Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference

Home > Asset Management Viewpoints > Tanzania: The Hard Road to Stability

Asset Management Viewpoints

Tanzania: The Hard Road to Stability

by Charles Laurie

Background

Tanzania’s long-term economic and political outlook has become closely aligned with how it develops its fledgling oil and gas industry and the way it manages the revenues arising. Despite growth expectations brought on by significant gas finds, the country continues to suffer from the entrenched problems of social inequality, popular unrest, and corruption. Resolving these issues will be imperative for the government, but it will need to carefully weigh the needs and demands of investors against the necessities of development as it seeks to maximize benefits from its natural resource wealth.

Tanzania’s model Production Sharing Agreement (PSA), published on November 4, 2013, will provide a useful bellwether for investors as they look to gauge the government’s long-term intentions for oil and gas development, which is likely to be a major driver of the country’s economy over the next 20 years.

The government’s efforts to clarify regulatory conditions and terms within the PSA are a step toward increasing confidence for investors, provided that growing challenges from opposition political parties do not undermine the stability necessary for the development of the extractive sector. Combined with Tanzania’s long-awaited natural gas policy, the PSA indicates an overt intention to maximize returns from the sector from the earliest stages of development, which may help the government to improve livelihoods, increase stability, and deflect rising political and public criticism.

Provisions in the PSA

Investors have undoubtedly seen a toughening of conditions, with up-front payments—including a minimum signature payment of US$2.5 million and a production bonus of US$5 million—providing the government with early revenues from the sector. Neither of these conditions were included in previous model PSAs. Equally, royalty rates of 12.5% for onshore or shallow oil and gas production and 7.5% for offshore production boost the state’s long-term take and will squeeze investor profits.

It is important to note that the model PSA provides a starting-point for negotiations between the state and oil and gas companies. However, although it provides a useful indication of the likely terms that oil and gas investors may be expected to face, it is unclear to what extent final production-sharing agreements will diverge from the model terms. This uncertainty is exacerbated by the fact that none of the current PSAs are publicly available, adding uncertainty. For example, the model PSA requires at least 25% state participation, but the government appears to be indicating that it will take either 65% or 75%.

Despite alarmist responses from several analysts, provisions in the PSA were both largely anticipated and in line with industry norms. East Africa has experienced a wave of “soft” resource nationalism since 2012, when governments across the region began reforming outdated oil and gas regulation in response to significant discoveries and booming foreign investment interest.

However, this is where Tanzania’s PSA stands out. Unlike Uganda and Mozambique’s ongoing reforms, which will be binding, the Tanzanian PSA is intended for guidance on negotiations. As a result, foreign investors may perceive Tanzania’s reforms as evidence of ongoing regulatory uncertainty, rather than as the implementation of necessary reforms. The state’s share is not specified in the PSA and local content provisions have become somewhat more stringent but not onerous.

The Socioeconomic Argument

The government’s decision to increase the fiscal burden on oil and gas investors reflects several key political and socioeconomic pressures. The strengthening of the regulatory regime suggests that influence from development organizations remains strong. External advisors have urged the aid-dependent Tanzanian government to ensure that the state receives fair revenues from the exploitation of its natural resources, that these revenues are handled in a transparent manner, and that they result in tangible socioeconomic improvement. This influence undoubtedly contributed to the increasing fiscal burden that oil and gas companies will face. However, it also suggests a longer-term development outlook, one that emphasizes political stability and a strong growth environment, which is a positive prospect for all investors.

The PSA also highlights the potential for increasing resource revenues to lead to improving social conditions. Tanzania remains one of the world’s poorest countries, with 88% of the population living on less than US$2 a day. The key problem in Tanzania is a lack of broad-based economic growth and increasing inequality due to the insufficient distribution of wealth from the relatively strong economy. With 42% of the population under the age of 15, already high unemployment is likely to increase in the coming years, exacerbating socioeconomic challenges and increasing long-term risks of unrest.

Increasing societal discontent due to rising inequality is a particular concern for the ruling Chama Cha Mapinduzi (CCM) party, because of its salience as a campaigning tool for opposition politicians. For example, the opposition Party for Democracy and Progress (Chadema) draws much of its support from Tanzania’s urban youth and will benefit at the polling booth from rising societal discontent. For the first time, CCM—which has ruled the country since independence—is facing real vulnerability from a political opponent. As such, it is increasingly likely that the government will take a more populist approach to its policies. This is expected to translate into calls for higher taxes and royalties, as seen in the PSA.

Back to Table of contents

Further reading

Books

  • Clarke, Duncan. Africa’s Future: Darkness to Destiny. How the Past Is Shaping Africa’s Economic Evolution. London, UK: Profile Books, 2012.
  • Compagnon, Daniel. A Predictable Tragedy: Robert Mugabe and the Collapse of Zimbabwe. Philadelphia, PA: University of Pennsylvania Press, 2011.
  • Diamond, Jared. The World Until Yesterday: What Can We Learn from Traditional Societies? New York: Penguin, 2012.
  • Gbetnkom, Daniel. International Finance: Theory and Policy in Africa. Bloomington, IN: AuthorHouse, 2012.
  • Jerven, Morten. Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It. Ithaca, NY: Cornell University Press, 2013.

Articles, Reports, Etc.

  • “Model production sharing agreement between the Government of the United Republic of Tanzania and Tanzania Petroleum Development Corporation and ABC Ltd for any area 2013.” Online: http://tinyurl.com/nn9hvx5
  • Gloystein, Henning, and Oleg Vukmanovic. “Bigger battle awaits Mozambique, Tanzania in East Africa gas race.” Financial Post/Reuters October 10, 2013. Online: http://tinyurl.com/qgwpjk2
  • US Energy Information Administration. “Tanzania.” Country analysis note May 30, 2013. Online: www.eia.gov/countries/country-data.cfm?fips=tz

Websites

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share