Making a bad situation worse: Tanzania introduces further regulatory changes to the mining sector


By Peter Leon, Partner and Co-Chair of the Africa Practice, Herbert Smith Freehills

In July 2017, the Tanzanian National Assembly enacted three laws, under a certificate of urgency, which together will have a profound impact on the resources sector in Tanzania. These are the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017, the Natural Wealth and Resources (Review and Re-negotiation of Unconscionable Terms) Act, 2017, and the Written Laws (Miscellaneous Amendments) Act, 2017, which amends the Mining Act, 2010, the Petroleum Act, 2015 and the Insurance Act, 2009 (the “Insurance Act”), among others.

Key elements include: sweeping powers for the National Assembly to review and instruct renegotiation of previous arrangements or agreements concluded by the Government; new requirements for State participation in all mining companies, including at least a 16 per cent free carried interest, which may be increased up to 50 per cent to match the value of historical tax benefits granted to the company; and an immediate blanket ban on the export of unprocessed minerals, which must in future be processed domestically prior to export.

Six months later, on 10 January 2018, the Minerals Minister promulgated a suite of new regulations under the amended Mining Act, 2010, which included the Mining (Local Content) Regulations, 2018 (the “Mining Regulations”).

The Regulations impose onerous local content requirements for companies operating in Tanzania, requiring them to restructure significantly the way they procure goods and services. Given the shortage of sector-specific skills in the country, as well as inadequate domestic support for the extractives sector in the provision of key goods and services, many of the requirements of the Mining Regulations do not appear to be immediately workable. This is exacerbated by the near immediate effect of the Mining Regulations, only gave companies until April 10 to comply.

Once implemented, the new restrictions will also have significant consequences for service providers to the mining sector, including the imposition of a number of specific restrictions on the procurement of services in the banking, financial services, insurance and legal sectors, with the result that these sectors will be particularly affected by the new requirements.

The changes are part of a worrying trend of sweeping legislative and policy changes, implemented without consultation with stakeholders, combined with an increasingly hostile approach by the Magufuli administration towards the private sector.

These reforms have begun to have a serious impact on investor confidence and the business climate in Tanzania.  Although the country has experienced healthy economic growth in recent years, the deteriorating business climate has led a number of analysts to revise the country’s growth forecasts significantly downward.  The financial sector in particular will have detected troubling trends underlying the headline macroeconomic figures, such as the decline in private sector credit and increases in non-performing loan ratios.

Most recently, Moody’s issued its first country rating for Tanzania, giving it a sub-investment grade of B1, citing an increasingly unpredictable policy stance of the government, particularly as it relates to the mining sector, could have a long-term negative impact on the country’s growth potential and ability to attract foreign investment.

The Mining Regulations provide that a mining company requiring financial services in relation to a mining activity shall only retain the services of a Tanzanian financial institution or organisation and may only engage the services of a foreign financial institution with the approval of the Mining Commission.  It also requires that companies must maintain a bank account with an indigenous Tanzanian bank and transact business through such banks in Tanzania.

As a result of the Mining Regulations, mining companies in Tanzania will be required to terminate existing relationships with foreign-owned financial institutions and procure services only from those institutions issued licences by the Bank of Tanzania, of which there are only eight; and relocate their business banking accounts from foreign-owned Tanzanian banks to banks that are majority-owned by Tanzanians.

It is likely to be difficult for mining companies to comply with these requirements in the near term, given the limited number of majority Tanzanian-owned banks within the Tanzanian banking sector.

On the insurance front, the Mining Regulations require that a mining company had to by no later than April 10: comply with the provisions of the Insurance Act; insure insurable risks relating to mining activities through an indigenous brokerage firm or, where applicable, an indigenous reinsurance broker; and only obtain offshore insurance services for a mining activity in Tanzania with the approval of the Commissioner of Insurance, who may grant such approval only if he or she is satisfied that local capacity in Tanzania is  fully exhausted.

The Insurance Act was recently amended by the Written Laws (Miscellaneous Amendments) Act, 2017. These amendments increased the Tanzanian ownership requirement for registration as an insurance broker from one third to two-thirds of the ‘controlling interest’ in such broker.

It is likely that the Tanzanian insurance market may simply not have the necessary capacity to insure mining companies effectively.

The Mining Regulations impose penalties for non-compliance, applicable to mining companies as well as insurance brokers and insurers, of fines of up to five billion Tanzanian shillings or imprisonment of up to five years.



Source link : http://africasciencenews.org/making-a-bad-situation-worse-tanzania-introduces-further-regulatory-changes-to-the-mining-sector
Author : Editor
Publish date : 6 May 2018 | 6:59 pm
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