State Participation in Mining Investment: Will Tanzania witness optimal benefits?
By Lucy Linus
Several African countries like South Africa, Nigeria, Botswana, Mozambique and Tanzania have taken different measures to increase direct state participation in the capital of mining investments (equity share). In its desire to revamp the mining sector, and in response to a prolonged public outcry of the country not obtaining optimal benefits from the mining sector, the Government of Tanzania (GoT) adopted numerous interventions which triggered different reactions based on divergent schools of thought. These include interpretations (by some) as resource nationalism whereby the government seems to maximize state control, socio-economic and political payments at the expenses of the mining companies. Others question the government’s capacity to negotiate and analyse financial models to manage government stakes in the mining investments drawing lessons from our own history and other countries experiences.
Digging deeper, from a historical perspective, one would be tempted to argue that the pace to revamp the mining sector by increasing state participation in the mining investments, serves as a semi-desire to bring back the 1967 policy of socialism and self-reliance in Tanzania (the means of producing national wealth including minerals being collectively controled by the state).
With an assumption that state participation will enable Tanzania to obtain optimal economic benefits, after protracted negotiations, GoT and Barrick Mining Corporations signed nine different agreements in January 2020. The agreements namely; The Framework Agreement, Management and Administrative Service, Twiga Shareholders Agreement, North Mara Shareholders Agreement, Bulyanhulu Shareholders Agreement, Buzwagi Shareholders Agreement, North Mara development Agreement, Bulyanhulu development Agreement, Buzwagi development Agreement and Pangea development Agreement.
The puzzle of equitable state in the venture
Section 8 of the Natural Wealth and Resource (permanent sovereignty) act of 2017 provides for any authorization granted for the extraction, exploitation or acquisition and use of the minerals to be arranged in a manner that ensures the government obtains an equitable stake in the venture. Interpretation and execution of this section is ambiguous, as the legal interpretation of the phrase ‘equitable stake’ is missing thus, there is a possible risk of each arrangement/agreement to have either its own interpretation or a confused understanding.
For example, notable confusion caused by the aforementioned ambiguity is on 50/50 sharing of the economic benefits principle in the new arrangement between GoT and Barrick Mining Corporation signed in January 2020. The signed framework agreement is yet to be published for public scrutiny. However, for the purpose of this article the annex 4 (i.e. The Framework agreement) in the “Final Recommended Offer for Acquisition of ACACIA Mining Plc by Barrick Mining Corporation” published by London Stock of Exchange and later Dar es salaam Stock of Exchange in 2019 is still a valid reference for public debates until the signed Framework Agreement is in the public domain/ published by the GoT in accordance to section 16 (a) of The Tanzania Extractive Industries Transparency and Accountability Act (TEITA) of 2015.
Debates on meaning and potentiality of 50/50 sharing of the economic benefits principle has triggered legal attention on whether the confused aforementioned 50/50 principle resulted from undefined equitable stake in the venture or is just a matter of mathematical and economic calculations? Economic benefits in the framework agreement includes taxes, royalties, inspection fees, corporate tax and 16% free carried interest to mention but a few of which the government is entitled in the lifetime of the mining project. The question remains on whether the 50/50 sharing principle reflect “equitable stake” in the venture? If the principle is grounded at Section 8 of the Natural Wealth and Resource (permanent sovereignty) act of 2017 then is about equity sharing rather than equal sharing. From Oxford and the 2nd edition of the black law dictionaries the word equitable means an act of fairness and reasonable, the subsequent question would be is 50/50 sharing of economic benefits as postulated in the new arrangement a fair and reasonable stake for the government rather than being an equal share?
In many countries, revenue leakages, among other reasons, can also be instigated by ambiguities and lack of legal interpretation on key terms in the legal framework. There is a legal misconception on the 50/50 sharing of economic benefits principle being drawn from the section 10 (2) of the Mining Act 2010 (as amended in 2017). The section entitles the government to acquire in total up to 50% shares in the capital of the Mining investment. The departure point on the intention and the legal meaning between the 50/50 principle and section 10 (2) is that the former focuses on the total economic benefits while the latter is on government equity share in the capital investment which the end product is dividend (in case of profit making).
Is converting tax expenditure to equity share a win-win situation?
Government equity share in the mining investment is another aspect that requires analytical attention. In accordance to The Mining Act 2010 (as amended in 2017), 16% is a minimum share that the government is entitled to acquire in the capital of any mining company, which is subjected to mineral type and the level of investment. Now the amendments provide for the threshold for government equity share (Free Carried Interest) as opposed to the previous where the power was vested under the negotiation team led by the Ministry of Minerals. Similarly, it would be prudent for regulations or guidelines to set a minimum shareholding criterion based on the mineral types and level of investment (capital intensity) as far as the Special Mining License is concerned.
Furthermore, the government equity share in the capital of the mining company can be increased in total up to 50%. The increased shares which is 34% would be commensurate to total tax expenditure (i.e. the government grant to companies). Therefore, as it stands 16% is a mandatory requirement, while additional shares (34%) remains at the hands of companies (depends much on their business/financial modelling) and whether they need tax incentives or not. Taking an example from the new agreement between GoT and Barrick whereby government shares are limited to 16% non-preferential for the project lifetime, the questions herein are; was/is Barrick not interested with receiving any tax incentive from GoT? Or is the legal offer opposed to mining business/financial model? if Barrick/Twiga (Joint Mining company owned by GoT and Barrick) is granted tax incentives will they be converted to increase government shares? or the maximum that will happen is 16% only?
Using a resource nationalism lens, translating tax expenditures to government equity shares in the mining investment sounds like an ideal win-win situation. The excitement of a win-win situation can be melt into a matrix of zero when the methodology of valuing Tax expenditure is not clear when factored in the financial modelling. A brief by Natural Resource Governance Institute (NRGI) on ‘Tanzania’s New Natural Resources Legislation: What Will Change?’ urges Tanzania to have a clear methodology for valuing tax expenditures so as to realize the full impact of the requirement. One of the experts argues
“’……Whilst the 50:50 sharing of economic benefits sounds attractive, as long as clear definition of the term 'economic benefit' remains a mystery, people will continue to wonder as to whether we have won or lost in this economic battle. Even after the long and painful negotiation we still appear to have not addressed the issue of who the Elephant in the room is. Taking a stock from the high-level report by Thabo Mbeki & Olusegun Obasanjo, the Elephant in the room is 'transfer pricing and smart accounting' practices by multinational companies. As long as such practice remain unaddressed African countries will continue to be in the losing end.”
Therefore, for Tanzania to realize full impact of state participation in the mining investment and obtain optimal benefits, transparency and accountability in the entire contracting chain is of high importance. This will help not only in crafting better agreements, reducing fraud and corruption, but also ensuring collective management of the contractual obligation for both parties including ultimate owners of resource (citizens). Additionally, the legal framework and contracts in the mining sector should provide a clear and complete meanings of the key terms to avoid a confused understanding or misinterpretation in execution.