Tanzania and Mining – Structural Change ………at last ???

Presentation to the British Tanzania Societyat SOAS London – March 15th 2012

Alan Roe

University of Warwick and

Oxford Policy Management

1964 – Five Year Plan July 1964 to June 1969

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Set out clear and ambitious plans for structural change in the economy, including:

•A new “transformational” approach to agricultural - high returns on a set of new managed village settlements (60 in five years each with 250 individual farms – financed using some public funds). A SIX-fold increase in cash incomes of settlement families was anticipated.

•Clear targets to greatly increase the contribution of industrial activities (including processing, mining and construction). 13% in early 1960 to target of 19% by 1970 and to 27% by 1980

•In mining: improved geological mapping entrusted to foreign specialists combined with a planned significant increase in diamond production and subsidies for gold mining “in the expectation of new discoveries

Clear recognition by Dr. Nyerere of a capital constraint - through 1965

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Feb 1965 – opening the £5 million ENI oil refinery in Dar, he said,

“none of this £5 million has to be found by the Government of Tanzania. This oil refinery is being financed, constructed, and will be run by a private Company: it is a private investment such as we have called for in the national Five Year Development Plan………On this basis of mutual benefit we in the United Republic of Tanzania welcome private investment in this, and in other fields.”

Also village settlement schemes based on the clear assumption that new settlements would be commercial enterprises – farmers beginning loan repayments in year 3 of each scheme – continuing for up to 25 years. In sisal technical support from established large farms

ODM and the December 1965 Ross Report

Mission fielded in response to Nyerere’s concerns that the new 5year plan was already experiencing major difficulties.

The general finding was that the manpower and organisational systems of the Tanzania government at that time simple could not cope with the huge management tasks and transformational ambitions that were implied by the programmes of the Plan.

It was discovered that the whole agricultural transformation planning had been based on a 20 day working visit of an Israeli expert in “physical layout” not agriculture in April 1963 !

Professors Len Joy and Peter Worsley above all noted …”the present Village Settlement programme has already run into very severe difficulties. These are largely the result of initiating too many projects too quickly with inadequate advance economic planning of their economic and agricultural implications. There is a real risk that the whole transformational approach will break down”

Ujaama: February 1967

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The Arusha Declaration, Ujaama and events that followed after February 1967 had many effects TWO to note in today’s context:

1.They reversed Nyerere’s previously benign recognition of the importance of private capital as a potential partner with government in addressing Tanzania’s chronic shortages of (i) capital and (ii) capacity. The contributions to development from this source were effectively lost for 30 years2.The ideological determination of policy drove ahead actions that were very highly unlikely to bear good results given the serious organisational limitations of the government system in the country in the 1960s and 1970s

Example 1: Bank nationalisation in April 1967 (Barclays, Grindlays, Bank of India, Bank of Baroda) folded into the new National Bank of Commerce. Result – stagnant financial system - gradual decline in effectiveness and capacity culminating in the effective bankruptcy of both the NBC and the Cooperative Bank in the early 1990s – now resurrected with significant private capital

Example 2: 800 or so Ujaama collective village settlements by end of the 1960s; by the end of the 70s (once compulsion was introduced) there were over 2,500 of these 'villages‘ versus the 60 planned for (but not very well) in the 1964 plan. Result: Agricultural Productivity halved !

Almost ZERO Structural change 1965 to end 1990s

Sector Shares since 20002000 2001 2002 2003 2004 2005 2006 2007

MINING 1.5 1.8 2.1 2.4 2.6 2.9 3.2 3.5

Total GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Monetary GDP 83.9 83.9 84.2 84.4 83.6 84.1 84.5 84.8

All Agriculture (Monetary) 18.2 17.7 17.5 17.4 17.2 16.2 15.3 15.1

Crop Husbandry 13.0 12.7 12.7 12.6 12.5 11.5 10.6 10.7

Other Agriculture 5.2 5.1 4.8 4.8 4.7 4.7 4.6 4.3

All Industry, Mining and Construction 16.9 17.0 18.7 20.1 19.9 19.7 19.6 19.9

Manufacturing 8.8 8.4 8.3 8.3 8.1 7.9 7.8 7.8

Other Industry and Construction 6.7 6.9 8.3 9.5 9.3 8.9 8.6 8.6

Services 41.6 41.7 40.5 39.3 38.8 39.1 40.0 40.2

Contributions little changed from the base level seen at the start of the 1964 Plan

Indicator 1997 2007 Number of operating large-scale mines

1 5

Annual mineral production US$16.1 m*

(diamonds only)

US$866.3 m (diamonds, gold and tanzanite)

Contribution to GDP 1.7% 2.7%Contribution to foreign exchange earnings

6.8% 42.1%B

Employment 1,781* 8,873Mining licenses held (number) 13 286Prospecting licenses held (number)

341 4,357

Rapid Transformation since the new Mining Act of 1998

Sources: Chamber of Minerals & Energy , Bank of Tanzania Economic Bulletin, March 08

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UNCTAD World Investment Report 2008 data tells us that:Tanzania is now the leading non-oil destination for FDI in Africa after South AfricaFDI flows of $10 million or less per annum in the 1990s have grown FIFTY-FOLD to over $500 million per annum now!In the 3 years to 2007 alone the total FDI was $1.7 billionMore than $2 billion of the $3 billion total FDI flows since 2000 are in the Mining Sector

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Foreign direct investment

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GDP – Mining is driving some structural change

Sector Shares since 20002000 2001 2002 2003 2004 2005 2006 2007

MINING 1.5 1.8 2.1 2.4 2.6 2.9 3.2 3.5

Total GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Monetary GDP 83.9 83.9 84.2 84.4 83.6 84.1 84.5 84.8

All Agriculture (Monetary) 18.2 17.7 17.5 17.4 17.2 16.2 15.3 15.1

Crop Husbandry 13.0 12.7 12.7 12.6 12.5 11.5 10.6 10.7

Other Agriculture 5.2 5.1 4.8 4.8 4.7 4.7 4.6 4.3

All Industry, Mining and Construction 16.9 17.0 18.7 20.1 19.9 19.7 19.6 19.9

Manufacturing 8.8 8.4 8.3 8.3 8.1 7.9 7.8 7.8

Other Industry and Construction 6.7 6.9 8.3 9.5 9.3 8.9 8.6 8.6

Services 41.6 41.7 40.5 39.3 38.8 39.1 40.0 40.2

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Exports: Gold has quickly overtaken Traditional Exports in relative importance ($ million)

0

100

200

300

400

500

600

700

800

900

1000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

GoldCoffeeCottonTeaTobaccoCashew

Note:

The radical differences between 1999 and 2008

Is this mining boom a Good Development?

Some Simple Answers and some more Complex Ones

Simple answer: The Tanzanian people have fared much better since the 1996 reforms (including of mining) than in most other periods of post-Independence history

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Tanzania Founded

New Mining Codes

Per capita income gains 1950 to 2007

Complex answer (1)

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Government has so far seen quite modest levels of tax and other revenues from the mining boom- a point stressed by advocacy NGOs (e.g. Golden Opportunity Report 2008 refers to only $28 million of taxes and royalties per annum)

Annual Revenue totals by 2007 = $85 million versus Production value of $860 million (<10%)

But move on a few more years (Source: OPM study-2008)

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0

50,000

100,000

150,000

200,000

250,000

300,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

0%

10%

20%

30%

40%

50%

60%

70%

80%

Total Government Revenuesfrom MinesCorporation Tax from Mines

Corpoation Tax - Share of TotalRevenues from Mines - RH Axis

Total revenues rise from $85 million in 2007 to a peak of $284 million by 2017 (7% or more of total government tax revenues) . By about 2015 the Corporation tax becomes the most important source of mineral tax

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Is that Fair?

Gov

ernm

ent T

axes

and

R

oyal

ties

Loan

s an

d In

tere

sts

Production Costs

Shar

e H

olde

rs

15% 10% 57% 11%

Cap

ital R

einv

estm

ent

7%

Tanzania is a high cost environment

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Poor infrastructure linkage to ports

• Cost of $4,000 to bring cargo from the Dar port to Kahama, to move the same volume by rail used to cost $2,500

Inconsistent energy supply

• Companies need to generate much of their won electricity

So the 57% production cost share underestimates the true cost in Tanzania

AND

The 7% share of “sustaining investment is critical to continuing the positive trends seen to date – without this production and export levels would fall quickly

Complex answer (2) – why judge “fairness” narrowly in terms of Government Revenue? Source : Chamber of Mines

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Cumulative Totals through 2007

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Social Investment Projects include:

Water projects

Hospitals

Schools and teachers houses

Teacher training

Scholarships - (>3800)

Business development

Agriculture projects

Leadership capacity building

Women income generation

Child care

What happens without further NEW investment?

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Production/Sales - Selected Mines only (oz) Historical Gold Production (oz)

The gap with 2007 - equivalent to 2 Geita Mines

African Mining Initiative

The Way Forward – recent African ideas…

• Integrate the mining sector with the national economy and society - away from mining enclaves

• Harness extractive resources for growth, poverty reduction and social development

• Take advantage of the policy space created by high commodity prices

• Adopt a developmental approach to mineral sector development

• African policymakers in charge of transforming mineral resource management

• Good governance is critical - build on improvements in governance already made (e.g. APRM)

• Create linkages along the value chain

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In Tanzania – The Bomani Report (2008/9) 1. A More Integrated Approach – involving the other main agencies of

Government

See for example, Bomani - recommendations 2.1;2.3; 2.16; 2.17.

This broad direction of reform is vital if the FULL benefits of the mining sector are to be realised. It relates above all to local procurement, to regional economic development planning, and to revenue management (especially at local level)

Efforts

• to provide improved infrastructure support to mining (2.1)

• to establish more systematic monitoring of the sector via a new Minerals Authority (2.3.10)

• to achieve broader strategies for encouraging local procurement (2.16)

• to develop lower cost energy supplies (2.17) and

• To decentralise some revenues to local levels

will ALL help to incentivise the new mining investments that are needed in the next few years.

2. Improved Fiscal Arrangements

Detailed recommendations on all the main mining taxes are in the Bomani recommendations of section 2.5. On-going discussions through 2010 on the details with the companies especially re the removal of special Capital Allowances; royalties on a net basis; reduction of fuel duty exemptions etc. Some are now actioned.

TWO higher level points

• TRANSPARENCY. Tanzanian participation in the EITI will address many of the complaints about lack of transparency, incomplete adherence to tax rules etc. The initial 2011 Tanzanian EITI Report found a 30% discrepancy between what the companies report paying and what the government reports receiving. Extend this to transparent reporting of the USES of the funds and the publication of the Mining Agreements (MDAs)

• EFFICIENT TAXATION. The “royalty” is a poor tax that can have large disincentive effects. Rather than increase the rate of royalty as proposed, eliminate the net basis but after that the authorities may be better advised to tighten the Corporation Tax rules. As we have seen very large tax revenues will in any case accrue from this source in a few years time

3. More Help to Local Communities

• Recommendations contained in Bomani - 2.1, 2.5.10,2.6, 2.8. 2.9,2.11, 2.12, 2.16 can all help in different ways to achieve this objective

• Above all it is critical to help build complementary activities (mining clusters) that can add to the relatively limited direct employment from the mines themselves

• But a very considerable effort to build new partnerships around these ideas will be called for.

• It is hoped that a further stage of the Resource Endowment Initiative that has so far supported our own work on Tanzania can probe these issues more carefully

Tanzania – limited collective action so far – but huge potential

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Thank you

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Please address any questions and comments to:

alan.roe@opml.co.uk