His Excellency President John Pombe Magufuli of the United Republic of Tanzania took a gamble and dared what few sovereign nations in Africa dared to do. A little over a year ago, the government of Tanzania boldly took legislative and policy measures that are supposed to put Tanzanians at the heart of ownership of its natural resources, but also to allow the government as representatives of the Tanzanian people to benefit more from revenues generated from natural resources and just get a more equitable deal.
The debate on the sovereignty of a state over its natural resources along with the subtleties of tax evasion and avoidance was opened in the country through the creation of "special commissions". These were tasked initially with investigating best practices of beneficiaries of Special Mining Licenses such as "Acacia Mining" and "Tanzanite One" and subsequently, many other beneficiaries of mining licenses and even artisanal miners with primary mining licenses were also investigated.
As we know, Tanzania is rich in a diverse array of minerals, gemstones, gold, uranium, copper, gas, to mention a few. The reality is that these natural resources have not been the catalyst for positive change of the economy. It would be easy to blame operators and government officials from the standpoint of supposed endemic corruption.
So, with the current government's "zero tolerance on corruption" policy, do the mining laws that exist since July 1, 2017 and the ensuing regulations that were released in 2018, guarantee a conducive mining environment that can foster development and real benefits for Tanzania as a whole or have these laws made the Tanzania market for mining uncompetitive (compared to say Cote d'Ivoire, Zambia, Kenya, Ghana, South Africa, etc.)?
From a global point of view, the mining industry has been riding the wave of an uncharacteristically long down cycle. For example, the global market price for uranium is still at its historical low, to a point that most companies exploring and developing uranium have slowed down their operations dramatically or just stalled to venture and take off. In July of 2017, ROSATOM, which was due to start mining uranium in 2018 in southern Tanzania, postponed the Mkuju River uranium mine Project due to a depressed uranium market and prices being very low. It decided to postpone the development of the Project until the demand for uranium is restored, if it is ever restored.
The result of the slowdown is twofold: mining projects are being carried on, but the reserves are being depleted. The topical themes in mining are Financing and Operational Efficiency on the one hand and global reduction of supply on the other. Operational budgets have become reduced and more money is invested in research and development / technologies. Current global markets dictate that survival of the fittest and the one to win is the one who can produce with lowest costs.
Erik Richer La Flèche, Editor of "The Mining Law Review",(The Mining Law Review, Edition 5, Published on December 2016) explains that from an international stand point, the mining industry generally is adopting concepts such as good governance, transparency, social license, 'know your client', and even more recently 'tell what you pay '.
These concepts are now commonly accepted and applied in the world's major mining financial centres such as Geneva, New York, London. This means greater disclosure of the business affairs of mining companies. There is greater scrutiny over directors' reports, financial audited accounts, operational accounts, etc. Stakeholders have the information necessary to challenge governments and mining companies, question the social acceptability of projects and demand greater revenue sharing at the local level.
Hence, the adoption of Tanzania's legislations and the spirit of these legislations aligns with international law and global policy and trends, although some provisions specifically are problematic in light with existing national legislations as well as bilateral investment treaties. The laws that were adopted are:
- The Natural Wealth and Contracts (Review and Re-negotiation of Unconscionable Terms) Act of 2017 (the "Natural Wealth Act");
- The Natural Wealth and Resources (Permanent Sovereignty) Act 2017 (the "Natural Resources Act");
- The Tanzania Extractive Industries (Transparency and Accountability) Act of 2015.
The global discourse alongside dialogues around competitiveness of mining is the question of sustainability and equity. These legislations in Tanzania basically put at the center of mineral policies the principle of sovereignty of a nation over its natural resources and the principle of equality which ultimately leads to a better distribution of benefits of natural resources particularly in the local context. But at what cost? This question can be answered from so many angles however, I will look at the financing of the mining projects in Tanzania and the general competitiveness of the market.
At Shikana Law Group, we have been caught up in the last year advising and counselling foreign investors from Australia, Kenya, Uganda, United Kingdom, Hong Kong, USA, etc on legitimate commercial and tax structures that meet the conditions of international financiers. This has proven challenging due to a number of legislative prerogatives in Tanzania. Many prospective and actual foreign investors have been curious and asked us about the following provisions:
- Section 10 of the Mining Act, which proposes government free – carried interest of 16 percent non – diluted shares. To be clear, free carried interest is essentially the government of Tanzania getting a share in the profits of the mining company irrespective of any capital contribution. On the one hand, the thing about this provision is that if the government is a shareholder and expects a cash out, you can bet that the government will make the mining environment conducive since it has an interest in the company doing well. The bad thing is that the carried interest is not guaranteed outright since mining companies are capital intensive and profits can be paid sometimes even 10 years later. However, since the government will be getting 16 percent carried interest on all mining and special mining licenses, similar to private equity, the government will have a portfolio of good, neutral and bad investments so it will spread its risks and make its money eventually.
- Section 10 of the Mining Act further
gives the government an option of acquiring up to 50 percent shares
equivalent to the total tax expenditure. Tax expenditures is
defined in the Mining Act to be the tax incentives offered to the
mining company. There has been a considerable reduction in tax
incentives over the years for the mining sector. To date, the tax
incentives that exist are expenditures, both capital and revenue
based, are wholly deducted when calculating the taxable income.
More significant tax incentives could be given if a mining company
benefits from the Export Processing Zone Authority incentives.
However, this supposes that the mining company is processing and
adding value in the form of industry.
One can wonder whether these tax incentives can really amount to 50 percent of a companies' shares assuming that the company has a high valuation. It is also a difficult sell to mining companies that these tax incentives are actually paid for by giving up more shares to the government. It is unrealistic for the government at this current juncture to operationalize this law.
- Regulation which was published as GN
286 of 7 October 2016 requires that an investor with a special
mining license ("SML") must enlist 30 percent of their
shares on the Dar es Salaam Stock Exchange. Therefore, for
strategic investors holding an SML this means 46 percent of their
shares is owned mandatorily by either the government or a
local/foreign buyer on the DSE.
This is on top of the option that the government has of acquiring a further 50 percent in the Company. There seems to be a very poor value proposition here for the investor. Furthermore, companies that are publicly listed might not even have those shares "to give" to the government. They will have to issue new shares however is that realistic to issue new shares just to comply with legislative requirements of one jurisdiction?
- The Mining Act provides that the companies still continue to pay royalty on the gold produced as well as other metals which has increased from 4 percent to 6 percent and on Gemstones and Diamonds from 5 percent to 6 percent. The law also introduces a 1 percent fee labelled as an inspection fee on the gross value of all mineral exports.
- Section 5 (2) of the Mining Act provides that the government will have lien over all minerals extracted from the mining operations or mining processes. In global markets today, investment bankers and financiers who provide financing to mining companies would need a guarantee of securely and rapidly recovering their investment in the event of default from the mining company. It is unclear whether or not the government can somehow cede, transfer or rent out the lien to third parties who have vested interests in the mining companies.
All in all, dividend cash out is not going to be as big as it was before the enactment of these laws and these laws do affect the competitiveness of the market in Tanzania. That being said, since the new regulations in Tanzania, the government has also made a point to approve 7,000 licenses that were comprising of priming mining licenses, prospecting licenses, special mining and dealer license. The government has encouraged the mining companies and entrepreneurs as well as signaled to the mining industry at large that it is more relaxed. Perhaps the next step will be to amend some of the provisions in the legislation so as to create a better investment climate for mining companies.
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