THE UNITED REPUBLIC OF TANZANIA

EXTRACTIVE INDUSTRY CONTRACTS; ROLE OF SAIs IN ENSURING TRANSPARENCY AND

ACCOUNTABILITY IN EXTRACTIVE INDUSTRY

By Eng. Dominic RwekazaAg. CEO, TMAA

Presented at: SADCOPAC/EAAPAC ACCOUNTABILITY CONFERENCE

HELD AT THE RADISON BLU HOTEL, LUSAKA, ZAMBIA FROM 12TH TO 15TH MAY, 2014 

1. WHY CONTRACTS ARE NECESSARY IN EXTRACTIVE INDUSTRY (EI)?

2. POPULAR FORMS OF CONTRACTS IN EI

3. LEGAL MANDATES AND GOVERNANCE PROCESSES

4. IMPLICATION TO THE INDUSTRY

5. MONITORING AND AUDITING FRAMEWORKS

6. DEVELOPMENT ON TRANSPARENCY AND ACCOUNTABILITY

7. CHALLENGES OF EI CONTRACTS

8. ROLES AND FUNCTIONS OF TMAA

9. CONTRIBUTION OF THE MINING SECTOR TO THE ECONOMY

10. TMAA SUCCESS STORIES

CONTENTS

Most capital invested in the EI is foreign sourced.Foreign  investors  are  always  afraid  of nationalization  policies  in  most  African countries.Foreign  investors  always  look  for predictability,  prospectivity  and profitability.Capital  is  mostly  sourced  from  foreign financial  institutions  which  seek guarantee  in  the  forms  of  extractive contracts.

1. NECESSITY OF EI CONTRACTS

There are so far two popular forms of EI contracts, namely:a) Mining Development 

Agreements  (MDAs) for the case of the Mineral Sector.    

b) Production Sharing Agreements (PSAs) for the case of the Energy Sector.               

2. POPULAR FORMS OF CONTRACTS IN EI

3. LEGAL MANDATES AND GOVERNANCE PROCESSES

Mandate  to  sign  any  contract  in  the  EI  is provided  under  the  respective  sector governing legislation.For the case of minerals, only projects worth USD100  million  and  above  are  entitled  for stability  contracts,  with  review  after  every  5 years.  All  fiscal  rates  and  imposts  are stabilized with  reference  to  the existing  laws at the contract signing date.

3. LEGAL MANDATES AND GOVERNANCE PROCESSES

Procedures for awarding stability contracts are well spelt out in the regulation whereby the Government Negotiating Team (GNT) scrutinizes all necessary documents.GNT is composed of experts well versed with the respective industry in terms of knowledge and skills.EI contracts will be enforceable if:a) Approved  by  the  Minister  responsible  for  minerals 

after review by respective Board(in the case of MDAs, Mining Advisory Board).

b) Registered by the Minister responsible for   finance in the Tax Agreements Register.

cont…

4. IMPLICATION TO THE INDUSTRY

Most of the contracts carry clauses for Fiscal Stability and/or Tax Concessions.Well  designed  contracts  attract investments  to  the  industry  hence economic booming of the sector.Booming of the  industry  is not always coupled  with  expected  benefits  in terms  of  Government  revenue collection.That situation leads to expectation gap hence public outcry/dissatisfaction.

5. MONITORING AND AUDITING FRAMEWORKS

Mining related contracts (MDAs) are administered by the Minerals Department and audited by TMAA.

Taxable information resulting from audits is forwarded to the Tanzania Revenue Authority (TRA) for consideration and action.

Controller and Auditor General (CAG) audits both TRA and TMAA.

CAG’s audits reports are presented and discussed by Parliament .

TMAA audits of contracts is designed to obtain assurance for the Government in respect of:

a) Feasibility assertions contained in the feasibility reports.

b) Compliance to the requirements of the contracts.

c) Any  abuse  of  fiscal  concessions  leading  to  non-realization  of expected benefits.

d) Validity  for  continuity  of  the  fiscal  concession  after  economic changes.

5. MONITORING AND AUDITING FRAMEWORKS

PSAs  are  monitored  and  audited    by  the  Tanzania Petroleum Development Corporation (TPDC).The audit is designed to confirm the fair share of the Government as documented in the respective PSAs.  Tanzania  is  the  member  of  Extractive  Industry Transparency Initiative( EITI).  Overall  transparency  issues are handed by TEITI  in collaboration  with  respective  organs  such  as  Local Government  Authorities,  TRA,  TPDC,  TMAA, Tanzania Chamber of Minerals and Energy, etc.

cont…

6. DEVELOPMENT ON TRANSPARENCY AND ACCOUNTABILITY

Transparency and Accountability attains its legitimacy from: Cluster 111 of MKUKUTA [National Strategy for

Growth and Reduction of Poverty]; in that TMAA is committed to ensure that audit is compatible with the systems and structures of governance that uphold the rule of law and are democratic, effective, accountable, predictable, transparent, inclusive and corruption-free at all levels.

African Mining Vision adopted by AU Head of States in Feb., 2009 which calls for transparency, equitable and optimal exploitation of mineral resources to capture broad based economic growth.

6. DEVELOPMENT ON TRANSPARENCY AND ACCOUNTABILITY

During 2012/13 the Government undertook a number of measures. These include among others: Implementation of the Open Government Partnership 

(OGP); Review  of  procurement  and  financial  management 

systems  with  a  view  to  promote  transparency  and accountability; 

Ensuring  that  institutions  adhere  to  the  established public reporting mechanisms; and

Investing in human and institutional capacity-building as  well  as  promote  active  participation  of  society  in the overall process of development. 

In  2009,  Tanzanian  Government  joined  the  Extractive Industry  Transparency  Initiative  (EITI),  in  its  efforts  to promote  transparency  in  the  extraction  of  gas,  oil  and minerals. 

TEITI  continues  to  follow  up  on  transparency  and accountability  of  company  payments  and  Government receipts in terms of revenues from natural resources. 

In December, 2012 EITI Board declared Tanzania compliant with the EITI Rules and Standards. 

Attainment of EITI Compliant Status requires preparation of annual EITI reconciliation reports. Three reports have been prepared  since  Tanzania  joined  the  EITI;  the  latest  report was launched in June, 2013. 

 6. DEVELOPMENT ON TRANSPARENCY AND ACCOUNTABILITY cont…

Due  to  conflicting  objectives  between  investors, government  and  community,  most  of  EI  contracts create expectation gap in the industry.Contracts lead to low revenue contribution from the industry.Contracts  create  unfair  treatment  within  the industry  due  to  the  facts  that,  projects  worth  less than USD 100 million lack such stability agreements.Contracts may cause political unrest hence  industry instability.  

7. CHALLENGES OF EI CONTRACTS

8. ROLES AND FUNCTIONS OF TMAA

AUDITBENEFITS

AUDIT INFORMATION

STAKEHOLDERS

• Reliable mineral production & sales data

• Reliable financial reports and tax returns

• Tax compliance

• Increased Govt. revenue

• Environmental compliance

• Sufficient mine closure funds

• Informed public

• MEM

• TRA

• NEMC

• NBS

• BoT

• MoF

• Mining entities

• General public

TMAA AUDIT ACTIVITIES

MINING ENTITY OPERATIONS

• Quality• Quantity• Value• Royalty due

Mineral Production

Mineral Sales/ Export

• Financial analysis

• Tax review

• Projections

CAPEX

OPEX

• Compliance

• Environmental budget &spending

Environmental Spending

Environmental Management

9. CONTRIBUTION OF THE MINING SECTOR TO THE ECONOMY

Mining  contributes  about  3.5% of  GDP  as  per  2012 prices.

Large  scale  mines  employed  8,024 people  in  2013  of which 6% were expatriates. ASM employs directly more than 700,000 people.

Large  scale  mines  paid  about  USD 196 million to  the Government in form of taxes and royalties in 2013.

In  2011,  large  scale  mines  voluntarily  committed  USD 7.44 million to  CSR  projects  representing  0.4% of  their mineral revenues in the same year.

9. CONTRIBUTION OF THE MINING SECTOR TO THE ECONOMY

Gold  exports  accounted  not  less  than  25% of total exports and 51.1% of non-traditional export earnings in 2012.

Spill-over effects of mining: notable  sectors  that have  benefited  from  mining  are Banking/Financial Services; Transport & Logistics; Manufacturing  &  Fabrication;  Hospitality  & Catering;  Consulting  (Environmental  & Engineering Services).

cont…

10. TMAA SUCCESS STORIES

Key  performances  recorded  by  the  Agency  as  part  of  the Government efforts to ensure a win-win situation between the Government and mining companies are:Analysis  done  by  TMAA  contributed  to  the 

establishment of a new Model Development Agreement  under the current mining code .

  For  the  period  covering  years  2010-2013,  a  total  of about USD 259 million has been collected as corporate tax from major gold mines as a result of TMAA’s audits in collaboration with the Tanzania Revenue Authority.

Substantial amounts of other taxes such as Service Levy have been paid to the Government after TMAA’s audits of the EI contracts.

GOLD EXPORTS BY 7 LARGE SCALE MINES(2000 – 2013, toz million)

MINERALS EXPORT VALUES BY 7 LARGE SCALE MINES

(2000 – 2013, USD million)

www.tmaa.go.tz

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1,109.4

260.2

117.0

364.3

493.0597.7 640.8

783.1825.4

920.8

1,582.6

2,167.9 2,168.4

1,785.3

TOTAL ROYALTY PAID BY 7 LARGE SCALE MINES(2000 – 2013, USD million)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

32.8

7.53.5

10.614.4

17.319.0

23.4 24.327.3

46.9

64.7

74.1

70.8

REVENUE FORECASTING

HISTORICAL AND PROJECTED ANNUAL TOTAL GOVERNMENT TAKE, 2000-2035 (USD million)

CORPORATE SOCIAL RESPONSIBILITIES

CSR EXPENDITURE BY 7 MAJOR MINES

THANK YOU