Reforms will cut the ground from under mining sector

Monday August 10 2009

By RACHEL KEELER

The experts all agree: Tanzania’s young mining industry is at a watershed moment.

The sector has grown at an astounding rate since liberal mining legislation was introduced in the late 1990s to attract investment.

However, 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.

Tanzania has roughly 45 million ounces of gold scattered beneath its surface, making it the third largest gold producer in Africa, after South Africa and Ghana, and the second largest non-oil recipient of foreign direct investment ($2.5 billion from mining over the last decade) on the continent.

Six large gold mines are responsible for much of the country’s production.

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 per cent of government tax revenue (around $100m a year), and production accounts for 3.5 per cent of GDP.

Analysts Oxford Policy Management (OPM) collected data from AGA and Barrick on five of their gold mines, plus a new mine under exploration by IAMGold, and concluded:

• The six mines plan to increase gold production and exports by around 50 per cent to 60 per cent in the next six to 10 years, increased profit from which will hike total mining tax payments to the government by almost 300 per cent to about $280 million per annum, under the current taxation scheme.

• This level of production, if continued long-term, will require these companies to invest an additional $2.3 billion 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.

The mining companies complain that the cost of doing business in Tanzania is appallingly high and getting worse.

A representative from a mining company comments: “There is little you can get done speedily. On the mining side it’s presently taking over two years to get a prospecting license granted… 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.”

High costs of doing business are underpinned by a xenophobia that Tanzania cannot seem to shake, no matter how much the country stands to profit from foreign investment.

And 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.

According to the case study published by the International Council on Mining and Metals (ICMM) in 2007, “Corruption continues to be a prominent feature of the Tanzanian public sector.”

However, Tanzanian corruption no longer comes in huge doses, or in the Democratic Republic of Congo 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 $100 million a year in mining revenue has gone, as social services have not been improved nor infrastructure developed.

President Jakaya Kikwete set up the Presidential Mining Review Committee chaired by Justice Mark Bomani in 2007, which produced a several hundred page report last year.

Under revisions made in 2007, Barrick, AGA and Resolute agreed to pay annual levies of $200,000 to local authorities.

The companies also gave up their 15 per cent tax allowance on unredeemed capital, which means they will start paying income tax sooner, probably within the next few years.

The Ministry of Energy and Minerals is expected to present a fully revised Mining Act by the end of the year.

Bomani also recommended raising the metals royalty rate from 3 per cent to 5 per cent, and that the government should take a 10 per cent stake in all mining operations in the country.

These government shares would be managed by the State Mining Corporation, 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 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.”

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, given diametrically opposed pressures: Tanzania’s socialist roots are still strong, and 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 exhibit a massive will to hold things up.

At the same time, the government is aware that the industry needs new investment and that any punitive measures will drive mining companies away.

Because of government’s mismanagement of revenues, simply raising taxes on mining companies will do little to improve the situation in Tanzania.

There is no question that Tanzania’s mining sector needs some kind of reform.

Bomani’s long list of proposals contains 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, more so in the context of the global financial crisis.

If anything, it might be a good idea to lower taxes, at least for exploration and prospecting, which Bomani does support.

Granting generous allowances upfront 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 “upfront” period is not over yet.

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: The government has already attempted and failed to manage several mines in the past, and lacks the capacity to do so now.

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.

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.

The full version of this article can be found on www.ratio-magazine.com.