A CRITICAL ANALYSIS OF THE MINING REGIME AND THE PROPOSED CHANGES
For many years now, the Tanzanian legal regime has been sited as the lead obstacle towards realizing a beneficial mining sector. Historically the country has passed through two major reforms that in a way affected the mining sector. The first reform was adopted way back in the mid 1980’s aimed at restoring macroeconomic balance and stimulate economic growth by creating an individual initiative and market-oriented economy rather than a centrally controlled economy. This saw the mining sector being officially opened to the public for extraction by private individuals and companies. The second reforms occurred in the 1990’s aiming at creating macro-micro linkages at a period where most Sub Saharan economies were facing huge dept problems thus necessitating the creation of conducive environment for foreign investor as a prerequisite of assistance by World Bank and IMF .
As the country is now engaged in a process to enact a new mining law that will replace the much blamed Act of 1998, it is a high time that the public is empowered to give a well informed contribution to the forthcoming Bill. It is therefore the intention of this brief to provide a critical overview of the weaknesses of the current mining Act and the strength of the proposed changes that will be made as indicated by the Commissioner for Minerals Dr. Peter Kafumu during a consultation meeting with Members of Parliament at Kiromo Hotel in January 2010.
2.0 WEAKNESSES OF THE 1998 MINING ACT.
2.1 Lack of transparency
The Act criminalizes any disclosure of information obtained from a report or that was furnished by the mining company to the Minister or any other authority. This is clearly stipulated under Section 21(1) and has a great impact towards obstructing public oversight on mining issues. Non disclosure clause have been said to be a tool towards protection against competitors but studies show that it only denies the local citizens of the information and not fellow mining companies who can access the information through the web and in exchange houses after paying some fees. This being the case, it is then logical that the secrecy only aims at avoiding accountability by the investor and government officials. The impacts of non disclosure are such as less revenue actually reaching government coffers compared to what the company paid and giving room for mining companies to pay less than the lawfully required revenue. It can also perpetuate corruption in awarding mining licenses and poor management of public revenue from mining.
2.2 Huge ministerial discretionary powers.
The Act gives the Minister for Energy and Minerals discretionary powers to award and revoke mining license, enter into Mining Development Agreement, defer royalties and not to be bound by the advise of the Mining Advisory Committee. Such powers are so huge, unchecked and a breeding ground for corruption. It is such powers that have resulted to the government entering into six MDAs that are currently the public’s outcry as they contain huge and unnecessary incentives which deprive the public of its rightful share. It is such powers that have seen the former Minister of Energy and Minerals signing an MDA outside the country without regard of the Mining Advisory Committee’s denial of entering the Agreement and the extension of contracts’ period even though the contracts have been declared as not beneficial.
2.2 Loopholes and pitfalls in the fiscal tools.
Tanzania is loosing a lot of revenue as the current Mining act has no rules on ring-fencing, loss carry forward, the presence of additional capital allowances and royalty reliefs. Companies have been calculating their tax liabilities based on the expenditures of all its pits even though some are still at the initial stage and have not yet started producing profit hence offsetting benefits of profitable pits against the unprofitable ones. This calls for introduction of ring-fencing rules. The Income Tax Act under section 19 provides for indefinite loss carry forward thus has been a pushing factor for mining companies to arrange their transactions in a way that will declare a loss as they are sure to deduct it from taxable income. Again under Section 145 of the Income Tax Act as amended in 2004 mining companies are allowed a 15% additional capital allowance on unredeemed capital expenditure, though this covers MDA entered before 1st July 2001 only, it has the effect of prolonging the period in which such companies will start paying taxes and in some circumstances this period can be prolonged until the mineral deposit is depleted. Section 87 (1) of the Mining Act of 1998 gives the Minister power to defer payments of royalties if the cash operating margin of a company falls below zero, this incentive is highly uncalled for considering the fact that royalty is the only revenue that the government is entitled to get when a mining project turns out sour even though extraction continues.
3.0 PROPOSED CHANGES AND THEIR STRENGTH.
3.1 Mineral Export and Processing.
The changes propose to ban the export of rough gems and ores, it further stipulate that such ores have to be processed in the country thus allowing value addition. This is a positive change that needs support as if realized it will lead to importation of new technology, provide employment opportunities, increased revenues from higher prices and connecting the mineral sector to the industrial sector in the country.
3.2 State Participation.
The government will own 10% free equity in big mining projects and can further invest up to 20% paid equity in selected and strategic projects. All these are beneficial to the government in that they bring additional revenues in the form of dividends, they build the country’s know-how, provide more employment, enhance the government’s oversight as it seat on the management table and brings national pride. However this is not automatic as it needs institutional capacity and that the free equity is not actually free as the government has to forebear some things in consideration. More over if the government is to benefit from the free equity then it has to be clear on the governance rules, voting rights and dividend policy.
3.3 Locals Participation.
These changes aim at ensuring that Tanzanians are involved in the mining industry as shareholders in big projects by holding shares. This will be achieved by big companies registering at the Dar es Salaam Stock Exchange where locals can easily access the share market and by locals acquiring shares in foreign exchange markets. This needs support as in one way or another it enables Tanzanian public who are the owners of the mineral to not only benefit from their resources indirectly but also directly enabling them to deprive profits from dividends that can be ventured as capital into other economic activities even long after the minerals are depleted. However it is much easy and practical that local participation be enforced through mining companies registering at the Dar es Salaam Stock Exchange rather than foreign markets this should be a mandatory requirement by companies and not merely a recommendation if local participation is to be effective.
Proposed changes on royalty are basically two, such include a change in the royalty base and on the rate. As regards the base, royalty shall be paid based on gross value. This means that the Government will receive more revenue from royalty as royalty will no longer be calculated after subtracting costs on transportation and processing but rather it will be calculated from the amount that the mineral is sold in the market as it is at the export point without subtracting any costs whatsoever. However adjusting the base alone does not guarantee increased revenues from royalty, company arrangements such as transfer pricing where the foreign company sells the minerals to its subsidiary located in another jurisdiction at a low price. To avoid this, the new law should set appropriate administrative measures that can avoid price manipulation such as by basing mineral values on internationally published indexes and by use of arm’s length principles. Moreover changes have been suggested on royalty rates whereby, 1% for processed gems from 0%, Gemstone and Diamond at 5% which was restricted to Diamond only, 4% on precious metals and PGM as a new category which previously was under 3% group and 5% for Uranium which is also a new category. All these aim at increasing Government’s take from royalties but this will be achieved only if good administrative measures of ensuring that the exact volume of minerals obtained and the correct prices in the market are used.
3.5 Fiscal Regime.
New rules to govern revenue collection, administration and calculation have been proposed, all these aim at increasing government revenues by eliminating current loopholes. Such fiscal rules include: exploration expenses to be capitalized and written off immediately, capital expenditure to be depreciated at a rate of 80% in the first year of expenditure and thereafter as prescribed by the Income Tax Act, introduction of ring-fencing thus every mine be taxed separately, introduction of windfall tax as income tax will be at a variable corporate tax rate depending on the profitability provided that the rate shall not fall below 30%, introduction of a rule to curb thin capitalization by rejecting the deduction of depts that exceeds the ratio of 70 to 30 and local government levies to be levied as provided by the Local Government finances Act and not the flat rate of $200,000. Such changes will be achieved if incentives and stability clauses in Mining Development Agreement will be restricted to the main fiscal tools available. On the other hand changes are also proposed that a transfer fee of 1% will be charged, though this discourages speculation and encourages serious investors it would rather be charged on the gains rather than on any transfer even one that makes a loss. This discourages transfers in totality, without regard that sometimes transfers are necessary and beneficial. Moreover though the changes introduce a penalty of 50% for deviation to pay taxes and other fees, this is not enough to prompt compliance as once the penalty is charged further failure to pay cant be enforced, this calls for provisions stating accumulation of interest on penalties. Lastly the changes should be more specific on amounts of fees and taxes to be charged as basing it on feasibility study is vague and confusing providing a loophole to non compliance.
3.6 Compensation, Relocation and resettlement.
Relocation and compensation is proposed to be as per the Land Act of 1999 requires, this means that there should be a fair and prompt compensation before locals are relocated by a mining project. This is a positive change if properly administered as it will eliminate the current situation where locals have been relocated by force others ending up living in an old courtroom at Geita as shown below. The commissioner goes further to propose amendments on the Land Act of 1999 that will make sure that it is the mining company that is obliged to compensate the people affected by a mining project. The proposed changes intend at introducing transparent, consultative and participatory procedures for compensation, relocation and resettlement. It aims at avoiding involuntary resettlement and where such cant be avoided, then measures to ensure that locals secure sufficient investment resources so as to be able to share in the project benefits. To achieve this, the proposals suggest that modern international standards be used in compensation and relocation.
Residents of ……. gathered in an old Courtroom for shelter as they had been evicted from their land to pave way for Geita Gold Mine operations in 2009.
3.7 Mining Development Agreements.
The proposed changes provide restrictions on the duration of the MDA and on fiscal stability, it restrict the life of an MDA to be for the life period of the ore body as stated by the feasibility study incase it is below 25 years and fixes it at 25 years if life of the ore exceeds 25 years. Moreover it allows reviews at the request of either party after every 10 years this is aimed at capturing more profit or eliminating unprofitable clauses in the contract incase of change of circumstances. The proposed changes are elaborate on which fiscal tools shall be stable and this include royalties and the income tax only as fees, duties, levies and other fiscal imposts will be fixed only in the critical time of investment.
3.8 Value addition and Local procurement.
These changes are a complete new input to the mining regime in Tanzania, Value addition has been proposed by restricting the exportation of ores and provision of processing licenses this aims at ensuring increased revenues from increased prices and profit, increased employment, acquisition of new technology and boosting the industrial sector. Local procurement as prescribed by the proposed changes that mining companies procure locally produced goods and services that meet international standards. This is further enforced by requiring such companies to submit annual procurement plans, publish the goods and services required and avail tenders to local markets. These changes aim at ensuring that the mining sector boosts and is linked to other sectors of the economy such as agriculture, processing industry and local traders. However for these benefits to be achieved then the government should ensure that it create a conducive environment for local producers of the goods and services to be able to produce quality goods at a competitive prices.
3.9 Corporate Social Responsibility.
Unlike the current law, the proposed changes aim at incorporating a corporate social responsibility clause, the clause will focus on encouraging the formation of voluntary foundation trust funds in mining areas which shall be funded by operational profits. The collected fund is intended to be used in community assistance and social projects which are aligned to the company’s corporate social responsibility policies. These changes have to be made mandatory instead of merely encouraging the formation of trusts. The modalities of voluntary fund should be clearly specified as companies are corporate citizens and just like natural persons they have civic rights and obligations to perform including the creation of a friendly and sustainable environment of production.
Tanzania is rated to be the third gold producer in Africa blessed with an exceptionally large and varied minerals resource base, possessing a considerable part of the world’s reserves. Prospective geology have manifested that Tanzania has 800,000 square kilometers geological formations with high potentials for economic mineralization remaining under-explored. This shows that despite the presence of six large scale mining operations already exploiting our resources under a poor fiscal regime, still a room for change and economic and social prosperity prompted by the mining sector can be achieved. This needs adoption of the above proposed changes with some slight rectifications as recommended above. Moreover the Commissioner was silent on the proposed changes to several issues which are equally very important and need a change from there current state, such include:
Transparency, the current mining Act restricts disclosure of any information in a report or obtained from a mining license holder without his/her consent so long as he/she still holds the license. This is a confidentiality clause whose effect goes further to restrain good governance in the extractive industry for development, such a clause should be avoided and instead the law should set a mechanism to ensure that the public is aware and can hold the government or the investor accountable of any bad practice in the mining sector. In the Commissioner’s proposed changes to the current law, no briefing spoke of transparency at all. Considering the advantages of being transparent in dealing with public affairs it is highly advised that the proposed changes to include a transparency clause as the same will be in line with the government’s initiative of joining the Extractive Industry Transparency Initiative (EITI) whose main aim is to promote transparency on the revenues derived from the mining companies by the government.
Oversight role of the Mining Advisory Committee (MAC), this committee is established under Section 20 of the current Mining Act whose role remains merely advisory and does not bind the Minister who can deviate from it upon publishing it. Moreover MAC’s current composition comprises of government officials only. All these do not enable the committee to perform its activities efficiently following that its decisions are not binding and hence irrelevant. Considering MAC’s oversight role and the need to curb unnecessary discretionary powers of the Minister, it is highly advised that the proposed changes to cover the Mining Advisory Committee in a way that it will give it more powers to bind the Minister in its decisions and to be comprised of different individuals well versed with mining issues and comprising of all stakeholder in the mining industry such as the private sector, CSOs, mining chambers and trade unions. Moreover it is advisable to have an Authority as recommended by the Bomani Commission , that will oversee all mining issues instead of leaving mining operations into different hands thus making it everybody’s business and at the end no man’s business.
Considering the value chain on the decision to extract and selection of companies, the value chain is an important tool in ensuring that minerals are turned into development by a mineral rich country. The current law in its endeavor to regulate on the mining industry was not guided by the need to ensure that the value chain is complied with, moreover, the proposed changes as revealed by the Mineral Commissioner, do not indicate observance of the value chain. It is therefore advisable that the changes put in place a mechanism that will ensure that there is a period to decide to extract or not on newly explored mineral deposits before awarding a mining license, selecting companies appropriate to award consignments instead of the current first come first served procedure which can result into inefficient companies being awarded consignments, negotiating win-win contract and ensuring that the proceeds from mining benefit all Tanzanians as planned.
It should be made clear that as the consultations with different stakeholders are taking place as required before a Bill is tabled in Parliament, then it is probable that though the current proposed changes are pro development, they might be dropped on the way. This depends on the fact that every stakeholder in the mining sector holds a different interest and would want his/her interest favored as much as possible. It is out of this that the general public is called upon to track the changes to the consultations and air out their concern immediately to protect its interest.