Why Tanzania Needs to Be Careful about Gas Revenues
By Michele Fletcher, July 18, 2014
More Transparency and Accountability Are Needed, if Tanzania Is to Truly Benefit from its New-Found Gas Reserves
Tanzania’s new-found gas reserves are valued at an estimated $20 billion. Many look at these prospects with optimism, as this revenue may help Tanzania achieve its goal of becoming a middle-income country by 2025. But for others, the situation is more precarious.
Tanzania has been in the same situation when it became a major source of gold not even two decades ago. Today, though Tanzania is still the third largest exporter of gold, there is widespread agreement that the mining sector did not produce the revenue it should have, nor was the effect of the growing industry felt in the population. Tanzania still stands 152nd out of the 182 countries on the Human Development Index, despite having exported billions of dollars worth of gold throughout the past two decades. The value of Tanzania’s mining exports grew to $1.5 billion in 2010, but annual government revenue from its sale was only about $100 million, or about 7%.
Like gold, oil and gas are tangible, valuable commodities that carry the risk of being seen as “easy” money: easy to talk about in terms of profit and easy to stake a claim in. However, this can often hinder politicians from accurately assessing what the country should be earning from these resources. In the mining industry, this political oversight led to bad practices concerning mining contracts, rampant trade misinvoicing, and a misaligned focus on the country’s long-term goals.
With the gas industry expected to be the largest player in Tanzania’s economy, the Tanzanian government could face substantial losses if they do not act to curb bad policies and practices. Here are three major issues Tanzania needs to tackle in order to ensure they capitalize on upcoming gas revenues:
Crack Down on Misinvoicing and Abusive Transfer Pricing
Our research has shown that Tanzania suffers from a growing problem with trade misinvoicing, siphoning US$8.28 billion illicitly out of the country between 2002 and 2011. The majority of export over-invoicing cases arise from the oil and energy sector, suggesting that the big players in the gas industry know the system well. Since gas companies will likely be shipping in expensive extractive machinery to Tanzania that would then be registered as imports, there will be opportunities for these products to be misinvoiced.
The government must also be on watch for abusive transfer pricing as multinational corporations transport materials across the border. Throughout the first half of this year, Tanzania developed a set of transfer pricing regulations that will have to be effectively implemented: a tall task for understaffed customs offices. The severity of these regulations, which include criminal sanctions, imprisonment, and heavy penalties for noncompliance, must be followed rigorously in order to deter illicit financial flows.
Tanzania should also seriously review its customs policies and make sure the system is designed to attract foreign direct investment without sacrificing its long-term goals. So far, policies to capitalize on MNC activity in Tanzania and incentive FDI–while still combating misinvoicing and abusive transfer pricing–are limited. A prominent example are the Export Processing Zones (EPZs), in which companies paid no import tax on raw materials and enjoyed a 10-year tax holiday, leading to major losses through customs and tax breaks for MNCs.
Make Sure Agreements with MNCs Are Fair
How much money Tanzania will actually earn from its gas deposits has received surprisingly little media attention despite numerous troubling signs. In a deal with Statoil, a Norwegian gas company active in Tanzania since 2007, leaked documents revealed that the Tanzanian government would receive far less revenue than the contractors. In fact, the model Production Sharing Agreement (PSA) proposed by the government and the Statoil agreement hardly overlapped.
In the model PSA, the Tanzanian Government was slated to earn at least 50% of gas revenues and at most 80%. The exact percentage would be determined on a six-tiered scale by the amount of gas extracted per day. Compare that to the leaked Statoil deal, which revealed that Tanzania would only gain at least 30% of all profits, and at most would receive 50% depending on a five-tiered scale.
Needless to say, this is very worrying. Furthermore considering Statoil has full license to take those massive profits outside of Tanzania and invest it offshore, the country could lose out on considerable profits.
Ensuring Tanzania profits appropriately from MNC involvement in the extractive sector extends beyond commercial agreements. Tanzania is yet to sign the Convention on Mutual Administrative Assistance in Tax Matters, and therefore cannot receive critical tax information from other countries. This puts the government at a considerable disadvantage in assessing the revenue the government should be collecting.
Manage Gas Profits Well
Tanzania plans to invest its earning from the extractive sector in the Natural Gas Revenue Fund, a Sovereign Wealth Fund (SWF.) An SWF is essentially a wealth management fund held by the state in another country’s currency. In theory, SWFs help avoid Dutch disease from increased extractive sector activity and, if managed well, curb local currency inflation. SWFs have been successful in Trinidad and Tobago for managing gas and gas revenues, as well as Angola, whose $5B starting fund has helped them climb investor confidence ratings. However, academics and economists warn that the Natural Gas Revenue Fund must proceed with caution.
In order for a SWF to be successful, the government must agree on the size and nature of investments and be transparent about its decisions. It must also establish accountability for management of the fund as well as maintain a strong independent judiciary to assess the lawfulness of the transactions and allocation of revenues.
This is a tall task for Tanzania’s government given past problems of fiscal opacity. On the mining industry’s profits, Revenue Watch Institue’s Silas Olang said:
It is very problematic to track the revenues from mining in Tanzania. But then it is also very difficult to find out what the money from mining is spent on. We don’t know anything about the relationship between the government and the companies.
For a government like Tanzania’s, which lacks effective government transparency and accountability, a SWF is risky. That being said, if properly managed, the government of Tanzania will profit immensely. These benefits may even be self-perpetuating: for example, increased investment into the extractive sector may increase the productive capacity of local mining companies, thus increasing cooperation with multinational corporations. This would lead to more profits remaining domestic and improve the quality of life of thousands of Tanzanians by improving the employment rate.
These three challenges suggest tangible policy initiatives that the government of Tanzania can undertake to maximize the success of FDI for the purposes of gas extraction. The government has suffered from public distrust and disillusionment with the covert trade deals and subsequently sub-par results. Thorough, well-enforced customs policies, better oversight of mining deals, and responsible wealth management are all necessary to improve these results, and increasing transparency and accountability is a good place to start.
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