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:

a)     
The Natural Wealth and Contracts (Review and
Re-negotiation of Unconscionable Terms) Act of 2017(the “Natural Wealth Act”);

b)     
The Natural Wealth and Resources (Permanent
Sovereignty) Act 2017 (the “Natural Resources Act”);

c)      
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:

1.      
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.

2.      
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.

3.      
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?

4.      
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.

5.      
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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