By Jaston Binala
President Jakaya Mrisho Kikwete of Tanzania made statements in January this year giving both a glimpse of the economic future of East Africa’s largest nation, and an indication Tanzania is moving in the right direction on the management of its wealth from gas. Analysts have identified gaps, but the general direction of decisions made is correct.
The state owned Tanzania Petroleum Development Corporations (TPDC) is being prepared to turn into a local version of the Norwegian oil and gas Parastatal, Statoil. Tanzania is also in the process of forming a Sovereign Wealth Fund, the President said. He made the statements during a joint government-religious leaders symposium in Dar es Salaam, explaining that the government was working on a law to introduce the sovereign fund. .
All funds generated from the gas sector will be put in this fund. The law will indicate how much should be allocated to the country’s budget each year and this will help ensure that future generations benefit from revenue generated from the gas sector.
Gauging the remarks against views from analysts Silas Olan’g of Revenue Watch and Dr. Mohammed Amin Adam , Executive Director of the African Centre for Energy Policy in Accra, Ghana, this is to say Tanzania is moving in the right direction in terms of gas revenue management. Formation of a Sovereign Wealth Fund and local ownership of the gas industry is plausible.
Olan’g says lessons from other African nations that have plenty of resources indicate that the successful management of a resource rich economy would require the following political economic stances:
One, that the primary beneficiary of the wealth must be THE African Country– and not foreign mining or oil corporations. Two, that the country should establish strong oil and mining institutions able to oversee the industry along the value chain; Three, that laws criminalizing transfer pricing and tax avoidance mechanisms must be in place. (Transfer pricing refers to the inflating of the cost of doing business in the country by a foreign firm to avoid corporate tax). Another position should be that the African country at issue becomes a major shareholder in oil exploration, exploitation, processing and selling; and to learn and internalize the lessons of Arab and Latin American Countries.
Tanzania is one of Africa’s most resource-rich countries with huge deposits of minerals and natural gas. The country sits on 2,222 tons of gold in proven reserves, 209,000,000 tones of Nickel in proven reserves, 50 million carats of diamonds, 13.65 million tons of copper, 103 million tons of iron ores and 1.5 billion tons of coal in proven reserves, Silas Olan’g, of the Dar es Salam-based Revenue Watch says.
And yet data made available last years says Tanzania, which has 43 trillion cubic feet (TCF) of natural gas in proven reserves, might see that volume of gas rise to 200 tcf within the next two years. Tanzania is a rich nation needing a proper wealth management plan according to both Olan’g and Dr. Adam, but President Kikwete’s statements indicate steps are being taken to place the country on the right track, even as there are gaps in the plans.
Olan’g identifies dangers which might stand in the way after Tanzania’s discovery of huge gas reserves. These include ‘rent seeking, the tendency of resource rich nations to overspend money, government and private sector people to over-borrow because they think they can always payback loans, the danger of Social conflict and the waning of public accountability.
On rent seeking, entrepreneuers will tend to work hard at getting a cut of oil or gas revenue instead of investing in productive activities, [which could manifest itself as a demand for exploration blocks]. The fight for access to the resource sector can become a source of corruption and patronage, Olan’g says.
On over spending, revenues in resource rich countries are viewed as endless, resource prices are assumed to always go up on the market in the long run. Now when the revenues run out or prices go down spending cuts cause political instability. On the issue of over-borrowing, resource (oil or gas) revenues bring access to cheap capital (e.g low interest rates; long debt maturity, so that over-borrowing may become common in the public and private sectors. But resource revenues can result in larger income inequality, which then results in political conflict and the resulting instability. One of Olan’g’s biggest fears is the danger of lessened public accountability because of the oil or gas wealth: the government might become less dependent on taxation of citizens and therefore less accountable to the public.
On the other hand, Dr. Mohammed Amin Adam , Executive Director of the African Centre for Energy Policy in Accra, Ghana warns of another danger that can be expected in a resource rich nation such as Tanzania. The nation has to be on the watch for what is called an “Enclave Economy.” This is when clever people come into your nation doing what appears like genuine business, but they formulate a way to facilitate the escape of hard currency from your country.
Dr. Adam advised that money from oil and gas be invested in industries that support the extractive industry but which are self sustaining. In Tanzania’s case this could mean investing in Agriculture. “In that way when the resource runs out you would still have that industry for sustainability,” he said. “Norway forced oil companies to do research work using the universities in Norway for building gas expertise. As a result the research capacity was built up in Norwegian universities. So tie the companies to create local expertise.”
Is Tanzania moving in the right direction as it prepares for the gas boom economy? A number of actions taken so far say the answer to that question is yes. There are gaps, but most of the actions taken so far point to a movement in the right direction.
There is a deliberate move to increase the number and capacity of expertise in the oil and gas sub-sector . A decision has been made to form an oil and gas SWF. The government is engaging the public to discuss the oil and gas wealth.
“The experts we have in this area (oil and gas) are very few,” the permanent secretary in the Ministry of Energy and Minerals, Eliakim Maswi, told journalists at the Ministry of Energy and Minerals recently. But the experts are being prepared, and the oil prospecting companies are involved.
“I have only one engineer here at the ministry,” he said. “And there are only two others at TPDC.” To reduce the magnitude of this problem, Tanzania has embarked on a massive training campaign, some of which is being done with the help of companies active in Tanzania, the Permanent Secretary said.
The Chinese company building the pipeline from Mtwara to Dar es Salaam has agreed to train 180 Tanzanians to prepare them for the management of the pipeline when Chinese experts leave in two years, Maswi said. He was now only waiting for a permit from the Public service department to issue the Chinese scholarships to deserving young people. The ministry will pick only the young and fresh who have not been polluted by corruption, he said.
The Brazilian Company Petro Bras has agreed to train 20 Tanzanians. Another 30 Tanzanians are already in Norway to study oil and gas while 10 are studying Petroleum Engineering at the University of Dodoma in central Tanzania. Two people from the Attorney General’s chambers and five others from his ministry have already been sent away to study oil and Gas Law.
Meanwhile, the British gas exploration company, BG Tanzania and the British Council have officially launched an international programme offering scholarships to Tanzanian graduates to study for Masters of Science degrees in UK universities. The scholarships will provide opportunities for 10 Tanzanians each year to study in the UK and to become part of the future work force in Tanzania’s oil and gas sector. A range of courses relevant to the sector are available under the program at three UK universities; Imperial College London, Aberdeen University and Robert Gordon University.
The scholarships, funded by BG Tanzania and administered in partnership with the British Council, cover the cost of academic fees, travel, living expenses and pastoral support while the graduates are in the UK. Successful candidates will be provided support when applying for a visa.
The government and religious leaders convened in Dar es Salaam to discuss oil and gas in January this year in what can be termed as economic participatory democracy. In the book Megatrends, participatory democracy is the way of the future and one seen to nurture positive economic development as well as political stability.
At the gas meeting, religious leaders supported the government plans to enable the state-owned Tanzania Petroleum Development Corporation (TPDC) to engage in exploration, appraisal and production of oil and natural gas in the near future. Chairman of a national religious leaders forum to debate the oil and gas subsector, Bishop Ndimi Mhegela of the Anglican Church and Deputy Qadh Sheikh Abubakar Zubeir of National Muslim Council (Bakwata), said empowering TPDC would benefit all Tanzanians, unlike when a small group of people gets a stake in the sub-sector.
“We are on the right track and hopefully with [Minister for Energy and Minerals], Prof Sospeter Muhongo, we will make good progress,” Bishop Ndimi Mhegela said at the symposium. Tanzania is in the meantime following in the footsteps of other African nations on the decision to form a Sovereign Wealth Fund.
Over the past two years, oil producers Nigeria, Ghana and Angola have established sovereign funds, managing $1bn, $100m and $5bn respectively, to open a new chapter for Africa. Financial Times warns, however, that African SWF do face “many challenges that slow their expansion”; the impediments include problems in “governance, especially lack of transparency and accountability.”
A sovereign wealth fund (SWF) is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign wealth funds invest globally, and that the most appropriate use of the fund is to spend interest a nation earns from the investments—local, or foreign investment.
The Minister for Energy and Minerals, Prof. Sospeter Muhongo said during the joint government-religious leaders symposium that Tanzania will have moved from a third world country to a middle income nation by 2025, its GDP moving from the current USD 33 billion to USD 200 billion. That is only ten years away from now; and all this will have been achieved through wealth generated from gas. Real Per Capita GDP will change from the current USD 600 to USD 3000, he said.
The challenge facing the nation will therefore be one of prudence on both the tapping and use of this wealth; but analysis indicates, despite gaps identified by Olan’g and Dr. Adam, some correct decisions are being made if they will be followed through properly.
By forming the Sovereign Wealth Fund, Tanzania is following in the foot steps of Ghana and several other African nations which opted for SWF to safeguard interests of future generations when tapping the finite resources. In Ghana, research showed this to be the correct path. Sovereign Wealth Funds have also been established in Ghana, Nigeria and Angola.
During years before they found oil, Ghana was heavily dependent on agriculture–like Tanzania. Like Tanzania, again, the west African nation suffered the “Paradox of Plenty.” The paradox of plenty denotes a situation where a nation endowed with seemingly ‘endless’ mineral wealth stagnates economically while one with fewer resources or no resources at all prospers. The Paradox of plenty is to be very rich and yet very poor. Ghana and Tanzania are like twin brothers in that sense.
In the 1950s, for instance, Ghana and South Korea were both ‘rag wearing beggars’. Ghana, the first country in sub-Saharan Africa to receive independence in 1957, was rich in natural resources (gold, timber, cocoa) under the leadership of the charismatic Kwame Nkrumah; the future seemed bright. In 1960, three years after independence, real GDP per capita stood at 400 USD. South Korea, on the other hand was ravaged by war, corruption and poverty. South Korea had no major natural resources….the future seemed bleak . Real per capital GDP was a mere 300 USD. Ghana was slightly better.
Today, Ghana displays a very feeble economy in comparison to South Korean when one uses the following indicators with South Korea in brackets: Ghana life expectancy is 57 years (South Korea 77yrs), Ghana literacy rate is 58% (98%), Ghana Real GDP Per Capita is USD 2,240 (USD 20,500).
Tanzania displays a similar pattern in comparison to South Asian nations which were equally poor in the 1960s. Singapore for instance was a third world nation in the 1960s–at the same level as Tanganyika. The tiny island nation with no resources at all now belongs to the first world. What are the correct policy stances that make the difference?
Ghana has learned its lesson on economic stagnation. The West African nation discovered oil in commercial quantities in 2010. Since then, the country’s government has worked to create an advanced approach to sovereign wealth management in Africa, by trying to learn from the successes and failures of other nations when setting up the Ghana Petroleum Funds (GPFs).
Authorities soon realised that the structure of a sovereign wealth fund (SWF) is just as important as its investment decisions. As a result – and in contrast to developments in several other countries – the Ghanaian government has invested significant political effort to engage the public and many other constituencies on the legislative process that underpins the fund.
The goal was clear: to adopt policies that harness the potential of natural resources, while avoiding the resource-curse and many pitfalls experienced by other nations. The term resource curse refers to negative impacts of resource wealth in a nation such as resource control wars, corruption and the sidelining of other sectors to put more emphasis of one particular resource sector.
The most significant piece of legislation that was passed as a result of this debate was the Petroleum and Revenue Management Act 2011 (PRMA), also known as Act 815. This helped to underscore the division of roles and responsibilities between the investment policy-making process and investment operations, which is critical in the design of an SWF as there is a broad range of models on how to own and invest in oil and gas revenues.
The PRMA gives absolute ownership of the funds to the government of Ghana. The governmental agency named as principal of the funds with the responsibility for investment policy is the Ministry of Finance and Economic Planning (Mofep), which reflects a general role of the Treasury in managing governmental funds. The Ministry of Finance is not doing it alone, which is quite often the case in these situations. An investment advisory committee provides Mofep with advice on investment recommendations, with these recommendations being published.
The Bank of Ghana, meanwhile, is the manager of the funds. Since the initial mandate is to invest the oil and gas revenues into fixed-income instruments, the Bank of Ghana’s skills and experience in managing foreign exchange reserves by investing in the treasury securities of developed economies made it a natural choice for this role. However, the Bank of Ghana’s mandate may become more challenging over time should the manager of the fund be allowed to invest in corporate bonds and equities. As we have seen in other countries, the shift from managing fixed-income portfolios to more diversified financial instruments requires deeper financial know-how and experience, which takes time to develop.
The PRMA requires an extensive reporting process, which adheres to the so-called Santiago Principles – the self-regulated code of conduct that requires high standards of governance, transparency and accountability by sovereign funds. As a result, the Bank of Ghana reports to the owner of the fund, the Ministry of Finance, on a quarterly, semi-annual and annual basis. Meanwhile, in a bid to maintain high standards of transparency and accountability, the internal audit unit of the Bank of Ghana provides an audit and also produces a risk management report of its activities that is shared with the parliament of Ghana. Additionally, the Office of the Auditor General also conducts its own periodical review and reports back to parliament.
As the principal is subject to the authority and review of the parliament of Ghana, the Ministry of Finance, which sets the investment strategy on an annual basis, also provides parliament with reports. This updated information is reported to parliament via the national budgets and national accounts. The minister of finance is also required to publish this information in the National Gazette and two state-owned dailies 30 days after the end of the quarter.
The public interest and accountability committee, which is responsible for public interest and oversight, is also required to provide periodic reports to parliament and the president, and, not later than March 15 and September 15 of each year, publish such reports in at least two state-owned dailies and on its website.
While the initial investment mandate of the fund is quite conservative in global terms, the governance structure of the fund appears to represent one of the more advanced approaches to sovereign management, including a clearly defined ‘checks-and-balances’ strategy.