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Shadow Governance Intel

Shadow Governance Intel

Shadow Governance Intel (www.shadowgovintel.com), the analytical arm of West Sands Advisory Limited, conducts in-depth research on power players and power plays that challenge the transparency…

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Tanzania’s Crackdown On Mining Companies Intensifies

mine

In recent months, the government of Tanzania has tightened its control over its natural resources – and the mining sector in particular – through a serious government crackdown on tax evasion and corruption, which has largely targeted mining companies, in an attempt to elicit increased revenue from invested companies.

In July 2017, Tanzania’s parliament passed three new laws that introduced widespread changes to the legal and regulatory landscape of Tanzania’s extractives industry: The Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Bill, 2017; The Natural Wealth and Resources (Permanent Sovereignty) Bill, 2017; and, The Written Laws (Miscellaneous Amendments) Act, 2017 – makes major changes to the country’s Mining Act, Petroleum Act, Insurance Act and other taxes acts.

The new laws, which were fast-tracked through parliament, have increased royalty taxes on both uranium and gold. They have also given the government the right to cancel and renegotiate existing contracts for both mining and energy companies if the terms are deemed “unconscionable”, and have removed the right for companies operating in Tanzania to seek international arbitration.

Furthermore, the government must now have at least a 16% equity in all mining operations, and now has the power to enforce new regulations which require mining companies to list 30% of their equity on the Dar es Salaam Stock Exchange by August 2017 .

President Magufuli claims that these reforms will increase transparency in the mining and energy sectors, and increase the country’s fair share of revenues. However, most companies disagree, and have accused the government of unfairly extorting unprofitable amounts of money from them .

Background

Since coming to power in November 2015, Tanzania’s President John Magufuli has worked hard to fulfil his campaign promises to eradicate widespread government corruption and mismanagement, increase transparency and promote economic growth.

Government officials and civil servants have already felt the effects of the new President’s austerity measures, with the downsizing of the government from 30 ministers to just 19, and the removal of more than 10,000 allegedly corrupt public officials over the last 18 months. President Magufuli has now turned his attention to the extractives industry.

Tanzania is the third largest gold producer in Africa, and also has vast deposits of coal, uranium, diamonds and other precious gemstones. In 2016, exports of minerals were valued at US $1.57 billion – of which gold accounted for US $1.45 billion – out of a US $5.69 billion export total . However, most of these resources are being exported in their raw form without being processed, resulting in the mining sector contributing less than 4% to the Tanzania's gross domestic product (GDP). Related: Is The EIA Exaggerating U.S. Oil Production?

According to Tanzania’s Five Year Development Plan (FYDP) 2016/17–2020/21, the mining sector is projected to contribute at least 4.6% by 2025 . As such, targeting the natural resources extractive industry is part of President’s Magufuli’s drive to overhaul the economy – largely through ensuring that mining and energy companies pay their fair share of taxes.

Tanzania is extremely reliant on foreign direct investment (FDI) - the mining sector, the oil and gas industry, and the primary agricultural products sector attract the most FDI . Notably, foreign investment has largely been driven by the discoveries of more than 53 trillion cubic feet of natural gas reserves in Tanzania over the last decade .

The UN Conference on Trade and Development’s (UNCTAD) estimates that Tanzania has accumulated FDI stock of US $19.818 billion, the highest in the East Africa region . However, in 2017, the World Investment Report of UNCTAD reported that in 2016 Tanzania only attracted an estimated US $1.365 billion of FDI inflows – a 15% decrease from 2015. This drop has been largely attributed to increased investor concerns over the country’s regulatory environment and tax policies towards foreign firms .

Since President Magufuli’s election in 2015, the government has introduced a whole host of measures aimed at increasing revenue. These include tax increases on money transfers, banking, tourism services, and cargo transit services. Although this has increased tax revenues by more than 12.74% in the first six months of the 2015/2016 financial year to the same period in 2016/2107, they have also appeared to have affected Tanzania’s attraction as an FDI destination .

Export Ban

The government’s targeting of the extractives industry only truly began in March 2017 – prior to the implementation of the new natural resources laws. As part of President Magufuli’s plans to tighten the government’s control over the country’s mining sector, in March 2017, the government implemented a controversial ban on the export of mineral concentrates and ores for metallic minerals, aimed at ensuring that the processing of raw materials produced from its mine also takes place in the country.

Until now, mineral concentrates produced in Tanzania – which can contain gold, copper and other valuable minerals – have usually been sold to specialised smelting companies oversees, which have the expensive equipment required to extract the minerals. Although the mineral contents of these concentrates are assessed and suitably taxed by the Tanzania Minerals Audit Agency (TMAA) before export, allegations of corruption, tax avoidance and tax evasion through non-declarations have been rampant.

The ban has exposed major issues within Tanzania’s mining sector – and has resulted in a high-profile dispute between the government and the largest mining company operating in Tanzania, Acacia.

The government has publicly accused Acacia of seriously under-reporting the amount of concentrate it exports, after two committees – made up of academics, lawyers and economists and established by the government – revealed that a sample of containers from Acacia contained 7 times the amount of gold declared by the company, as well as double the amount of silver and almost a third more copper .

If the committees’ findings are accurate, this potentially deliberate undervaluation is huge – amounting to approximately 10% of Tanzania’a GDP .

However, Acacia has vigorously denied these claims. Its position is that these findings merely imply that the company’s two gold producing mines, Bulyanhulu and Buzwagi, are the two largest gold producers in the world; and, that Acacia is the world’s third largest gold producer, producing more gold from its three mines than companies like AngloGold Ashanti produce from 19 mines, Goldcorp from 11 mines, and Kinross from their 9 mines.

Although Acacia is Tanzania’s largest mining company, both the Bulyanhulu and Buzwagi mines are not considered large in global terms. Acacia is still able to export gold bars – which make up 70% of its output – its inability to export concentrates from two of its three mines has resulted in losseshttp://www.telegraph.co.uk/business/2017/05/27/acacia-set-close-loss-making-mine-tanzania-export-row-deepens/ amounting to US $1 million a day , and has impacted around 50% of its combined production at the Bulyanhulu and Buzwagi mines.

Acacia, which continues to deny all wrongdoing and insists that it had consistently declared all revenues, has also warned that it may be forced to close its loss-making Bulyanhulu mine by the end of September 2017 if the ban continues.

Shares in the company have fallen by more than 68% since the start of the dispute, suffering a further blow on 25th July 2017 after Acacia was hit with a US $190 billion fine for unpaid taxes, penalties and interest from the government over a 17-year period between 2000 and 2017 .

The tax bill – which is four times the GDP of Tanzania – has attracted widespread international criticism for its size, which amounts to “more than twice what all top five global gold miners (including Barrick) combined have paid in taxes since 2000” .

Acacia is simply unable to pay such a huge sum and, in short, if the government continues to insist that Acacia pay the US $190 billion fine, Acacia will be forced to pull out of Tanzania completely. Related: The Race For Floating Wind Farms Has Begun

Although negotiations are currently underway between Acacia’s Canadian parent company Barrick Gold Corporation and the Tanzanian government, the government has consistently threatened to close all gold mines operating in Tanzania if mining companies remain unwilling to comply with the new regulation or resolve any disputes.

Notably, although the new Natural Wealth and Resources (Permanent Sovereignty) law now prohibits the use of foreign courts or tribunals in proceedings related to national resources as well as allowing the government to cancel or renegotiate any existing contracts which the government deems “unconscionable” , Acacia has since served notices of arbitration in London against the Tanzanian government. These notices mean it can seek intervention at the London Court of International Arbitration if the government tries to renege on its original contracts with the company.

Furthermore, South African AngloGold Ashanti has also joined Acacia in announcing, on 13th July, that it had commenced arbitration proceedings as a precautionary step to safeguard its interests in Tanzania in light of the new laws, which allow the government to renegotiate existing contracts at its discretion .

Conclusion

In just a matter of weeks, President Magufuli has completely changed the landscape of Tanzania’s extractives industry. By quickly and efficiently implementing new natural resources laws, and boldly challenging the country’s largest gold producer, President Magufuli has demonstrated his commitment to re-assert control over the country’s extractives industry.

Notably, in what can be viewed as a victory for Tanzania, Acacia has already agreed to begin paying higher royalty taxes which were introduced under the new laws – even though this extra cost is expected to cost Acacia an additional US $31 million a year .

However, although the government may feel encouraged and emboldened by its high-profile dispute with Acacia, it also risks undermining its larger economic plans by deterring investors, which Tanzania so largely relies on.

The Australian Stock Exchange has already suspended trading in the shares of several smaller exploration firms, while Shanta Gold – a Channel Islands-listed gold mining company which operates only in Tanzania – has already announced that “as a result of the new legislation, Shanta is undergoing a business review of its operation and cost base”.

Furthermore, if Acacia does indeed pull out of Tanzania altogether, it is unclear how the government will afford to lose an estimated US $1 million per month in revenue . Interestingly, allegations have also emerged that the dispute with Acacia was deliberately started, and merely used as an excuse to introduce a whole host of further restrictive and costly measures on Tanzania’s extractives industry in order to maximise government earnings from the country’s natural resources.

For example, President Magufuli has made it clear that he aims to develop a domestic smelting industry in Tanzania, and it has been suggested that the export ban is merely an attempt to force Acacia into funding a new smelting industry.

Conversely, although these new regulations could increase the government’s shares in revenues, not only do they increase the costs of operating in Tanzania, the new laws have also served to paint Tanzania as an unreliable and unpredictable investment destination.

As a result, this perceived assault on Tanzania’s mining industry is also likely to have unintended consequences on the country’s nascent oil and gas industry.

With gas production expected to almost double by 2021, and major growth predicted by 2025, increased regulations affecting the extractives industry in Tanzania may deter further investment and make current investors rethink their future in the country, despite the potentially substantial rewards on offer . Currently Statoil, Exxon Mobil, Royal Dutch Shell (formerly BG Group) Ophir and Swala Energy are the main players in Tanzania's oil and gas exploration industry and stand to be most affected the new legislation.

Furthermore, while President Magufuli has demonstrated his sincerity in the government’s fight against corruption and levelling the playing field when it comes to who benefits from natural resources, there is a risk that potential short-term financial gains could come at the cost of long-term investment. It is yet to be seen whether these new measures will benefit the country and the economy in the longer term.

Ultimately, this could all be part of a wider plan to nationalise the natural resources sector – at a time when Tanzania’s oil and gas appears to promise substantial rewards.

By Shadow Governance Intel

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