Tanzania Mining Industry: Revenues, Resentment and Overregulation?Published by MAC on 2009-07-27
Source: Rachel Keeler, Ratio Magazine
Tanzania's young mining industry has grown at an astounding rate since liberal mining legislation was introduced in the late 1990s to attract investment. But against the background of tense relations between mining companies and locals, Tanzania's parliament is considering removing many of the tax breaks. This, mining companies argue, will make Tanzania's business environment even less attractive and strangle the mining sector before it has fully developed.
The experts all agree: Tanzania's young mining industry is at a watershed moment. Dominated by gold and invigorated by recently discovered uranium, the sector has grown at an astounding rate since liberal mining legislation was introduced in the late 1990s to attract investment. But as it so often goes with resource-rich African countries, relations between locals and foreign mining companies have grown untenably tense. Accusations of exploitation abound, and parliament is now reviewing new mining legislation that could rescind many of the tax breaks enjoyed by mining companies in an effort to increase the industry's contribution to society.
This could not have come at a worse time.
Tanzania's mining industry has just reached a critical stage where mining companies are about to turn their first profits, and more investment is needed to keep output flowing. With little capital to spare thanks to the global crisis, and uncertainty looming around the proposed reforms, no companies have announced plans for major new investments in the country. This situation is unlikely to improve in the short term, as Tanzania's government currently lacks the ability to stabilize the industry.
Mining Sector Brief
Tanzania has roughly 45m ounces of gold scattered about beneath its surface. No one is quite sure how much of that is retrievable, but it is enough to make the country the third largest gold producer in Africa, after South Africa and Ghana, and the second largest non-oil recipient of foreign direct investment (USD2.5b from mining over the last decade) on the continent. Even so, Tanzania's gold mining industry is relatively small on a global scale. Brent Barber, principal geologist and managing director of SRK Consulting in Tanzania, says: "The belief that Tanzania is overflowing with mineral wealth is false - it has good exploration potential but it is not as richly endowed as generally envisaged."
Six large gold mines are responsible for much of the country's production. Barrick Gold, the world's largest gold miner, runs Tanzania's largest mine, Bulyanhulu, with 12m ounces in gold reserves. Barrick also own Buzwagi (3.3m ounces) and North Mara (3m ounces), and maintain a 70% stake in Tulawaka (80,000 ounces). Anglo Gold Ashanti (AGA) operate Geita (5.1m ounces), and Resolute Mining Ltd own Golden Pride (2.5m ounces). These companies have yet to pay corporate income taxes because of capital allowances and other tax exemptions under current legislation. But overall contributions for mining already make up about 4% of government tax revenue (around USD100m a year), and production accounts for 3.5% of GDP.
A litany of problems plague the sector: Secrecy surrounding mining contracts, none of which have been made public or available to parliament, has bred widespread mistrust. Social unrest is on the rise.
Longstanding environmental and security problems around Barrick's North Mara mine exploded this month following the death of 20 locals and nearly 300 cattle allegedly due to water pollution from the mine. Mining security officers are accused of illegal mining and indiscriminately shooting locals. Communities surrounding the mines have seen little improvement in their daily lives and artisanal miners have been displaced.
The mining companies complain that the cost of doing business in Tanzania is appallingly high and getting worse. Barber says: "Tanzania is a beautiful but difficult country to work in. There is little you can get done speedily. On the mining side it's presently taking over two years to get a prospecting license grantedŠ Tanzania is the only country that I know of where you can make a top level, 'Class A' investment but have no automatic right of prolonged residency." The government has not provided the infrastructure necessary to support mining activities, nor has it used mining revenues to provide social services, linking back to the problem of social unrest. The present situation is bad.
Something Must be Done!
Tanzania's President Jakaya Kikwete arrived on a reform platform in 2005 with a promise to "do something" about the mining matter. Kikwete set up the Presidential Mining Review Committee chaired by Justice Mark Bomani in 2007, which produced a several hundred page report last year.
The National Assembly began debating the report in October 2008, and has since announced intentions to implement recommendations to restrict value added tax (VAT) exemptions to exploration and prospecting activities only, and abolish fuel levy and petrol excise duty exemptions.
These measures, if passed, would be on top of revisions already made in 2007 under which Barrick, AGA and Resolute agreed to pay annual levies of USD200,000 to local authorities. The companies also gave up their 15% tax allowance on unredeemed capital, which means they will start paying income tax sooner, probably within the next few years. Barrick also agreed to a "voluntary" contribution of USD7m a year to the government for five years. The Ministry of Energy and Minerals is expected to present a fully revised Mining Act by the end of the year, which is supposedly almost complete. Bomani also recommended raising the metals royalty rate from 3 to 5%, and that the government should take a 10% stake in all mining operations in the country. These government shares would be managed by the State Mining Corporation (STAMICO), which Bomani has advised the government not to privatise as was previously planned.
Needless to say the mining companies have been lobbying hard against tax reforms. The Tanzania Chamber of Minerals and Energy (TCME), an industry body, warned in June 2009: "The timing and manner in which these regressive measures have been instituted is too costly to be borne by any industry or sector." In response to "A Golden Opportunity", a report released by activists in 2008 that demands a higher tax contribution from mining companies in Tanzania, Barrick made some caustic comments: "The authors' proposed changes in law to make the Tanzanian investment climate vastly less attractive for new investment could not possibly be any more insensitive to global economic reality. Such changes would only aggravate an already desperate economic picture for new investment in the sector and cast an even larger cloud over the long-term future of the gold mining industry in Tanzania." Mining companies recently asked parliament to consider postponing reforms until the effects of the global crisis subside, which MPs responded would be a "politically irresponsible" thing to do.
To complicate matters, the current approach to mining reform by the Tanzanian government can best be described as paralytic. The country is a newcomer to multiparty democracy and still dominated by the ruling CCM party. CCM holds 86% of elected seats in parliament. But unlike other African states with weak oppositions (such as neighboring Uganda), Tanzanian political power is not centralized in the executive. Insiders say Kikwete does not drive economic policy in the country, as CCM influence is spread amongst various cadres that Kikwete merely adjudicates between. Furthermore, the fledgling opposition is working hard to rise, but still lacks (as do many African political parties) a coherent platform and real policy prescriptions. This, along with a feeling that CCM has little time to hear opposition politicians out, has led to some rather randomly obstinate exchanges in parliament. One favourite reported recently in the local press:
After accusing the government of ignoring pollution problems at North Mara, UDP MP John Cheyo (one of two opposition representatives on the Bomani Committee) was tossed out of the debating chamber by National Assembly Speaker, Samuel Sitta. The Citizen newspaper writes, "'Problems at the North Mara mine did not start yesterday,' [Cheyo] pointed out. But before he took his seat, Mr Sitta asked the MP to clarify what he meant as effects from chemicals were felt immediately. But Mr Cheyo answered that he was an expert in chemistry and that was why he had raised the issue. Then Mr Sitta wanted Mr Cheyo to revisit his science notes. The latter said because the Speaker had said so he would end there, though he was not satisfied with the answer. But the Speaker rose and said: 'I think I need time to speak about this as members from the opposition bench have been forcing things to be done their way.'"
The opposition's refrain is that CCM remains firmly in the pocket of the mining companies. The government's recent move to renegotiate taxation terms directly with mining companies elicited outrage in parliament even though this is technically required by law, as current tax provisions are guaranteed under individual mining contracts. Others say the government is committed to reforms if for no other reason than an election is coming up next year. If President Kikwete has nothing to show the public by then, there is a good chance that voters will turn on the CCM. Tanzania's socialist roots are still strong, and the government is largely beholden to the will of the people. Public opinion remains hostile toward mining companies, so any legislation presented that does not increase taxes and offer major reform will be widely rejected, not least by opposition MPs who maintain a massive will to hold things up.
At the same time, the government is well aware that the industry needs new investment and that any too punitive measures will drive mining companies away. The Ministry of Energy and Minerals' Commissioner of Minerals, Dr Peter Kafumu has repeatedly voiced the need to produce measured reforms that will not repel investors.
In May 2009, the International Council on Mining and Metals (ICMM) hosted a forum in Dar es Salaam, from which the ICMM reported: "In the minister's closing speech he assured the workshop that a competitive regime would indeed be sustained by the imminent reforms!" With political pressure coming from so many different directions, and no one powerful executive to make decisions, Tanzania is left with political paralysis. The new Mining Act has been delayed for months, and it is still unclear how the government intends to balance these competing demands.
Between Corruption and Transparency
For mining companies, Tanzania's messy attempt at democracy presents a giant headache. Extractive industries are accustomed to doing business in African countries where the political problem is blatant corruption. In a failed state like the DRC for example, all a company need do is hire good security and pay off the few right people and the path forward is paved for them. That is not to say the mining industry prefers corruption to democratic transparency, as is often suggested. None of these companies mind working in the US or Australia. And large steps have been taken in recent years that demonstrate a commitment to transparency by the mining industry. Major companies have supported the Extractive Industries Transparency Initiative (EITI), and the Publish What You Pay campaign has made some headway.
Fernanda Diez, communications director for ICMM, says the organisation was set up to conduct research and public relations in the late 1990s because mining companies realised they needed to do more to restore their international image: "Companies are realising there is a much greater societal expectation of them, and that companies have a responsibility to be good corporate citizens." Diez likes the term "enlightened self-interest." She also says: "Our [member] companies are far more comfortable dealing with transparent governments." Transparency provides predictability, a prized commodity for mining companies making long-term investments. Barrick and AGA are both members of the ICMM. Both are also public companies required by law to audit and publish their financial records.
As for Tanzania, according to the ICMM's 2007 Tanzania case study, "corruption continues to be a prominent feature of the Tanzanian public sector." Transparency International's Corruption Perception Index for 2008 puts Tanzania at 102 out 180, with 180 being the most corrupt country.
Other mining destinations in Africa score much better: Botswana is ranked 36, and Ghana 67. Kikwete's government has made an effort to cut down on major scandals. Two former MPs were charged in November 2008 for their role in hiring the British firm Alex Stewart Assayers with no open tender to audit gold mining company activities in Tanzania from 2003 to 2007 at an outrageous rate of about USD1m a month. (Needless to say the auditing itself was less than professional.) The country's new Prevention and Combating of Corruption Bureau has also prosecuted cases linked to the Bank of Tanzania's external payment arrears (EPA) account embezzlement scandal with fervor.
Generally, Tanzanian corruption no longer comes in huge doses, or in the DRC mold. There is no one person to pay off, but rather an enormous and inefficient bureaucracy to face, with leakages and bits of corruption at various points along the way. Hence the two-year wait time for a prospecting license, many of which are handed out to ruling party insiders anyway for speculative purposes.
The government is also notoriously bad at revenue collection, and known to mismanage the taxes it does collect. It is not clear where the USD100m a year in mining revenue has gone, as social services have not been improved nor infrastructure developed.
For this reason, simply raising taxes on mining companies will do little to improve the situation in Tanzania. Although it has not made much press, the Bomani Commission also recommends that the social responsibilities of government and mining companies be clearly defined and enforced. This is where real progress could be made, if the Tanzanian public's focus can be somehow pried away from the traditional view that "rapacious" mining companies must be made to pay up.
The government must be accountable for providing a workable business environment and tending to the needs of its own citizens, including especially workforce education. Mining companies can then be held accountable for their part, which should include a degree of corporate social responsibility (CSR) spending, local procurement and hiring requirements, strict environmental practices and building relationships with the communities where they operate. Pricewaterhouse Coopers have even come up with a way to monitor mining companies' half of this relationship, called the Total Tax Contribution Framework. The firm hopes to extend this research to low income countries soon.
But "mining companies cannot do this on their own," says ICMM's Diez. "It's not just about building bridges and building schools and hospitals, it is about getting the right people talking to each other." This is the only way to build lasting linkages between the mining sector and the broader economy. And here, Tanzanians have a valid complaint. They say Barrick, more so than any other mining company that has operated in the country, maintains an arrogant top-down approach to CSR: Willing to throw money at problems, but unwilling to cultivate working relationships with locals. Barrick's defense on the North Mara pollution charges is that locals broke into its premises and stole plastic lining meant to keep chemicals out of the groundwater.
This could very well be true, given the amount of animosity that locals harbor toward Barrick for what they see as its callous invasion of their backyard. (When contacted for comment, Barrick's Tanzanian spokesman said he was too busy dealing with the North Mara fallout to speak with us.)
Tanzania will not shed its socialist mindset anytime soon, and with that comes some unspoken rules. For any foreign company to be successful there, it must acclimate to the personal side of Tanzanian business. At the same time, Tanzania's leaders could do more to support only reasonable demands, and educate the public when it takes a myopic stance.
New Investment Needed
Results of an international mining study carried out by Oxford Policy Management (OPM) were presented at the ICMM's May forum in Dar. OPM collected data from AGA and Barrick on five of their gold mines, plus a new mine under exploration by IAMGold, crunched the numbers and
- These six mines plan to increase gold production and exports by around 50% to 60% in the next six to ten years, increased profit from which will hike total mining tax payments to the government by almost 300% to about USD280m per annum, under the current taxation scheme.
- This level of production, if continued long-term, will require these companies to invest an additional USD2.3bn in their existing mines just to stay in business through to 2034.
- Contributions from current mines will begin to decline around 2018. To sustain Tanzania's gold mining industry at its current level of growth into the long term, an additional two to three mines the size of AGA's Geita will be necessary.
Tanzania is not on track to meet these goals.
"The mining policy and conditions of investment in Tanzania have failed to attract sufficient exploration. No new large gold mines are planned to be opened in the next five years," says Barber, explaining further: "The gold mining sector should have a pyramid structure, capped by a handful of large mines, then underlain by tens of medium and hundreds of small scale formal mining operations. Tanzania only has large mines.
The reason for this is that these are the only operations that can be economically developed due to the difficulty and high cost of doing business in the country."
That high cost of doing business is underpinned by a xenophobia that Tanzania cannot seem to shake, no matter how much the country stands to profit from foreign investment. Much of Tanzania's skepticism is directed at Kenya: Tanzanians have long resented living in the shadow of Kenya's strong economy, and tried to insulate themselves from Kenyan competition. The fear of being overrun or exploited has come to apply to most outsiders. The Dutch government recently threatened to revoke millions in aid to Tanzania because of the country's mistreatment of foreign investors. Overall, Tanzania's way of thinking and approach to business remains stubbornly parochial.
Barber observes: "There seems to be little general realization of what economics are about and how to attract meaningful investment into the country. It has to be accepted that there is an international marketplace, and to attract investors you have to make it easy and trouble free."
What Reforms Make Sense?
There is no question that Tanzania's mining sector needs some kind of reform. Bomani's long list of proposals is populated by both good and bad ideas. Instituting as many new taxes as have been suggested, at a time when the government is finally about to start making good money and the industry needs encouragement to maintain momentum, is simply a bad idea, and even more so in the context of the global financial crisis.
From ICMM's Tanzania case study: "The objective assessment from investors is that the tax regime in Tanzanian (as is also the case of Ghana) still represents a significant deterrent to investment relative to the similar regimes of countries that compete for the same investments." So if anything, it might be a good idea to lower taxes, at least for exploration and prospecting, which Bomani does support.
Granting generous allowances up front to attract investment that will pay off in the long run as Tanzania has done is a common strategy in the mining sector. Tanzanians must understand that the "up front" period is not over yet. It has taken Ghana several decades to begin reaping the kind of rewards from its gold mining industry that Tanzanians are demanding to see after just ten years in business. AGA records show that the company has yet to turn a profit on its Geita operation. Between 2000 and 2008, Geita made USD1.82bn in revenue and sustained USD1.83bn in costs, which included about USD170m in taxes. It is expected that AGA will begin to pay income tax in 2011 once it starts actually making some money.
One area that should be reformed is the lack of contract transparency, to improve both public trust and stability for investors. Bomani proposes making contract terms available by law to the public and National Assembly. The ICMM recommends that contracts also be standardised, not negotiated privately on ad hoc terms. A standard, transparent taxation system can make it easier for the government to navigate its revenue collection role.
This is a much better way to begin addressing the revenue question than Bomani's suggestion that the government take a management stake in the country's major mines. "Due to lack of ownership by the government in the mineral sector the government has failed to know the exact amount of minerals harvested, tax and expenditure," the report says. But the government has already attempted and failed to manage several mines in the past, and lacks the capacity to do so now.
There are other ways of monitoring performance and revenue, which could start with the government hiring credible auditing firms and becoming a full fledged member of EITI.
Another area that must be dealt with is artisanal mining: Individual Tanzanian miners have been displaced, but they have also caused harm to themselves and the environment by working with cheap chemicals and unsafe tools. Bomani wants government support to improve these conditions, but others say this kind of mining is unsustainable. Rather than go the route of so many ill-fated aid programs that support inefficient enterprise based on social concerns, the government could spend money on creating safe jobs for these workers in other sectors. Focus on development of other sectors would also avoid over-reliance on one industry, a classic symptom of the resource course.
Perspectives: What Are the Chances for New Investment?
When asked what kind of reform might be reached that could both satisfy the public and encourage investors, AGA's public affairs manager Alan Fine replied: "We believe the answer to dealing with negative public opinion lies primarily in good and responsible governance by both mining companies and government at national and local level, including transparent information disclosure about mining, the way companies are managing their socio-economic and environmental challenges, and the fiscal and developmental benefits of mining." Which all sounds about right.
Emmanuel Jengo, executive secretary of TCME, provides a similar list of conditions for reforms that would sit well with the public and investors, concluding that overall, they "must be fair and equitable, stable and predictable, non-distortionary and internationally competitive; in effect balancing the country's interests with those of the investor." Other countries have managed to pull this off.
Unfortunately, the public debate in Tanzania remains focused on taxation, and the government is happily avoiding discussion of broader issues that would draw attention to its own governance failures. The Ministry of Energy and Minerals has also been overwhelmed by the rapid growth of the sector. Even with the right political will, it will take time for pragmatic legislation to catch up. One great proposal by the Bomani Committee was to improve electricity supply to the mining operations and surrounding communities through links to the country's burgeoning natural gas sector. But to do so, the committee recommends an entire national strategy for the energy sub-sector be designed, essentially from scratch.
One good sign is that the 2009/10 budget read in June 2009 includes specific provisions for local government expenditure, which should help to ensure central government revenue, including mining industry contributions, makes its way down into local-level service provision.
Ultimately, the global crisis has revised the assumption that the search for mineral wealth is insatiable. Mining operations around the world have been cutting back or closing down as capital dries up. AGA is still planning USD17m in capital spending for 2009, but Fine says: "The company's overall investment plans are of course constrained by the difficulties of raising funds in these times, though a number of corporate activities have helped remedy this situation.
These include a USD1.7bn rights offer, signing of a USD1bn syndicated term loan facility, and sale of our Tau Tona mine and of our one-third share of Boddington mine. These constraints will presumably continue to exist for as long as the international financial recovery takes." AGA is not planning to open any new mines in Tanzania.
Investors everywhere are recalculating risk and thinking twice about where to place their own limited resources. As long as this climate continues, Tanzania's hostile business environment will deter investment. Jengo says the aggressive changes proposed to Tanzania's fiscal mining regime will do the same: "When such regressive measures prevail, investor confidence for both existing and potential investors is to a large extent eroded. The fact that the proposed reforms are to be promulgated amidst the current global economic meltdown certainly exacerbates the situation, notwithstanding the predicted temporary nature of the meltdown. Any future investment will depend on the outcome of the proposed changes. If all recommendations of the Bomani report are taken on board, the country will certainly lose its ompetitiveness and investors will be looking elsewhere where the reward is worth the risk. There are several advanced projects in the pipeline such as the Kabanga nickel, Uranium, platinum and gold that stand to suffer in a stringent tax regime."
It is unlikely that all of Bomani's recommendations will pass, but some of them, including tax increases, probably will. Even in this case, gold companies might not stay away forever. The global crisis has been good for gold prices, as investors flock toward anything that appears more stable than banks. Demand for gold went up 38% year on year in the first quarter of 2009. Aram Shishmanian, CEO of the World Gold Council, commented in May: "There has been a seismic shift away from capital appreciation towards wealth preservation and we believe this trend will define investment behaviour in the next decade." Major uranium discoveries made in Tanzania in late 2007 will also keep the global mining industry's eye trained on the country.
If reasonable reforms pass, the mining sector will be vital to the long-term growth of Tanzania's economy. Even though the ratio of dollars invested by mining companies to jobs created is dismally low, Tanzania is not yet able to absorb very many other kinds of FDI. If the government can focus on better governance, infrastructure improvement and creating economic linkages, the mining industry can help prepare the country for more foreign investment down the line. But for this to happen, nothing less than a sea change in Tanzanian attitudes toward the outside world is required.