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Tanzania Mining Act 2010: Stifling New Investment? |
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Thursday, 20 May 2010 |
Government officials have accused mining firms of reacting like spoiled children, but the Tanzanian government’s approach to mining legislation is unlikely to enhance investments in the sector, nor to ensure that the wider population sees more impact from mining revenues.
In late April 2010, Tanzania’s Parliament finally passed new mining legislation in an effort to end years of caustic debate over the industry’s contribution to society and economic growth. The Mining Act 2010 replaces the 1998 version that was credited with liberalising the sector and attracting a surge in foreign direct investment, enough to make Tanzania Africa’s leading gold producer after South Africa, Ghana and recently Mali within a good decade. However, as the industry matured in Tanzania, it was criticized for favouring mining companies at the expense of local interests while the sector contributed a paltry portion of GDP.
The new legislation, which still awaits presidential approval, raises royalty rates across the board by basing calculations on gross profits rather than net back values as before. In addition, royalty rates on gold go up from 3 to 4%, diamonds stay at 5%, and uranium is set at 5%. These values are not wildly out of sync with Tanzania’s peers. Ghana’s royalty rates on minerals vary from 3 to 6%; Namibia charges 3% for its uranium. And world demand for gold, diamonds and uranium remains high. However, industry experts say that Tanzania’s generally hostile business environment grants the country less space than friendlier producers like Ghana and South Africa to charge higher royalties without driving investors away.
Against this background, much more worrying than rising royalties are the various vaguely written nationalistic provisions included in the bill: the government would have a right to take a stake in any “strategic” mining operation, to be determined by “the type of minerals and the level of investment”; all mining companies would be forced to list on the local stock exchange, still small and illiquid, and to set aside a “certain percentage” of their production for processing, smelting or refining within the country; no foreign firms would be granted licenses for gemstone mining without entering a 50-50 partnership with a Tanzanian; and mining contracts, while granted for the life of the mine, would be subject to “performance review” every five years.
Perspectives
Tanzanian officials say the new legislation will finally bring an end to the regulatory uncertainty that has deterred investment in recent years. But these fuzzy new clauses and nods toward nationalisation will likely do the opposite. The Tanzania Chamber of Minerals and Energy (TCME), an industry body representing major miners, has warned President Jakaya Kikwete that passing the bill without amendment could cripple Tanzania’s gemstone industry and drive mining companies away. Many investors will think twice before sinking money into a project subject to the recurrent vagaries of Tanzanian bureaucracy and government meddling, not the least because TCME note that investors are also already struggling with confusion over VAT refunds and excise duty remission on fuel costs.
While the legislation would not affect existing mining contracts, in the gold sector, especially, many of the largest mines will begin winding down production in the next 10 years. New investment is needed, and under this act it may not arrive. In that case, with fewer operations to tax, raising royalty rates becomes a futile attempt to increase government revenues. Energy Minister William Ngeleja argues that the bill will not scare away investors, and that interest, notably from China, remains strong. This may be true. China’s Jinchuan Mining signed on to a nickel project in northwestern Tanzania in January. And French energy giant Areva announced this month that it is interested in developing Tanzanian uranium. However, a shift toward a less diversified and vibrant pool of FDI available to the mining industry is unavoidable under this bill.
While government officials and mining representatives trade accusations in the background, the legislation is currently awaiting president Kikwete’s assent. With an election later this year, he will have little room to maneouvre since the public looks at the mining sector with suspicion. Few appreciate is that if investment and production decline, higher royalties may not necessarily translate into higher revenues. And even if revenues rise, the impact will be undermined by the fact that the government has an unimpressive background in spending such funds wisely. Tanzania’s greatest challenge is still posed by a highly corrupt state incapable of managing public funds so that they translate into tangible improvements for its citizens, nor of regulating smartly.
For a more detailed background analysis, read:
Tanzania Mining Industry: Revenues, Resentment and Overregulation?
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