Tanzania Country Brief: December 2009

Tuesday, 26 January 2010

An overview of key deals, industry news and data releases in Tanzania in December 2009. BUSINESS ENVIRONMENT Tanzania's key port plans expansion to combat bottlenecks: The Tanzania Port Authority (TPA) announced that the Dar es Salaam port would build a second container terminal in an expansion programme valued at USD400-630m in a project due to be completed by 2013/2014. TPA stated that cargo volumes handled at the port have expanded by 15% per year since 2004, leading to congestion. Tanzania Ports Authority (TPA) has signed a five year, USD60m investment agreement with Hutchicon Ports Holdings, Wai Chau and TICTS to improve cargo handling and reduce congestion. Interesting about this agreement is also that Tanzania, traditionally suspicious of both foreign companies and the private sector in general, has decided to outsource cargo handling to a group including foreign corporates With its current capacity, Tanzania’s port cannot not compete against Mombasa sea port, which remains the regional hub and handles 75% of all the transit cargo to Uganda. TPA intends to market its services more actively to Uganda, but also to Rwanda, Burundi and DRC, and if it can improve its performance, this will be welcome: The supply disruptions during the 2008 post-election violence in Kenya showed the risk of depending on Kenya for goods traffic into the EAC and central Africa. In addition, the current lack of capacity will also impede any efforts to expand railway transport through Tanzania and into Burundi and Rwanda. Unimpressive ranking in global tax survey: In the PricewaterhouseCoopers/World Bank ‘Paying Taxes 2010’ survey that measures how easily taxes can be paid, Tanzania fell to rank 120 out of 183 countries. It ranks behind Rwanda (59), Uganda (66), Burundi (116), and before Kenya (164). This is mirrored in the ‘Paying Taxes’ category of the World Bank’s Doing Business survey 2010, where Tanzania’s ranking fell slightly from 131 to 120. Its overall rating deteriorated from 126 to 131. DATA RELEASES November inflation rate eases marginally: Tanzania’s consumer price inflation eased slightly to 12.5% in November from 12.7% in October. Food prices have come down, but rising oil prices continue to put pressure on prices. Tanzania’s central bank, Bank of Tanzania, stated that they were planning to adjust the current basket to reduce the weight of food from 55.9% to 42-42%, which, they expect, will also lower the inflation figures. Revenue collection down: The Tanzania Revenue Authority (TRA) missed its revenue collection target for the first quarter of the current fiscal year (July 2009-June 2010), collectingTZS28.86bn versus a target of TZS38.63bn. TRA cited declining oil imports, tax evasion and smuggling as the reasons for the shortfall in revenue collection. But exports doing well despite global downturn: Tanzania’s exports in the year to September 2009 increased by 3.2% to USD4.6bn compared to the same period in 2008. Imports, in contrast, fell by 4.4% on the back of lower oil prices, stated the Bank of Tanzania. As a consequence, the current account deficit up to end-September fell from USD2.95bn to USD2.06bn. REGULATORY AND LEGAL CHANGES Standard marks required for imports: The Tanzanian government is about to gazette regulations that will require importers to affix the Imports Standards Mark (ISM) by the Tanzania Bureau of Standards (TBS) to their products. The intention is to ensure the quality and safety of imported goods, and, as one commentary said, to prevent the country from becoming a dumping ground for substandard goods. Like many other countries, Tanzania has problems with counterfeits, but experiences in Kenya with a compulsory standard mark have shown that this creates a bottleneck and, therefore, rent-seeking opportunities. In Tanzania, notorious for over-regulation, it remains to be seen whether the authorities have sufficient capacities to implement these regulations without causing too many obstacles for importers and adding new non-tariff barriers – a concern also for its EAC neighbours. Norwegian power company Artumas, who started generating power in Tanzania in late 2006, is in a dispute with the Energy and Water Utility Regulatory Authority (EWURA) over licensing requirements. A new Electricity Act was passed in late 2008 amidst government infighting over privatisation of the sector, which led to several confusing and inconvenient clauses that could technically bar Artumas from being granted a new permanent license when its current agreement with the government, struck in 2007, runs out in June 2010. EWURA says it can legally only grant Artumas an exemption to operate without a license, but the company says it needs a full license to qualify for the funding it seeks. A permanent license would also allow Artumas to transmit electricity rather than sell it to the government-owned Tanzania Electric Supply Company (Tanesco). Tanesco has long been inefficient, expensive and corrupt, yet the government remains wary of granting too much control over the power sector to private investors who have also been accused of defrauding the state. The legal confusion is typical of the political chaos that has come along with attempts by the government to cut out corruption while maintaining its overly bureaucratic way of doing things. Regulatory risk in Tanzania thus remains the highest in East Africa. SECTOR UPDATES Energy: Orca Exploration Group Inc. has started the sale of natural gas to the newly commissioned Tegeta 45MW power plant at Dar es Salaam. Tanesco announced this month that it was preparing to officially connect the plant to the national grid. Tanzania experienced severe power rationing in October and November 2009 as the result of low water levels at its main hydropower dams and a damaged turbine at the Songas plant, together which caused a 150 MW shortage. The government was forced to intervene at the behest of the private sector and restart production at the embattled 100 MW diesel power plant, Independent Power Tanzania Limited (IPTL). IPTL has been locked in a court battle between its investors and with Tanesco since 2008 over mismanagement and high capacity charges. Parliamentarians have accused IPTL and other independent power producers (IPPs) of defrauding the government, which led in part to the aforementioned clauses in the new Electricity Act 2008 that temporarily prevents the government from granting new licenses to old IPPs. Under orders from President Kikwete, IPTL provided 60MW to the grid in November 2009. But in December, Tanesco announced that IPTL production would be shut down once again. The gap was expected to be filled by increased production at Songas and the dams, along with the new Tegeta gas powered plant. The government has promised that rationing will not resume, but provided little insight to the highly politicised negotiations raging behind the scenes. Meanwhile, IPTL minority partner VIP Engineering Company filed an application in December 2009 to allow an investigation into the proposed USD20m conversion of the IPTL plant from heavy fuel to natural gas. The investigation would have to be approved by the IPTL liquidator authority, which has been presiding over the company’s assets during its ongoing court cases. The Tanzanian government has been considering the conversion since at least 2003, and VIP is now accusing Tanesco of preventing it. Zanzibar experienced a prolongued power cut right through the holiday travel season that was quite costly to tourism revenues. The cut resulted from a breakdown of the 30-year-old undersea transmission cable that connects Zanzibar to the mainland. Two factories - Huda Tissues factory and Zanzibar Poultry Company – also closed in December as a result of the cut. Telecoms: Vizada Networks connected Tanzania to the Seacom undersea fibre optic cable in December. Through its subsidiary in Dar es Salaam, Vizada will now provide high speed communications services in conjunction with its satellite network to customers in both urban and rural areas. Internet service capacity is expected to triple at the same monthly cost for the average Vizada customer. Tanzania’s communications sector grew by 20.5% in 2008/09 due to increased mobile phone traffic. Banking: Ecobank announced it will launch operations in Tanzania in January 2010 as part of its regional expansion plans. The entry will be good for competition, but Tanzania is already home to 25 banks – none of which have managed to bring down the country’s high interest rates (many banks charge up to 25%). There is much opportunity to court new customers, as only 10% of Tanzania’s 40 million people have access to formal banking services. But scarce human resources that have plagued other foreign entrants will also be a challenge for Ecobank. Construction: Despite the 2009 global recession, Tanzania’s construction industry has maintained its growth streak, registering the country’s highest number of investment projects over the last three years. Local banks also unaffected by the crunch have been driving real estate growth in Dar es Salaam, as has the growth of Tanzania’s middle class. British private equity firm Actis has also invested in office space due to open in Dar’s central business district in January 2010. Construction has now surpassed both mining and tourism to contribute 7% of the country’s GDP. Observers warn, however, that the capital’s infrastructure is woefully unprepared to support the growth spurt. Dar lacks proper management systems to ensure sustainable development. A similar combination of poor planning, corrupt city administration and growth has led to terrible congestion and logistical nightmares in neighboring Nairobi. Agriculture: The Tanzania Coffee Board (TCB) announced in December that it has set a goal of increasing coffee output to 120,000 tonnes by 2014/15. Coffee production is expected to decrease by 11% in the year ending June 2010 due to coffee berry disease, drought, old-fashioned cultivation techniques and low fertiliser use. Output for the 2008/09 season was 68,000 tonnes. 2009/10 output is expected to be just 50,000 tonnes. The EU has pledged TES12bn to help the country revive the sector through research between now and 2015 and the distribution of high yielding seeds. The board also plans to ban the processing of coffee by small farmers and start central washing to boost sales of quality beans. If Tanzania can produce higher quality beans in bulk, farmers could command higher prices. The board will also increase the area under production from 250,000 to 300,000 hectares. Technology and more commercialised processing will boost production over time, but farmers will still face perennial problems such as lack of credit and high transport costs that the TCB has yet to address. Tourism: Air Tanzania has launched daily flights from its base in Dar es Salaam to Arusha. Arusha is a traditional safari destination, but traffic has also grown since the East African Community secretariat set up shop there. Diplomatic demand will boost air travel and hotel revenues, but the flight also comes at a time when activity in the rest of Tanzania’s tourism sector is slow due to the global crisis. International tourist arrivals declined by 10% in the first 10 months of 2009. The country also faces an acute shortage of specialised personnel in tourism and hotel management that has forced some hotels to employ foreigners. The French government is supporting the construction of a new National Tourism College, which will enroll up to 500 students in various fields of tourism. There is an indication that the sector is gaining momentum and might recover soon. DONOR FINANCING The European Union committed an unprecedented EUR370m to Tanzania in December, despite warnings from other donors that the country has failed to deal effectively with public corruption or excessive administration that has damaged the business environment. To its credit, Tanzania has launched a series of anti-corruption campaigns under President Kikwete, and remains on par less corrupt than neighboring Kenya (although Kenya doesn’t receive nearly as much aid). And the EU stresses that its cash will come with conditions. Turning a blind eye to government waste is nothing new for donors, but the EU is trying something different in dispensing the money over a six-year term. Normally donor funds come in smaller, shorter spurts that make it hard for governments to plan effective long-term development programs. This money will be directed at improving roads, supporting the sugar sector and other poverty reduction campaigns. REGIONAL NEWS: The East African Community will soon implement a competition law meant to protect small firms from regional business giants. The law, which is being amended from the EAC 2006 Competition Act, will include new members Rwanda and Burundi. It will impose a maximum USD100,000 fine on companies or a USD10,000 fine on individual company officials found guilty of interfering with the free movement of goods and services in the community or unfairly suffocating small to medium competitors. The law is meant to prevent collusion or market domination by large companies and monitor government subsidies to promote fair competition across borders. It may also help harmonise tax structures between states. 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