Reforming the Mining Sector in Tanzania: Legislators Gather for RWI Training on Legal and Economic Frameworks

By Silas Olan'g, RWI Tanzania Program Coordinator

The mineral policies in Tanzania once called "new" are new no longer, and many of their objectives remain unattained. A decade ago, Tanzania embarked on mining sector reform, formulating a policy in 1997 and passing corresponding legislation 1998. The reform's main objective was to create an enabling environment for private investors in an industry that was previously state-controlled. Unfortunately, the goal of increasing the sector's contribution to national growth and poverty reduction has proven to be far-fetched. New reforms are underway, but the question remains, what really went wrong?

On October 14 and 15, 2009, Revenue Watch conducted a training workshop in Dar-Es-Salaam for Tanzanian legislators at the invitation of the Parliamentary Committee for Energy and Minerals to help participants learn more about the complex challenges of managing the nation's mineral wealth. 

Should Investors Decide When a Country Will Extract its Minerals?

This was the first question parliamentarians had when RWI presented an overview of the resource "value chain" and the importance of the initial decision of whether to extract or leave minerals in the ground. Legislators appeared ready to accept that extraction may happen even against their wishes. But when asked whether they were happy to be left out of the decision, committee Chair Hon. William Shellukindo declared, "No, this should change."

MPs Confront the Challenges to Effective Fiscal Regimes

The current Tanzanian fiscal regime creates loopholes that might hinder the maximization of tax revenue from mineral extraction. The primary loopholes are through the practices of "ring fencing" and royalties. Ring-fencing is the practice of limiting cost recovery for an extractive project to the revenues generated by that same project. Tanzanian income tax law has no provision for ring-fencing on a mine-by-mine basis, leaving companies with the option of siphoning one mine's revenues to offset another's losses. Workshop trainers illustrated for participants how host countries like Tanzania can use ring-fencing to protect their own potential revenues. Committee member Hon. Daniel Nicodem Nsanzugwako offered a Tanzanian example from the case of Tulawaka and Buzwagi Mines, both owned by Barrick Gold. In 2006 the cost of developing the Buzwagi Mine was included as part of Barrick's operational costs, thereby reducing the taxable income of Tulawaka to the point where it effectively took a loss.

A discussion of royalty systems emphasized  that oversight bodies as well as government regulatory agencies need access to accurate price and quantity data to be able to check that companies are indeed paying their royalty dues. Hon. William Shellukindo expressed his worries when he asked, "Are these data indeed available and who in Tanzania has to check them?" Tanzania's leaders can make great progress in providing the public with assurances of company accountability by ensuring that credible checks on company data are in place. The Parliament of Tanzania has a role to play in verifying the strength of systems meant to check these data. (Tanzania uses the "net back value" method to calculate royalty payments.)

Revenue Watch legal analyst Matthew Genasci covered the issue of transfer pricing, a challenge for many resource rich countries, including Tanzania. Transfers take place beyond the jurisdiction of a specific country's tax regime, limiting the ability of single governments to address the issue. "The government has limited powers when transfers are done outside the country with support of giant international financial institutions," said Hon. Daniel Nsanzugwako.

Scrutinizing Government Participation in Mining Operations

Participants reviewed a range of options for ownership and government participation in the mining sector, such as free equity, carried interest and full government participation. Workshop leaders advised maximum caution when considering the options, and the trade-offs, that can come in foregone tax revenues as well as conflicts of interest on the part of the government due to its regulatory role.

Losing Added Value by Exporting Employment

In a discussion on securing added value from mining, participants cited a need to increase employment and benefits for local residents in regions hosting the gemstone industries. This underlines the important role of legislators approving and implementing training policies and other measures that can create additional employment, generate cash flow, help reduce poverty and improve local livelihoods. Sensible employment policies can also go a long way to defuse conflicts between companies and local residents.

The workshop focused in particular on the case of Tanzanite. Though this unique gemstone can only be found in Tanzania, the country nevertheless ranks between 4th  and 5th as exporter of the gemstone, trailing South Africa, Kenya and India. In fact, at least 80% of raw Tanzanite is produced by a South African Company and processed in Jaipur, India, where it creates thousands of jobs and macroeconomic benefits. Several participants expressed outrage when they learned that many leading advisors on Tanzanite to their government and to industry were researchers trained at South Africa's University of Stellenbosch, which has developed considerable expertise on the economic geology of Tanzanite.

Meanwhile, there is not a single university in Tanzania that can provide expertise on the physical and economic geology of Tanzanite. The committee's deputy chairman pointed to a dire need to do more to increase value addition in the country, acknowledging that Parliament has a responsibility to do more to ensure that the country extracts greater value from mineral resources before more opportunity is lost.

Sustainable Environmental Management: A Question Of Implementation

Despite the fact that Tanzania has a well-defined policy and legal framework for environmental management, environmental performance has been poor, especially in the mining sector. All companies are already required by law to produce an Environmental Impact Assessment and Implementation Plan before commencing operations. Participants identified major weaknesses that hinder good environmental practices, including:

• Lack of coordination among regulatory agencies and weak enforcement of existing laws. (Civil society was urged to strengthen advocacy on environmental management.)
• Lack of standards for corporate social responsibility.
• Lack of clear roles for local government and community groups in environmental monitoring.
• An inadequate 2009 policy that considers environmental issues as "cross-cutting," rather than as an integral part of mining operations.

A key lesson for the environmental challenges, and indeed for all issues covered, was that a good policy is one that is implementable.

All workshop leaders were amazed to see a shift in dynamics over the course of the training, from a fairly low-key and occasionally defensive mood among participating MPs, to an environment of open and constructive discussion, where the trainees added enthusiasm and vital substance to the exchange.

Resource Persons: Matt Genasci and Matteo Pellegrini from Revenue Watch and Dr. Hatibu Haji Semboja from Economic Research Bureau, University of Dar-Es-Salaam

LEARN MORE

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• "Knowledge is Power": Empowering Civil Society to Make the Most of the EITI in Tanzania
• CSOs and Media Meet to Devise Ways of Promoting Transparency in the Extractive Industries (Policy Forum)
• TANZANIA: Government Plans to Begin EITI Process
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