (a) employment and training, (b) research and development, (c) technology transfer, (d) legal services and (e) financial services.

 

  1. With regards to employment, priority is given to qualified Tanzanian nationals and on-the job training must be given by employers. Junior and Management Level employment is reserved for Tanzanians.

 

  1. On procurement, it is mandatory for the Contractor/Licensee to establish and implement a bidding process for the acquisition of goods works and services. The Mining Commission must set up the bidding rules. In terms of awarding contracts, the principle of lowest bidder will apply, Tanzanians companies will be prioritised and awarded the contracts..

 

  1. All insurable risks relating to mining activity in Tanzania must be insured through an indigenous brokerage firm or an indigenous a reinsurance broker. Offshore insurance service relating to Mining activities in Tanzania may be obtained only upon written approval of the Commissioner of Insurance.

 

  1. All entities engaged in mining activities that require legal services in the country are now required to only retain the services of a Tanzanian legal practitioner or a firm of Tanzanian legal practitioners whose principal office is located in Tanzania.

 

  1. Similarly, the Contractor must only retain the services of a Tanzanian financial institution or organization. Where the Contractor wishes to engage the services of a foreign financial institution, it must seek approval from the Mining Commission. A Contractor is required to maintain a bank account with an indigenous Tanzanian bank and transact business through banks in the country. An indigenous Tanzanian bank means a bank that has one hundred percent Tanzanian or a majority Tanzanian shareholding.

 

  1. Foreign as well as domestic investors must source a certain percentage of intermediate goods or inputs from local producers. The Regulation foresees a gradual increase of the percentage of inputs that needs to be sourced locally.

 

  1. The Local Content Regulation in Tanzania, through its requirements aims to develop and support local manufacturing and service provision through backward, forward and sideways linkages along the value chain.

 

 

So now that we have contextualized the discussion, let us look at whether or not the Local Content Regulations are compliant with various World Trade Organisation plurilateral and multilateral agreements.

Is the Local Content Regulation in Tanzania compliant with the WTO Rules?

Despite Tanzania’s history and strong affiliation to socialist like policies in the past, it has been a WTO member since 1 January 1995 and a member of GATT since 9 December 1961.

The General Agreement on Tariffs and Trade (GATT)

One of the very core principles of the GATT is that of “national treatment” whereby imported products may not be discriminated against in relation to their domestic counterparts (Article III). Local content measures most often violate at least one of the paragraphs of Article III since typically these measures condition a benefit on the use of goods of national origin therefore discriminating against goods according to their territorial origin.

The salient features of Article III are:

  • Article III:1 of the GATT provides that domestic laws, regulations and restrictions affecting the sale and use of products should not afford protection over domestic production.
  • Article III:4 of the GATT refers to the national treatment principle and requires that imported products are treated equally to domestic products with respect to laws and regulations affecting their sale or use.
  • Article III:5 of the GATT prohibits support schemes that “requires, directly or indirectly, that any specified amount or proportion of a product which is the subject of the regulation must be supplied from domestic sources”.

Article III:4 and III:5 may only restrict support schemes with local content policies if Article III:8a of the GATT does not specifically exclude them. This paragraph excludes government procurement from the national treatment obligation, with the exception of any procurement scheduled under the Government Procurement Agreement (GPA).

Article XX of the GATT sets exceptions for policymakers to implement local content policies if the WTO member state, in this case Tanzania, can prove that its measures protect or aim to protect “human, animal or plant life or health” and if so, that it is necessary to achieve that objective (paragraph b), or that the measure is linked to the “conservation of exhaustible natural resources” (paragraph g). However, the tests for these exceptions are very difficult to meet as a number of WTO Appellate body decisions have shown us and the likelihood that local content measures are categorised as discriminatory and arbitrary is high.

Agreement on Trade- Related Investment Measures (TRIMS)

TRIMS apply to all investments in goods production. It does not apply to investments in services.  These measures include regulatory measures for foreign direct investment, local content requirements and foreign exchange/trade balancing measures.

TRIMS explicitly prohibits local content policies, which are qualified as measures requiring the purchase or use by an enterprise of domestic products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

General Agreement on Trade in Services (GATS)

Local content policies that may impact on foreign investment and employment of local and foreign staff are regulated by the GATS.

The GATS recognises the right of WTO members to regulate the supply of services in accordance with their own policy objectives, members must nevertheless ensure that it be done in a ‘reasonable, objective and impartial manner’.

In contrast to the GATT, where all the provisions apply directly and automatically to all WTO members, the GATS has a binary approach:

  • general obligations, which include Most- favoured- nation (MFN) treatment, transparency, exceptions for regional integration and have a universal coverage; and
  • schedule of commitments made by a country in relation to obligations concerning market access and national treatment. This is contained in individual countries’ schedules of commitments.

Countries that have scheduled commitments in services related to the extractive sector for example, unless they have expressly stated exceptions, are restricted in their ability to use local content regulations to:

  • Protect domestic suppliers: Article XVI.2 (a) – (c) of GATS
  • Limit employment of expatriates in lieu of local workforce: Article VI.2 (d) of GATS. This is relevant for specific job categories, obligations to use local workforce by sub-contractors and those indirectly involved in supplying services to the mineral sector.
  • Impose ownership requirements: Article XVI. 2(e – f) of GATS restrict local content regulations and laws in the form of joint ventures, equity participation, maximum foreign ownership and obligation of state participation.

The government of the United Republic of Tanzania has not made extensive commitments when it comes to the supply of services (only in tourism sector) and therefore when it comes to the regulations related to joint venture, local shareholding requirements, insurance, legal and financial services as it stands, Tanzania is free to implement policies that are in line with its national goals.

Plurilateral Agreement on Government Procurement

Tanzania is not a signatory to this Agreement.

Conclusion

Tanzania may be at risk of violating its obligations under GATT and TRIMS where it implements local content policy around the supply of goods and the priority given to Tanzanians against foreign suppliers. However, the local content regulation provisions which relate to trade in services in mining and procurement in mining, do not fall in the realm of the GATS nor the Agreement on Government Procurement.

 

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.

Continue Reading

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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Tanzania’s construction industry

In Eastern Africa, Tanzania is coming in at second for having the largest market for construction. Ethiopia is the first market for construction.  Tanzania’s construction platform is made up of multitudinous regulations and stakeholders.

Investors, with their own foreign financial services and/or banks, are coming for these opportunities in Tanzania.  Proposing projects with these funds along with the help of donor aid or multilateral financial assistance.  These companies are able to choose architects, contractors and engineers for their needs while also complying with the the many registration entities and legislation.  Each company with each project has to be registered in Tanzania; this is a pre-requisite.  It is typical for foreign companies to partner up with local companies.  In doing so, the process for registration seems to be smoother and less time consuming, we have seen.

More on this topic, you can read my article here

 

 

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