Foreign Direct Investment Impact On Tanzania Mining Sector

FDI is made to acquire a lasting interest in a foreign enterprise with the purpose of having an effective voice in its management. It is a business investment in another country, which often takes the form of setting up local production facilities or the purchase of an existing business. It is normally undertaken by multinational enterprises (MNEs). FDI has grown greatly both in relations to trade and in absolute terms during the last two decades or so. The growth is one of the most striking signs of globalization (Ngowi 2001).

Foreign direct investment-Wikipedia, defines FDI as long term participation by country A into country B. It usually involves participation in management, joint venture, transfer of technology and expertise. There are three types of FDI: inward foreign direct investment and outward foreign direct investment resulting in a net FDI inflow (positive or negative) and stock of foreign direct investment which is the cumulative number for a given period. It is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Once a firm undertakes FDI, it becomes a multinational enterprise (the meaning of multinational is being “more than one country”).

1.1.2 Mining

Mining is the extraction of valuable minerals or other geological materials from the earth, usually from ore body, vein or (coal) ridge. Materials recovered by mining include base metals, precious metals, iron and diamond. Mining in a wider sense comprises extraction of any non-renewable resource (e.g. petroleum, natural gas, or even water). Mining of stone and metal has been done since pre-historic times.

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Modern mining processes involves prospecting for ore bodies, analysis of the profit potential of a proposed mine, extraction of the desired materials and finally reclamation of the land to prepare it for other uses once the mine is closed ( Mining – Wikipedia).

2.0 BACKGROUND

2.1 Distribution of FDI in Tanzania according to the Sector of the Economy

In Tanzania, up to 2001 the largest sector for FDI is believed to be the manufacturing sector which accounts about 33.5% of the total FDI stock, the second largest sector for FDI was believed to be mining sector with about 28% of total FDI stock by the same year. In manufacturing sector, food and beverage accounts much of FDI, whereas in the mining sector, gold mining industry is the largest single sub-sector in terms of FDI. Tanzania has abundance of mineral resources which made mining sector to being able to attract mineral explorations and investment. On the other hand, during 1990 FDI in mining sector was improved by the revised, investor- friendly investment and mining code introduced in 1998, which was well received by international investors. Since, 1990 there has been remarkable growth in the mining sector. Previously, South Africa and Ghana were the leading countries in Africa in terms of the number of exploration activities but from, 1998 Tanzania started to be the leading country in Africa. In Region wise much of FDI stock are concentrated in Dar-es-salaam since it is the largest city, Mwanza and Shinyanga regions are taking the second chance among the top recipients of FDI mainly because they are endowed with abundant natural resources, especially minerals (Kabelwa,2006).

Notable development in the mining industry in Tanzania has been experienced with the opening up of six large scale gold mines at Nzega, Geita, Bulyanhulu, North Mara, Buhemba and Tulawaka. Since then, more than 15 mineral prospects of gold, nickel and uranium have also been developed into various stages of exploration.

In 1997, Tanzanian Government established the mineral policy which guides development of the Mineral Sector. This policy was strongly influenced by the national policy instruments that addresses issues of poverty and economic development, and incorporate mineral sector reforms as one of the several related components which, when combined, offer a multi-sector approach to poverty reduction and economic growth. The Mineral policy of 1997 provided a plan for development strategies for the Mineral Sector in Tanzania.

2.2 The Mining Sector in Tanzania

Mining in Tanzania started as far back as the pre-colonial era. The performance of the industry over the years has been determined by various political, social and economic ideologies and various policies. The mining sector in Tanzania includes both small- scale operations characterized by the deployment of manual and rudimentary technologies; and large scale mechanized mining dominated by nine (9) major mines: six for gold and one each for diamonds, coal and Tanzanite. Gold accounts for 90 percent of the value of Tanzania’s mineral exports (SID, 2009).

The mining sector, although small, contributes about 23% of GDP and is an important earner of foreign exchange (www.tanzania .go.tz). Recent investments, particularly in gold mining and exploration have led to the rapid expansion of the sector, and Tanzania is now on target to become an important producer in the African context. Other mineral resources include diamonds, colored gemstones, coal, salt and limestone (EIU, 1997c).

FDI flows were non-existent in the early 1990’s, but changes in the investment laws have led to an increase from US$ 12 million in 1992 to US$ 183.4 million in 1999. Since Tanzania liberalized its economy two decades ago, the mining industry has seen a series of new acts and policies put in place to attract foreign investment, the underlying objective being to promote the large-scale extraction of the countries mineral reserves. In 1996 the Tanzanian government issued New Investment Policy, which was followed by the Tanzania Investment Act No. 26 of 1997. The main aims were to increase the transparency of the legal framework, deregulate the investment process, create a one stop investment agency and provide for transferability of capital and profits. In addition to that, the Tanzanian government efforts to promote private sector led to mineral development. These efforts were assisted with Mineral Policy of Tanzania of 1997.The policy ensured that the wealth generated from mining supports sustainable economic and social development as well as minimize or eliminate adverse social and environmental impacts of mining activities. Also the 1997 Mineral policy of Tanzania aimed to facilitate exploitation of mineral resources that would contribute significantly towards income generation, employment creation, social and economic infrastructure development (particularly for rural areas), increased foreign exchange and government revenues as well as reducing poverty.

Exploration and exploitation of the mineral resources, including petroleum and gas sub-sectors, in Tanzania, fall under the supervision of the Ministry of Energy and Minerals. But, despite all the positive arguments of incentives, there were indication of abuse by foreign investors. In 2003, the government, for instance, had to remove tax incentives on petroleum imports for mining companies, due to the fact that some of the foreign companies accorded the incentives, have been abusing them by importing petroleum and selling it in the open market. There were also concerns as to whether the government has effective and practical criteria for issuing and removing incentives. There had been, therefore, some calls for a review of the criteria used in issuing incentives to foreign investors (CUTS, 2003).

3.0 THEORIES OF FOREIGN DIRECT INVESTMENT

3.1 Market Imperfection

FDI is defined as direct outcome of imperfect market. The market imperfections may arise in one or more of several areas for example, product differentiation, management skills, and government imposed market distortions. The rise of multinational firm can be pointed to a variety of market imperfections that prevent the completely free flow of goods and capital internationally. These imperfections include government regulations and controls, such as tariffs and capital controls, which impose barriers to free trade and private portfolio investment. These are factors that inhibit markets from working perfectly. The market imperfections explanation of FDI is the one favored by most economists. In international business literature, the marketing imperfection approach to FDI is typically referred to as internalization theory.

With regard to FDI, market imperfections arise in two circumstances: when there are hindrances to the free flow of products between nations and when there are barriers to the sale of know how. (Licensing is a mechanism for selling know – how). Barriers to the free flow of products between nations decrease the profitability of exporting, relative to FDI and licensing. Impediments to the sale of know-how increase the profitability of FDI relative to licensing.

Thus, the market imperfections explanation predict that FDI will be preferred whenever there are barrier that make both exporting and the sale of know-how difficult and/or expensive.

3.2 Transportation Cost

Multinational firms arise because of the need to bypass imperfection in intermediate product markets by internalizing the market across national border. For instance, when transportation costs are added to production costs, it becomes unprofitable to ship some products a long distance. This is particularly true of products that have a low value to weight ratio and can be produced in almost any location (e.g. cement, soft drinks, etc.), for such products, relative to either FDI or licensing, the attractiveness of exporting decreases. Thus, transportation costs alone help explain why some companies have undertaken FDI rather than exporting.

3.3 Location

There are four factors that are relevant to the location- specific theory of FDI, which involves the multinational in seeking locations such that the differences between benefits and costs are maximized. The four key factors are:-

Labour costs

Real wage costs which happen when there are differences between labour in developing country and industrialized countries. That is, when a multinational company decides to invest in a country on which labour costs are low compared to its country of establishment.

Marketing factors FDI decision by multinational company may take place due to various reasons such as markets size, market growth, stage of development and the presence of local competition.

Trade barriers-sometimes host countries may impose trade barriers to encourage local investments from home industries. In other circumstances host countries may decide to remove trade barriers. When trade barriers are removed by host countries multinational companies are getting a chance to develop their industries in the host countries.

Government policy of the host country may have effect on the investment climate of the country. This may take place either directly through fiscal incentives, monetary policy or the regulatory regime. Also, may take place indirectly through the prevailing social environment.

4.0 ANALYSIS OF THE CURRENT SITUATION OF FOREIGN DIRECT INVESTMENT ON THE MINING SECTOR IN TANZANIA

From 1990 the Government began to encourage FDI in mining germstone, gold, and other minerals, and this resulted in the Mineral Policy of Tanzania being introduced in 1997, followed by the 1998 Mining Act. This provides (with the 1997 Tanzania Investment Act) the present statutory framework for FDI in the mining sector.

The policy and operating framework is investor-friendly. In many ways it is “best of its kind” in terms of providing a positive supporting environment. The taxation and investment allowances are attractive. The ministry is relatively efficient and supportive and all necessary certificates are normally obtained within two weeks. The FDI framework is thus strongly positive. The industry as well as the Ministry, is hopeful that Tanzania will become a significant international mining location in the future, creating employment and exports, thereby acting as a driving sector for change. The main areas for improvement are the removal of restrictions on land ownership, and infrastructure in the main mining areas (UNCTAD, 2002).

The petroleum (Exploration and Production) Act of 1980 recognizing the high costs and uncertain results of exploration and development seeks to provide an attractive operating environment for international oil and gas companies.

As regards incentives in addition to the standard fiscal incentives these include zero import duties on any purchased equipment and full allowance for unrecovered exploration costs incurred under earlier production sharing agreements (PSAs). An attractive feature is that international companies in this sector can opt to maintain their operating accounts for their Tanzanian activities in dollars and to pay their Tanzanian taxes and charges in dollars at the prevailing exchange rate.

This constitutes a dollar basis for investment, capital expenditure and purchases of the global oil and gas industry. The policy appears to be effective in encouraging FDI in the emerging Tanzanian hydrocarbon sector.

4.1 SWOT ANALYSIS

4.1.1 Strength

Tanzania’s extractive industry is currently characterized by a rich mineral endowment, increasing FDI and policies and acts that are geared towards encouraging foreign investment at any cost. The mining sector in Tanzania is thus one of the fastest growing sectors in Tanzania with an average growth rate of 12 percent per annum.

There has been a tremendous increase in prospecting in mining following the policy changes undertaken by the government since early 1990s. These policy changes have included efforts to create an enabling environment for investment in the mining sector through:

Introduction of a competitive mining policy and an equally competitive mineral legislation;

Review and streamlining of tax regulations on mining activities ; and

Establishment of a sound macroeconomic framework.

4.1.2 Weakness

However there are consistent and growing murmurs of discontent about the mining industry. The chief complaint is that the investments are not of benefit to Tanzania but are instead being used to transfer the country’s resources out of the country.

In addition to that, although there are successes in the mining industry in Tanzania, but these successes have proved failure according to the concerns of certain stakeholders, their feeling is that, the mining sector could be contributing much more to the national exchequer than it currently is. Also, the legislative and legal regimes around the mining sector, it is argued, seem to lean more towards encouraging foreign investment than to promoting and safeguarding the interests of the wider population. There are also concerns over the harmful impacts of the industry on the environment and politics. Moreover, the fraught issues of the livelihoods of those people who have been moved from their homes and farms t o give way to mining activities remain unresolved. Furthermore, there is little or no evidence to show that the increase in the extraction of the country’s natural resources has actually contributed to a reduction in poverty levels.

4.1.3 Opportunities

The impact of FDI on the quality of jobs is seen to have been positive in the country; the number of job opportunities has not grown fast enough to absorb the increasing job seekers. At the sector level, the impact of FDI on the quality of jobs is observed to have been positive in all the sectors except the financial, where it is negative.

4.1.4 Threats

The Tanzanian Government has limited capacity to ensure that the country’s resources are properly exploited and it has already attempted and failed to manage several mines in the past. The government has problems keeping track of the exact amount of mineral exploited, and how to determine the expected tax and royalties.

Inequality in society is further worsening by large-scale corporate mining operations. In most cases, people from the local communities around the mining area remain unemployed, while the minority working for the mining companies enjoys a good income and high living standards. Furthermore, salaries paid to people in Tanzania are still low compared to other countries in Africa like South Africa. The same jobs assigned to foreigners could simply be given to Tanzanian in such a way strict immigration laws and procedures are required.

Also, lack of adequate tools, expertise and organizational setup required to oversee and support a modern, market-driven mineral sector. Low integration of the sector with other sectors of the economy, low contribution to the GDP compared to the sector growth and environmental degradation.

In addition to that arrival of FDI in mining projects brought numerous challenges. Large-scale mining are blamed for the decline in employment due to use of advanced technology which crowding out small-scale mining operations.

5.0 PERFORMANCE AND IMPACTS OF FOREIGN DIRECT INVESTMENT ON MINING SECTOR

5.1 Economically

The mineral sector is one of the fastest growing sectors in the country in absolute terms. It is fastest growing also in terms of its contribution to the economy and export activities. Between 1997 and 2001, this sector has grown at an average annual rate of 16.2%. Its annual contribution to the GDP rose from 1.7% in 1997 to 2.5% in 2001 (URT, 2001).

In nominal terms, export earnings generated in the sector increased from US $ 29.7 million in 1996 to US $ 311.9 million in 2001. This increase was mainly attributed to the huge capital invested by big mining companies (CUTS, 2003).

The recent growth of gold production in Tanzania has marked a transformation of its export sector. Before independence in 1961, Tanzania’s exports were dominated by agricultural products including coffee, tea, cashew nuts, tobacco and sisal.

Recent earnings from gold mining have contributed about US$ 750 million per year in foreign exchange and tax contributions from gold production. Gold mining is also one of the largest sources of tax revenue for Tanzania at 3.6 percent of annual collections. These revenues have helped to pay for essential manufactured imports.

Also, large scale mining contributes much as the sources of a country’s foreign direct investment. This has enabled the government to significantly increase the volume of domestic investment.

5.2 Socially

Employment in the sector has also increased. The revenue from the sector is from taxes, prospecting royalties and mining license fees. Large mining companies have been the most reliable source of government revenue from the sector. This is because tracking of production volumes and exports from big mining companies is relatively easier, compared to the small-scale miners whose informal nature of operations make them difficult to keep track of ( CUTS,2003).

Employment in the sector has also increased such as employment resulting from gold mining in Tanzania which is quite significant. The sector creates more jobs than the country’s utility sectors combined, which includes gas, electricity and water. The economic boost from this is increased by the employment multiplier, estimated to be about three percent in Tanzania.

According to figures from Tanzania Investment Centre, different numbers of total employment for 13 sectors between September 1990 and September 2000 were

Basing on the above estimates petroleum and mining was the sixth out of 13 sectors. Therefore, we can conclude that FDI has contributed positively to job creation in Tanzania including the mining sector.

Apart from employment creation, FDI in Tanzania taken an example of Kahama Mining Corporation Ltd (KMCL) in Bulyanhulu, has provided US$ 5.48million housing loan scheme to construct over 800 modern houses at subsidized costs. According to KMCL (The Financial Times, January 31, 2001) the scheme initiated to change the bad housing situation in the area.

Furthermore small scale mining in Tanzania contributed to poverty alleviation and rural job creation. Incomes and the money from small scale miners is circulating locally and contributing to secondary economic activities that followed mining such as shops and services. Generally it is said that small-scale mining generates an estimated three jobs for every one individual directly involved in mining. It has enabled Tanzanian to accumulate capital and to invest in more stable business such as shops, restaurants and guesthouses. It is agreed that it is one of the program which has been able to inject income in rural areas, stimulate cash flow and reduce poverty.

6.0 REASONS FOR FAILURE OF MINING SECTOR IN TANZANIA

In addition, to the above explanation on challenges and threats of FDI on mining sector, Tanzanian government has failed to ensure that the country’s resources are properly exploited and managed for the benefit of the citizens. Among of the reasons for the failure is the limited capacity of the government to organize and manage technical resources economically. Apart from that, the government has problem of keeping track of the exact amount of minerals to be exploited.

Furthermore, corruption is a prominent feature in the Tanzanian public sector which discourages investment in the sector.

7.0 CONCLUSION

This essay has attempted to explain the potential impact of FDI on mining sectors in Tanzania. It has beginning with defining FDI and mining, historical overview of FDI, prior and post reforms how FDI was being implemented. Theories of FDI as multinational strategy used by MNC to find cheap sources of productions and markets have been explained. Analysis of the current situation of FDI on mining sector, in Tanzania, shows that the sector is growing and becoming stable economically. The sector has performed well socially and economically and it has a lot of benefits such as revenue generation, capital formation and employment generation.

However for Tanzania to become one of the best performers in the sector, hardworking and investment is required from its stakeholders. Furthermore, the government has to focus on improving various aspects of the industry such as accountability and transparency with particular regards to the nature of contracts and agreements signed with investment partners. The government and its stakeholders have to adhere to human rights and careful management of the environment in order to ensure sustainable development.