The article was first published in African Mining copyright Interact Media Defined.
Bad publicity, deservedly or not, has hurt the image of Tanzania and its firebrand president John Magufuli. Most of it is centred around the president’s tax dispute with Acacia Mining, which dragged on for more than two years.
As a result of the spat, Magufuli became unpopular amongst most foreign nationals, although local Tanzanians are full of praise for their leader. His no nonsense attitude in dealing with corruption, unethical behaviour and a disregard for Tanzanian interest, has hit a chord with voters, and his popularity inside the country (despite claims to the contrary from outside its borders), seems to be at an all-time high (based on my own interactions and interviews).
Nevertheless, nothing in Tanzania should be taken for granted. Magufuli is an enigma and he has prevented surveys about his (and the opposition’s) popularity being made public. Nobody really knows or understands his real power and support. In 2018, regional think-tank Twaweza reported survey results showing a substantial reduction in his popularity. Soon enough, Twaweza and its executive director Aidan Eyakuze became the subjects of state harassment. Since then, no new survey reports have been published, but the president’s ruling party, Chama Cha Mapinduzi (CCM), scored a landslide victory in the local elections in November, which is a clear indication of what is likely to happen in the presidential election in 2020. The CCM won almost all of the more than 330 000 local leadership positions up for grabs during the vote, despite claims of manipulation by opposition parties. The ballot decided who would take office at the grassroots of government in villages, cities and towns across Tanzania.
Magufuli’s reign has become synonymous with uncertainty and ambivalence, which hampers growth, and that is Tanzania’s conundrum. Often, it seems that the Magufuli administration is suspicious, and even hostile to international capitalism. However, on the rare occasion, they are amiable, understanding, and keen to lure investors and open up the market.
The Magufuli purge
Not long after his election in November 2015, Magufuli (nicknamed the Bulldozer) had foreign investors eating out of his hand. But the love affair between the private sector and Magufuli didn’t last long. The president delivered on his promises and really started clamping down on corruption, which caught most by surprise. It wasn’t just the usual populist rhetoric by a desperate politician like so many companies doing business in Africa have become accustomed to. Magufuli meant business. His purge not only included crooked government officials, but he took straight aim at those that sung his praises so loudly at the beginning of his tenure, yet kept previous corrupt regimes in power for so long. Doing business in Tanzania was never going to be the same, and it hurt those that had become part of the patrimonial system (including business). Suddenly, Magufuli was enemy number one and analysts warned about investing in Tanzania. Those negative perceptions have persisted, and foreign investors remain cautious, despite the obvious opportunities.
According to Vincent Phiri, economist at NKC African Economics, Magufuli’s administration has sent mixed messages regarding the state’s relationship with the private sector, particularly the mining sector. “This has resulted in an element of unpredictability, which makes planning in the long term extremely difficult,” says Phiri. Lara Smith, managing director at Core Consultants, says that a lot of money is being invested in infrastructure development, which helps with job creation, and will bode well for Magufuli in the 2020 election. “The issue is, however, that economic growth is regarded as something that the state itself needs to deliver on. There is a lot of money being spent, though, on vanity projects like the national airline (Air Tanzania), or building new sport stadiums. The fact that the government is investing in infrastructure-related projects is fantastic, but they seem to be ill-conceived, badly implemented and don’t make financial sense – and definitely won’t benefit the citizens beyond the construction (job-creation) phase,” Smith says.
Tanzania’s regulatory risk, expounded so well in the Acacia case, might just scare future mining investors and exploration companies. A little more than two years ago, Acacia was heavily fined with a tax bill of USD190-billion, several executives were arrested and some of the company’s operations came to a standstill. The matter was resolved soon after global mining giant Barrick Gold took full control of Acacia’s operations in September 2019 when Barrick and the Government of Tanzania signed an agreement according to which Barrick would settle an outstanding tax bill of USD300-million. Other terms of the agreement included the lifting of government’s ban on export concentrate; the sharing of future economic benefits from the mines on a 50/50 basis; and the establishment of a unique, Africa-focused international dispute resolution framework. According to Mark Bristow, president and CEO of Barrick, a new operating company called Twiga Minerals Corporation was formed to manage the Bulyanhulu, North Mara and Buzwagi mines in Tanzania.
“The Government of Tanzania will acquire a free carried shareholding of 16% in each of these mines and will receive its half of the economic benefits from taxes, royalties, clearing fees and participation in all cash distributions made by the mines and Twiga. An annual true-up mechanism will ensure the maintenance of the 50/50 split,” says Bristow.
A regulatory overhaul
Concerns were raised by mining companies back in 2017, two years after Magufuli came to power, when there was a regulatory overhaul that included substantial amendments to the legal and institutional frameworks governing mineral resource extraction. According to Phiri, the most notable changes were made to the institutional structure, resource contracts, the fiscal regime and mineral licensing requirements.
“Tanzania’s mineral resources were now held in a trust by the President on behalf of the citizens. Before ownership was vested in the country as a whole. Regardless, any mineral or petroleum agreement needs to be submitted to the National Assembly, which now has the authority to review and require the renegotiation of any existing or future agreement,” explains Phiri.
The 2017 regulatory overhaul included an integrity pledge that obliged companies to reduce environmental and community impact. Furthermore, it stated that companies should refrain from actions that undermine the country’s national security or tax system. “The pledge received fierce criticism and created uncertainly by the incorrect wording and could be interpreted as mandatory. Fears were compounded by perceptions that non-compliance could constitute a breach of a company’s mining license prescriptions which could lead to it being suspended or revoked,” says Phiri. Reports in August indicated that the Tanzanian government was also considering revoking undeveloped exploration rights and re-awarding the areas.
In February 2019 government eased some of the earlier drastic regulations. The most noteworthy amendment included the lowering of the local content prescription from 51% equity in a mining venture to only 20%. With this, the government hoped to attract more mining-related foreign direct investment inflows, which started drying up as more mining companies took flight, the tighter Magufuli turned the screws. Despite these important changes, uncertainty remains, and, in the meantime, Tanzania has been put on the backburner by a host of exploration and development companies.
Too many changes are never good, and in fact, has created uncertainty in many African mining jurisdictions, which often results in a dearth of new mining projects. According to Claude Baissac, CEO at consultancy firm Eunomix, it is the continuous reviews, changes and debates that never stop, and scares investors. “Investors never know what to expect. To exacerbate matters, policy changes are normally radical, and it happens suddenly. It’s usually for political reasons like declining support, a crushing debt crisis, or not favouring mining companies because they had close links to the previous regime. New government normally starts issuing licenses to companies aligned to them. These changes, of course, always take place under the cloak of resource nationalism, and are claimed to uplift the people. But most of the time, the outcome is catastrophic for the very people they claim to represent,” Baissac told me in an exclusive interview.
A growing economy
Despite its deteriorating economic position due to weaker external balances, falling forex reserves, and increasing public debt, Tanzania has enjoyed a high growth rate and it is expected that GDP will continue growing at between 6% to 7% per year in the next two to three years. Smith says Tanzania is a stable country with well-functioning public institutions and the president has been in office since 2015. However, Smith warns that there are many uncertainties and challenges. “Tanzania is currently ranked 137 on the ease of doing business index. The IMF, World Bank and UN all cite access to finance, corruption, inadequate infrastructure and unpredictable government policies (as was experienced in 2017) as the big obstacles to doing business in the country,” Smith says.
Tanzania’s economy expanded by 7.2% in the second quarter of 2019 compared with 6.1% in 2018. According to a Tanzania National Bureau of Statistics report released recently, the fast growth of the gross domestic product (GDP) in the April-June 2019 period was due to the improved performance of the construction, mining and communications sectors.
“The largest share to GDP in the second quarter of 2019 was from tertiary activities which accounted to 41.5%, followed by primary activities by 32.9% and secondary activities had the least share of 25.7%, before adjustment for taxes,” the report said.
Construction recorded the highest growth of 19.6% followed by mining and quarrying (17.2%) and information and communication (10.3%), the report said. The economy grew by 6.6% in the first quarter of 2019 and government expects full-year GDP growth to expand by 7.1% in 2019, up from 7% in 2018.
Phiri and NKC African Economics regard the current political risk in Tanzania as low to moderate. However, Phiri expects the political climate to heat up in the run-up to the 2020 election, as criticism of government policies by opposition is expected to intensify. Over the short term, political risks could stem from isolated terrorist attacks by Islamist extremists (particularly in Zanzibar and in coastal areas) and an increase in opposition protest action. Negative spill-overs from instability in neighbouring Burundi and the DRC also pose significant downside risks over the short- to medium-term.
Tanzania is the fourth largest gold producer in Africa after South Africa, Ghana and Mali. The country exported TZS3.44-trillion (USD1.50-billion) worth of gold in 2018. However, the country also hosts decent coal reserves and diamonds. Peak Resources is developing Ngualla, an impressive neodymium and praseodymium rare earth mine while several graphite projects are in the pipeline. According to Smith rare earth elements is making a major comeback. “This is mostly thanks to the Sino/US trade war where US and Europe are again looking for sources outside of China. Whether Ngualla will be brought into production or not is a different question, but it is getting funded,” Smith says.
Meanwhile, several graphite mines are in different phases of development in Tanzania. Black Rock Mining published a Definitive Feasibility Study (DFS) in July last year while Graphex increased its mineral resources at the Chilalo mine. Walkabout Resources began procuring machinery for manufacturing and Armadale Capital is also in the middle of their DFS study for the Magenge Liandu project.
The fact that mining ground to a virtual halt in 2017 didn’t help the graphite cause in Tanzania much. Smith says that during this time other graphite sources such as mines in Mozambique and Madagascar gained traction. “There might still be room for the Tanzanian projects in the market due to the growing lithium battery sector in China that requires flake graphite, but I don’t feel that all these projects will come to fruition,” Smith adds.
Independent geologist, consultant and regular contributor to the African Mining magazine, Nicolaas Steenkamp, says the dash for graphite has made Tanzania one of the hot spot countries for the exploration of this critical mineral in the battery and energy storage sector. “Tanzania is endowed with highly sought-after high purity, large flake graphite deposits. There is also a move to explore and develop rare earth elements, lithium and nickel sulphide deposits. The combination of these have the potential to make Tanzania a major supplier in the new energy economy,” says Steenkamp.
In addition, the gold sector is expected to benefit from the current global uncertainty in which investors consider the yellow metal to be a safe haven during the current economic downturn and trade wars. “Gold mining companies are investing in continued exploration, new projects and listing on the Dar es Salaam Stock Exchange, suggesting confidence in the Tanzanian gold mining sector. The Tanzanian government will, however, have to address the increasing illegal and artisanal mining issue, that is currently resulting in millions of shillings being lost to the country,” says Steenkamp. The traditional energy sector is also still alive and well in Tanzania, with coal-to-power projects actively being developed. The country will potentially benefit from the new equipment and technologies being imported into the country on the back of these projects.
Meanwhile, Tanzania has launched the first ever international minerals trading hub in the gold rich Geita District in the northwest of the country. According to Jacky Chan, CEO of Amani Gold, a mining company operating in the area, the trading hub will accommodate buyers, miners, government offices, banks and dealers at a one-stop centre. The Geita District produces 40% of all gold produced in Tanzania. Artisanal and local miners produce about 20 tonnes of gold per annum in Tanzania and it is estimated that more than 90% of this gold is sold illegally. Chan says the mineral trading hubs will allow miners to access formal and government regulated markets. This move follows similar establishments made by governments in Botswana and South Africa.
The Geita District minerals trading hub is expected to attract both local and foreign gold dealers and is designed to be a model for other regional precious metals trading hubs in an effort by the government to crack down on illegal gold and precious metals trading.
The hub’s development at Geita is in line with Magufuli’s latest directive to ensure that Tanzania takes a lead in the international gold business. The international gold bullion market is expected to boost the earnings of the small-scale miners generated from gold mining activities as well as maximise government revenues. According to records from the Federation of Miners Association of Tanzania (FEMATA), there are more than six million small scale miners across Tanzania and more than USD1.54-billion in gold was exported in 2018.
A challenging environment
Smith says companies need to be vigilant when entering the Tanzanian market. “We’ve dealt with several litigation issues about trapped cash. Before entering the country, take proper advice, get established with a bank and ensure procedures are followed in order to avoid these incidents,” Smith advises.
Furthermore, companies need to choose their bank wisely. Following the 2017 debacle, many banks were on the verge of collapse due to high levels of non-performing loans. Smith also warns prospective investors to look carefully into workers’ permits. “This is another area where companies are caught out as there are usually several departments that need to approve foreign workers’ permits,” says Smith.
Although the process to apply for a mining license is easier now, there are still time constraints that can be costly if a company decides to operate in Tanzania. Infrastructure in terms of accessible roads, water, health facilities and electricity remain a challenge in most remote areas.
Regulations and mining legislation are very clear, and like with any other mining jurisdictions, companies need to be aware of them and make sure that they follow the rules and comply. Working with Tanzanian experts can help to smooth the process and ensure compliance. Other challenges include limited skills and corruption in government departments.
Magufuli may not be business-friendly, but at least he’s consistent. In the short-term his economics will hurt those who historically depended on the goodwill of a corrupt system. In the long-term, however, the Magufuli way is bound to reap rewards. Tanzania offers huge opportunities which are often overlooked as a result of negative perceptions.
On the ground, the political and economic situation is a lot different from that portrayed in the media. Magufuli is popular amongst his people, and the business fraternity not implicated in corrupt dealings, is positive about the impacts of his reforms. Those that are not, have already left Tanzania; are in the process of doing so, or are fighting legal battles to stay out of prison.
The economy has taken a hit as a result, but the cleansing process has flushed out the fly-by-nights and those not committed to building a prosperous Tanzania. Dar es Salaam is a vibrant and fast-growing city, and, with the help of Chinese contractors, Tanzania’s infrastructure is getting a facelift. A new railroad system will soon connect the cities of Dodoma and Dar es Salaam, and the Julius Nyerere International Airport boasts a new, world-class terminal. Mining is a long-term play, and in Tanzania, for at least the next six years, the Magufuli way is the only way.