Tanzania | Legislative changes increase political risks

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Tanzania | Legislative changes increase political risks

The Tanzanian government appears to be taking an increasingly interventionist and hostile stance towards foreign businesses in the natural resources sector.

So far changes to legislation have primarily affected mining rather than oil and gas, with several export bans affecting firms since the start of the year, and a Canadian-owned mining firm pressed into renegotiating the contract. While the government denied last month that it intends to nationalise mines, its actions this year have led to regulatory uncertainty for businesses, even beyond the resource sector.

The most significant move in terms of risk this year is that the government overhauled the legal frameworks governing contracts and operations in the extractives industries in July 2017. It can now declare existing contracts with mining or energy firms void if it deems them ‘unconscionable’ – a term that captures everything that is not in the interest of the country as defined by parliament. The new legislation also restricts the use of international arbitration to resolve any disputes ‘arising from extraction, exploitation or acquisition and use of natural wealth and resources’, and increases royalties on several products, including for gemstones and diamonds, and for metallic as well as platinum group minerals.

The changes also mean that the government is entitled to claim a minimum 16% non-dilutable stake in mining projects at no cost and without further justification. It can also acquire up to 50%, in exchange for an amount ‘commensurate with the total tax expenditures incurred by the government in favour of the mining company’. It also requires companies to process all ‘natural wealth and resources’ locally despite a lack of existing infrastructure to do so.

Deteriorating investment climate

In addition to the July 2017 reforms, the government has implemented a number of export bans affecting the mining sector this year. In March, the government imposed a ban on unprocessed gold and copper concentrates. And in September, airport officials confiscated diamonds worth $29.5m at Dar es Salaam airport, claiming that London-based Petra Diamonds had significantly undervalued the export. The government then imposed a temporary ban on exports by the firm.

The government has also proven that it is willing to enforce its changes to legislation. It has forced the Canadian firm Barrick Gold, which operates three mines in Tanzania through its London-listed subsidiary Acacia, to renegotiate a royalty contract this year. This came after the government accused Acacia of evading taxes and under-declaring the volume of its exports. In the renegotiation, finalised last month, the government obtained a 16% stake in all three mines that Acacia operates in the country – apparently at no cost – as well as a one-off payment of $300m and 50% of ‘economic benefits’ going forward.

The new legislation restricts the ability of firms to use arbitration as a mechanism to resolve disputes, as it states that only Tanzanian courts can rule on cases involving Tanzanian natural resources. This move conflicts with existing contracts, thereby watering down previous investment protections. But since the country is party to 11 bilateral investment treaties, arbitration will probably remain an option for a limited number of firms. At least two mining firms have already filed for arbitration, but it is as yet unclear how the Tanzanian government will respond to these cases. The way in which the government responds to them in the coming months is likely to provide a guideline for future cases and will be indicative of future legal and contract risk.

Rhetoric from the president suggests that the government is ready to take a confrontational approach to the private sector: in a televised address in September, President Magufuli said mining firms should not threaten the government, and should instead ‘be scared’. And despite a government spokesperson insisting that the government had no plans to nationalise the country’s mines in October, when commenting on the confiscation of diamonds from Petra Diamonds in September, the finance minister said the gemstones had been ‘nationalised’. And Magufuli also threatened to ‘close all mines’ if firms delayed talks with the government.

Political risks likely to increase for other sectors

The focus of the government currently appears to be on the extractives industry. But the success the government had in renegotiating a contract with Barrick Gold is a potential incentive for it to seek to redraft contracts with other firms in the sector, and potentially also other industries. We have already seen some evidence of the government targeting the private sector more widely in recent months, particularly by threatening to expropriate some local firms.

It appears that the government predominantly targets previously state-owned firms that were privatised under specific contracts, rather than specific sectors. Since August, the government has repossessed at least eight factories from a wide variety of firms and instructed the repossession of at least ten hotels, all of which appear to have been in local ownership. In all instances, it claimed that the owners did not honour terms of the contracts under which they had been privatised, as they had failed to invest and develop these businesses accordingly.

There is also evidence to suggest that the government is looking to boost tax revenues by going after a variety of firms, regardless of whether they had previously been state-owned. The president issued a two-week ultimatum to operators of fuel stations to install electronic fiscal devices in July, saying that it was ‘better to lack fuel than to have traders that evade taxes’. Upon expiry of the ultimatum in August, the tax authority reportedly shut down 241 petrol stations that had failed to comply.

Similarly, the president threatened to expropriate dormant pharmaceutical companies earlier this week, and hand ownership to local investors if they failed to start production. He gave them a two week ultimatum, demanding that they ‘don’t hike prices and hurt Tanzanians who vote for him’. This – as well as the language used in the recent legislation, which asserts the permanent sovereignty of ‘the people’ over natural wealth and resources – suggests that there is a populist element to the government’s approach as well.

While resource nationalism appears to at least partly underlie the government’s stance towards business, the overall approach appears to be largely pragmatic. This is because the government seems to be trying to maximise revenues by going – first and foremost – after foreign-owned businesses in lucrative sectors, where the potential for substantial increases to state revenues is greatest, as well as after local businesses that have so far failed to pay taxes altogether.

Anecdotal evidence suggests that these policies targeting the private sector have been particularly popular, as they have not yet led to any significant negative effects to the population. But it seems likely that Magufuli will lose popular support should his policies prompt declining foreign investment, leading to a fall in tax revenue and ultimately the government’s ability to deliver basic services. Possible indicators of a general decline in the investment environment include higher local content requirements, as well as more stringent investment controls and another increase in extractive royalty rates.

Author: Risk Advisory's Security Intelligence & Analysis Service
Published: 3rd November 2017