Just how much do the East African Community governments stand to gain from oil and gas exploration and extraction deals with foreign oil majors?

Will the governments use the revenue to lift millions of people out of poverty? Will the return on investment on the countries’ natural resources and the huge government spending on infrastructure ease exploration and extraction?

These are the questions in the minds of many but a new survey by the African Union-backed African Progress Panel paints a worrying scenario: International mineral extraction companies, mainly from Australia, Canada and China, are using complex ownership models to avoid tax in East African countries.

“Although much has been achieved, a decade of highly impressive growth has not brought comparable improvements in health, education and nutrition,” said APP’s head Kofi Annan, the former United Nations secretary general.

“International tax avoidance and evasion, corruption, and weak governance represent major challenges. Tax avoidance and evasion are global issues that affect us all. But in Africa, it has direct impact on the lives of mothers and children,” said Mr Annan.

“Africa loses twice as much in illicit financial outflows as it receives in international aid. It is unconscionable that some companies, often supported by dishonest officials, are using unethical tax avoidance, transfer pricing and anonymous company ownership to maximise their profits, while millions of Africans go without adequate nutrition, health and education,” said Mr Annan.

READ: $1.33bn siphoned out of EA in 10 years

For the Democratic Republic of Congo, for example, the APP report details five deals between 2010 and 2012 that cost the DRC over $1.3 billion in revenue through the undervaluation of assets and sale to foreign investors.

This sum represents twice the annual health and education budgets of a country with one of the worst child mortality rates in the world — and seven million pupils out of school.

But Botswana has a different story to tell.

“Botswana’s key lesson has been that Africa’s natural resources belong to the people. In this way, diamonds became the country’s relative economic success,” said Linah Mohohlo, the governor of Botswana’s Central Bank and a member of the APP.

The APP said that while global mining firms listed on stock exchanges are more transparent, their unlisted counterparts bear the biggest blame in tax avoidance.

Commentators also blame African governments for failure to make proper scrutiny of the companies to which they award exploration contracts and absence of national policies on oil and gas.

“We should blame ourselves because before these companies are invited here, we should already have the right policies, the way the Gulf countries did. In the absence of policies on oil and gas, these issues will continue to arise and the continent will continue losing money,” said Israel Kamuzora, chairman of Africa Trade Insurance, a firm working with regional insurers to improve their capacity to underwrite oil and gas risks.

APP also faulted listed oil and gas firms for opting to raise funds from international markets even when some of the funds can be sourced from African capital markets.

British explorer Ophir Energy is seeking over $830 million from shareholders to fund its oil and gas drilling projects in East Africa. US firm ERHC Energy and British Ophir Energy, both with operations in the region, are eyeing rights issues to fund exploration activities in northwestern Kenya and Tanzania respectively.

READ: Ophir, ERHC energy seek cash for oil exploration projects

African governments also stand accused of colluding with the international mineral extraction companies.

“The challenge is that the money to spend in oil exploration is not available in Africa and, therefore, we need to ensure that foreign companies invited to undertake exploration are properly audited. It is also possible for governments to facilitate local fundraising for oil activities by having models that enable even low income people to invest in the oil business through the stock market,” said Eric Kimani, a Kenyan entrepreneur and district governor of Rotary International in Kenya, Tanzania, Uganda, Ethiopia and Eritrea.

APP, in the Africa Progress Report 2013, said that lack of transparency in ownership makes it difficult for revenue from minerals and oil to trickle down to citizens, many of whom live on an income of below $1 a day.

Since 2011, Tullow Oil has an unresolved tax dispute with Uganda after the British oil company sold its stake to France’s Total and the China National Offshore Oil Corporation for $2.9 billion. The government hoped to receive a total of $472 million in taxes from the deal.

Tullow, however, said this figure was calculated incorrectly and that it believes the total liability to be “significantly less” than the $141 million it has agreed to deposit with the government pending discussions on the matter.

Uganda pursued Heritage Oil, Tullow’s former partner in the fields, for $404 million in taxes the government says are due on the sale of its interests to Tullow.

Recently, Patrick Bitature, a prominent Ugandan businessman, is alleged to been appointed by President Yoweri Museveni as a key broker to exert pressure on Tullow Oil to pay over $404 million in capital gains tax that to government over the acquisition of an oil block from Heritage.

READ: Uganda happy with outcome of tax case against oil company

Across the region, citizens have gone to court to block extraction of mineral resources, where benefits to the local community are not clearly spelt out.

In Kenya, for example, residents of the coal-rich Mui Basin in Kitui county sought to block Fenxi Mining, a Chinese company, from mining in the area, claiming that the deal was an infringement of their constitutional rights. The court issued an order to stop the extraction of Ksh3.4 trillion ($40 billion) worth of coal deposits.

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The findings by APP back the Global Financial Integrity report released in December last year that showed that $1.33 billion was moved out of the East African Community through illicit financial transactions over the past decade. Uganda led, having lost at least $680 million over the 10-year period, followed by Tanzania, which lost $333 million. Rwanda lost $158 million, Kenya $112 million while Burundi lost $49 million.

APP said that many resource-rich countries have been moving up the international wealth rankings as a result of their vast mineral wealth but citizens of countries such as those in East Africa, which are just starting to extract natural resources, run the risk of missing out on the mineral, oil and gas revenues if extracting companies and governments do not become transparent on ownership and contracts.

The Tanzania government is in court seeking $196 million in capital gains tax following Moscow-based ARMZ Uranium Holding Company’s acquisition last year of Perth, Australia-based Mantra Resources Ltd, whose Tanzanian unit owns the Mkuju River uranium project.

The Tanzania Revenue Authority had said it would require Barrick Gold, the largest gold miner in the country, to pay a 20 per cent tax on any capital gains resulting from its proposed sale of African Barrick Gold Plc to China National Gold Group Corp. The proposed sale of its 73.9 per cent stake fell through after talks with the state-owned Chinese company failed.

READ: Africa Barrick sale talks collapse

“At an appropriate time, we shall require African Barrick to submit all the details of the transaction to determine the amount of capital gains to be paid,” said Harry Kitilya, Commissioner General of the Tanzania Revenue Authority during the negotiations last year.

Governments are often left out at the beginning of such deals, implying they rely on companies involved for information, raising speculation on how much the governments lose in the form of tax.

The report comes at a time the region has attracted new investments in the gas and oil industry. Pan Continental Oil and Gas from Australia, American firm Marathon Oil, Canadian oil and gas company Africa Oil, China National Offshore Oil Corporation and France-based Total are among firms seeking oil and gas in Kenya and Uganda.

Listed firms such as African Barrick Gold, Pacific Wildcat Resources Corporation, Base Titanium Ltd and Goldplat are prospecting for lucrative minerals such as gold, niobium and titanium across the region.

“The involvement of subsidiaries and affiliates as conduits for intra-company trade creates extensive opportunities for trade mispricing, aggressive tax planning and tax evasion, enabling companies to maximise the profit reported in low-tax jurisdictions,” notes the APP report.

“Some major companies show a disregard for ethics and human lives. By cheating the system, they make work harder for honest business,” Strive Masiyiwa, chairman and founder of Econet Wireless and a member of the APP, said.

In Kenya, public competitive bidding for prospecting rights has been introduced. A one-off fee of $1 million per prospecting area is charged but the firms must spend $108.2 million on onshore blocks within the first six years of acquiring the licences and Ksh14.6 billion ($173 million) in the case of off shore or deep-water blocks.

However, though Kenya has made strides in getting more revenues from oil and mineral prospecting companies, it is yet to win the battle of getting the most in taxes from extracted minerals.

Last year, the government allowed Base Titanium to pay a 15 per cent corporate tax for 10 years and royalties at 2.5 per cent, lower than the usual 3 per cent for its titanium operations in Kwale. 

Additional reporting by Steve Mbogo