PART ONEHow Can Revenues Derived from Domestic Extractive
industry Oil and Gas Production be productively Utilized to
Eradicate Poverty in East Africa. Conceptual Research Paper. By
Eng.Gilay Shamika, ([email protected] ) An Expert in Extractive
Industry
AbstractThis research paper examines how revenues derived from
domestic extractive industry oil and gas production can be
productively utilized to eradicate poverty in East Africa. The
paper describes the obstacles to using extractive industries as a
vehicle for poverty reduction and sustainable development, and
poses solutions based on two schools of thoughts which entails the
two stories of extractive industry; mineral resources are a
potentially great source of wealth for poor countries, and the same
can be a curse to the developing countries - for policy makers to
be aware with both stories and find a way to minimize the second
story of negativities.The researcher has developed new conceptual
framework showing relationship between economic growth and revenues
generations. The concept cemented that revenue re-investment is a
denominator of sustainable economic growth and not the function of
revenues boom from extractive industry or any other economic
sector. Other argument of Soft and physical Infrastructure has been
introduced. The article concluded that; the revenues re-investment
is the denominator of the sustainable economic growth when guided
with comprehensive and transparent soft infrastructures.The
research tells all about two stories of extractive industry;
positivity and negativity side of it. There is a great danger of
telling single story of positivity only, especially when the
negativity surfaces the authorities use more efforts to explain and
contain riots from the citizens. Let the truth be told and the
citizen will be used to it when negativity emerges from extractive
industry.
1.0 IntroductionThe expanded trade and investment among the East
African Community (EAC) Partner States has increased economic
growth and development prospects in the region, with regional GDP
increasing from US$42.4 billion in 2006 to 74.5 billion in 2009 and
reached $ 80 billion in 2012. Kenyas economy remains relatively
large at about 35.7% compared to that of the other EAC partner
states. The extractive industry in East Africa has experienced a
boom that coincides with favorable enabling investments
environment. The overall inflow of FDI to EAC increased from a
total of US $1,323 million in 2006 to US $1,714 million in 2009.
For the period from 1998 to 2012, the 7large scale gold extractive
industry entities in Tanzania paid to the Government a total of TZS
2.86trillion (royalty amounting to TZS484.69billion and taxes
amounting to TZS 2.38trillion). This is about 15.81% of total
revenue generated (TZS 18.09 trillion or USD 12.06billion) by the
entities during that period. Huge discoveries of offshore gas have
been made in recent years in Tanzania, with estimated reserves
currently at 53.2 trillion cubic feet (tcf) and rising, valued at
USD 430 billion (TPDC Report, 2013) and expect to see an increase
in revenue of up to $ 3billion a year.The ongoing laying out of
Mtwara Dar gas pipe in Tanzania, will result in providing gas to
produce electricity capable of generating over 2,000 megawatts of
electricity and expect to reduce the cost of producing thermal
electricity from the current USD 0.34 cents to USD 0.12 cents per
megawatt. In Kenya, the discoveries of Oil by Tullow in Lokichar
basin, promised to have a 600million barrels of oil reserves. Kenya
is planning to build the pipeline like Tanzania, from Lokichar
basin to a terminal on the coast Lamu. The Tullow operations have
contributed KES 4.1billion in local content expenditure in 2013 and
KES 1.9 Billion government payments.Uganda oil discoveries show the
good sign of the government and the community to benefit. Ugandas
energy ministry and Tullow Oil both estimates that the current
reserves alone could generate over $ 2billion in annual revenue for
more than 20years.The contract to build oil refinery has already
endorsed which means East Africa has now entered into a new history
of oil and gas producer.These discoveries have increased revenues
in East African Partner states, the current situation of the region
economically also shows the improvement of the economy. The GDP of
total 5 countries grew from USD 30billion in 2002 to USD 75billion
in 2009 with an average of GDP growth rate of 7 per cent and single
digit of inflation rate of 5 per cent. The poverty continues to
drop from 24.5 in 2009/10 to 22.2% in 2012/13 for Uganda, Kenya
population below poverty line in rural is 49.10 and urban 33.7
while Tanzania rural 33.3 and urban 15.5 in 2013.Rwanda and Burundi
are also showing improvements in explorations going on.
1.1 Poverty The definition of poverty according to the World
Bank, considers poverty to be a multi-dimensional phenomenon, it is
more than inadequate income or even low human development as
perceived by many. Poverty comprises as well: material deprivation,
low levels of education and health, vulnerability and exposure to
risk, voicelessness and powerlessness.The benchmark of measuring
poverty line using one dollar per day, while the currency
strength/pegging are now manipulated, its authenticity becomes
questionable. Purchasing power within local markets is different
from international markets. There are most of countries in the
suburb where people can live satisfactorily below one dollar per
day by purchasing locally..why comparing someone in New York who
cannot get daily bread below one dollar while there are someone in
Kinshasa who can and you put them together into similar economic
index computation?It is true that there are common human needs but
no common human wants. The two result into total daily expenses and
ultimately purchasing power. The definition above encompasses both
common needs and wants, which is wrong to my view. Needs can always
be met but wants can never be fulfilled.Is better to have a
reference (below one dollar) but this reference should not be
ultimatum in grading poor countries especially African countries
and other developed countries. There are should be a comprehensive
debate among economists on the way to re-define the computation of
poverty lines generalizing the purchasing power, incomes and
expenses (wants and needs) globally bring inconsistency. Better put
in a certain geographical location which has economic
similarities.
2.0 Poverty Eradication Measures2.1 Economic GrowthEconomic
Growth and Revenues Generations are inseparable terms and they need
careful definition to differentiate. You might have reliable
sources of revenues generations which shows an increase annually,
and it can be defined or interpreted as an economic
growth.Additionally, the increase of foreign direct investment
(FDI) in the country can be defined or interpreted as an economic
growth since more capitals have been poured into the economy of a
specific country. The question is, which one should start and is
truly Economic Growth;(a)Does the revenues generation lead to the
economic growth by re-investing those revenues to boost other
economic projects and result into economic boom, or (b) Economic
Growth (in the sense of FDI) leads to the reliable Revenues
generations and re-invest those revenues to keep the economy
escalating?Both are collect: The essence of economic growth is to
get optimal revenues for the Government to fulfill its obligations
of serving its people satisfactorily. Therefore economic growth and
revenues generations is a complete closed circuit (cycle); there is
no definitive starting point once both are rolling. You can have a
single reliable source of revenues generations and use those
revenues wisely to boost the economic growth, or prepare suitable
environment for investments (FDI) and ultimately the economic
growth takes its way by re-investing revenues.In light of the
above, the common denominator is the utilization of revenues
generated to keep the economic growth cycle existing and revolving,
otherwise there will be a gap between revenues generations and
sustainable economic growth. The figure below shows relationship
between economic growth (EG) and revenues generation (RG).
The relationship between EG and RG shows four patterns in which
the countries both resource-rich and non-resource rich countries
can experience depending on the measures taken by the government
and the private sector whether formal or informal.
Economic Growth (EG) Vs Revenues Generation (RG) Conceptual
Framework
Quadrant I: Real Economic Growth. There is direct proportional
between EG and RG due to;Proper mechanisms in supervising
investments compliance, revenues collections and proper incentives
and taxes;No single dependence on revenues generations, all sectors
are strengthened including local projects within the communities
(re-investing revenues).The economy is characterized by labor
intensive industries and services sectors.
Quadrant II: Statistical Economic Growth. There is inverse
proportional between EG and RG due to;Increase of Investments
accompanied with over-incentives to the investors which delay the
maturity of investments in terms of return to the countries of
operationsInadequate institutions capacity (soft infrastructure)
Mostly RG depends on the single sector especially extractive
industry while there is relaxation in dealing with other
traditional economic sectors Quadrant III: Zero Economic GrowthThis
is the mirror image of quadrant I. Lack of the measures taken in
quadrant I results into economic setbacks (austerity).Quadrant IV:
State Economic Growth. This is a mirror image of quadrant II.There
is inverse proportional between EG and RG;Statistically the EG show
decrease while the Revenues generations (collection) increase. This
is due to boom of informal sectors where there is no proper records
from informal economic activities but the state collect taxes from
local councils, municipals and local markets from those activities
and the state economy goes on. Internationally the Economy Growth
statistics wont be available for compilation while locally the
state is gaining revenues from informal sectors (state economic
growth) and the livelihood of citizens show improvements.The
interpretations shows that you might have Economic Growth but with
decimal revenues generations, and as well having revenues
generations without statistical economic growth.
In light of the above, the real economic growth is reflected
into how the revenues generated from that growth is re-invested to
keep the growth escalating, otherwise the growth will be decimal.
And that the denominator of economic growth is revenues generations
and not the status of number of capital intensive investments.2.2
Economic Growth from Extractive Industry2.2.1 Positivity: It is
true that, the resource extraction can contribute to poverty
reduction by generating economic growth. The growth in GDP of
resource-rich countries tends to reduce poverty as the country
become able to fulfill its obligation of serving its people
(Weber-Fahr, 2002). The rational for extractive industry to
eradicate poverty is through enhancing economic growth, increase
government revenues and in return finance the poverty reduction
programs, create jobs directly or indirectly, transfer of
technology through either learning by doing or colleges initiated
by extractive industries, downstream industries related to
extractive industries and also infrastructure advancement within or
to the vicinity of extractive industries. All these in totality if
managed responsibly, they would contribute to the vast poverty
eradication in the East African community taking considerations of
ongoing discoveries of Oil and gas. To get rid of resource
dependence to effect economic growth negatively, the revenues boom
and spill over from extractive industries have to be re-invested
into traditional economic activities like agriculture and
manufacturing industries. 2.2.3 Negativity: The negativities of
Extractive Industry are not explicit told to the extent that most
believes that there is no way the natural resources can bring
negativity to the countrys wellbeing;
Decrease rate of GDP There are three types of resource-rich
countries where extractive industry, oil and gas is dominant (50%
of all exports), critical (15 to 50% of all exports) or relevant (6
to 15% of all exports).The empirical records demonstrates that from
199o to 1999 the GDP of all three types countries were decreasing
compared to non resource rich countries (Scott,2005).Level of
Illiteracy The dislocation of people, child labor and migrant
workers cause comparatively high illiteracy in resource-rich areas.
Thorvaldur Gylfason tests three different measures of education
against natural resource abundance and finds that;1) An increase of
18 percentage points in the share of natural capital from one
country to the next is associated with a decrease in public
expenditure on education by 1% of GNP; 2) A five percentage point
increase in the share of natural capital is correlated with a
decrease by one year in the schooling that an average girl at the
age of school entry can expect to receive; and 3) A five percentage
point increase in the share of natural capital is associated with a
10 percentage point decrease in secondary-school enrollment from
one country to another (Gylfason, 2001).
Social Tension The commissioning of extractive industry, oil and
gas projects are capital intensive with a lot of exposure of the
poor within those vicinities to social risks; displacements from
their areas, influx of migrant workers and foreigners who disturb
the cultural arrangements of the inhabitants. The World Bank
demonstrates that, often at any extractive industry areas the
influx of people lead to price inflation; higher income of mine
workers lead to rising local prices for food, fuel, land, and
housing.This cause more poverty on local community; mine workers
enjoy the situation while the locals and newcomers who have missed
the employment, turn the area into poverty hot bed and in return
results into school absenteeism, child labor and prostitution.
2.2 Revenue Generation from Extractive IndustryThere are few
areas of economic policy-making in which the returns to good
decisions are of so high and the punishment of bad decisions so
cruel as in the management of natural resource wealth. Rich
endowments of oil, gas and minerals have set some countries on
courses of sustainable and robust prosperity; but they have left
others riddled with corruption and persistent poverty, with little
of lasting value to show for squandered wealth. And amongst the
most important of these decisions are those relating to the tax
treatment of oil, gas and minerals.Positivity: The first and
foremost intention of the developing countries to attract foreign
direct investment is to get the reliable sources of revenue
generation. The revenues accrued will be used in fulfilling poverty
reduction programs. The capacity of East African countries to
ensure appropriate mechanism to collect the net returns from
extractive industries is of high importance. Though due to
financial muscles of those multinational companies and sometime
recommendations from the World Bank, the countries of origin tend
to be challenged to reduce the royalties import duty, corporate
income tax and customs duties (Campbell et. 2003)The East African
community in its Article 114 of the Treaty for the Establishment of
East African Community has emphasised efficiency management and
utilization of natural resources to strengthen the development of
East Africa. East African Development Strategies has again
earmarking on how to govern, audit and monitor revenues from
natural resources including the intention to have strong mechanism
of revenues collection. Tanzania has gone extra mile by
establishing Tanzania Minerals Audit Agency (TMAA) and Kenya is on
move to establish Minerals Audit Unit.The establishment of stable
fiscal regime with win-win situation between parties, appropriate
mechanism for revenues collection, transparency, accountability and
ultimately proper channel of revenues expenditures, will result
into more revenues generation and hence fulfillment of poverty
reduction programs.Negativity: The initial programs of having more
revenues generation can either be a source of sustainable
development or a cause of more poverty. Most of the African
countries think mostly of Foreign Direct Investment (FDI) as a
proper way to have more revenues generation. In making sure they
entice more FDI, they give more incentives to those investors to
the extent that; the expectations of having more revenues are not
met, simply because the over- incentives given takes more time for
those companies to give back to the countries in which they
operate.These incentives sometimes cause setbacks of local
industrialization schemes like free importations of consumables,
spares and other supplies which are locally produced. Secondly,
revenues collection from local economic activities does not
consider the level of activities. While for FDIs there are
incentives like tax holiday and free importation, there is no
intentional plan to give grace period for locals who have just
started their business. Ironically, the multinational companies get
more incentives to the expense of local economic activities in the
name of revenues generations to the Government. The World Bank
structural adjustment has addressed this issue and most of the East
African state partners have started implementing policies which
favor internal communities (local content policy) in participating
into extractive industry opportunities.2.3 Job Creation The
Africans mindset of pre and post colonialism era, define job as
employment in public sector. Those in private sector and
self-employed were not considered as employees having real
job.Fortunately the shift has happened since 1990s when the FDI
started operating in most of African countries. Currently there is
no demarcation among public sector, private sector and self
employees. The mindset has changed and most of Africans, especially
middle age generations have shown a way to initiate their companies
and like to work into private sectors.Job Creation from Extractive
IndustryThe extractive industry is an assembly where all careers of
literates and illiterates convene to work together in producing a
single line product.Positivity: The extractive industry is among
the sector which creates a good number of jobs. The booming of
extractive industries in East African Partner states expect to
employ more people. The large scale mines in Tanzania have employed
8,803 workers in 2012, out of which 8,134 (equal to 92.4%) are
Tanzanians.The World Bank recounts that, small-scale extractive
industry provides employment for about 13 million workers
worldwide, while large-scale extractive industry provides direct
employment for about two to three million workers. The Bank
estimates that each large-scale extractive industry job indirectly
creates somewhere between 2 and 25 jobs with suppliers, vendors,
contractors and others. Negativity: However, extractive industries
apart from creating jobs, it is as well the cause of unemployment
when local populations are forced out of traditional productive
activities. When compared to other sectors, extractive industries
employ less per unit of capital invested. The capital intensive
project in textile, agriculture or tourist will employ many than
the same capital invested in extractive industry. For instance
30billion USD in extractive industry project will employ less
people compared to the same amount invested in let say Kapunga rice
project or Kigoma Mawese project. But this logic is debatable
because the ILO recounts that though extractive industry will
employ less since most of the money goes into equipments but the
multiplier effect of the high salary from miners will compensate
many workers in agriculture with less salary compared to miners. Do
African miners get higher salary like may be Latin America as price
per ounce is the same everywhere and cost per ounce in Africa is
likely low hence they should get higher or the same like their
counterpart.Cultural disorientation is another source of
unemployment caused by extractive industries in their operating
areas. The indigenous tend to shy away from their cultural life
before the newcomers and left the areas in search of other
locations without being sure if they can still practice their daily
activities like hunting, beehives keeping, cutting trees for
charcoal vending. All these activities are against Safety, Health
and Environmental compliances within extractive industry, oil and
gas operating areas.
2.4 Technology TransferTechnology transfer has been named as one
of the profound advantage of foreign direct investments in all
sectors. Does the technology of those large scale extractive
industry companies suffice the technology needed for our local
miners? Or they dont match with the small scale and medium miners?
If Yes or No who is supposed to twist the status quo?The
Governments in east Africa through Ministry of Energy and Minerals
are battling around the clock to build capacity of small scale
miners financially and technically.In reality the technology used
by large scale extractive industry companies is not compatible with
either small scale or medium scale (VAT Leaching) operations.
Therefore there is no technology transfer merits in this sense. But
in terms of career development, yes there is. For instance since
1990s when the large scale extractive industry companies started
operating in Tanzania, most of Tanzanians who were employed in
large scale extractive industry companies in the country, are now
experts in Congo, West Africa and Australia.Technology Transfer
from Extractive Industry Positivity: The technology related to
extractive industry is a must taking into account the booming of
extractive industry in the region which has to match with the human
resources. The technology can be impacted from the extractive
industry through learning by doing or trainings in colleges.
Negativity: Though findings show that knowledge and technology is
not developed indigenously and there is little learning by doing.
(Power, 2002).This is due to the fact that most of the technical
jobs are done by foreigners. Few local graduates who know technical
know-how and are in position to acquired technology by learning by
doing.However, extractive industry was the national learning
experience in the USA that let to building a strong technological
system from which modern manufacturing developed (de Ferranti,
2002). The East African partner states can imitate this strategy by
insisting implementation of succession programmes into extractive
industry, oil and gas operations. And mandatory programs for
extractive industry to impart technology to nationals, study tours
to learn different processing and recovery operations, technology
for small and medium scale miners to maximize the recovery in their
operations.2.5 Infrastructure ImprovementsNew concept of
infrastructure: We often tend to miss the correlation between
physical and soft infrastructures. These two types of
infrastructures relate to each other.Soft infrastructure is all
about policies, regulations, visions, national programmes and
ultimately democratic government. These intangible infrastructures
are the ones needed to plan, design and foresee the physical
infrastructures. That means soft infrastructures are supposed to be
laid down first and then ground work for physical infrastructures
follows. The soft infrastructures are immortal for the whole life
of the country while physical can be done to completion. Thats why
when you listen to the political campaigns in Africa, all
politicians talk about physical infrastructures - roads, bridges,
School and hospital buildings and the like.In developed countries,
the story is different; they will be talking about soft
infrastructures health care policies, international diplomacy,
security arrangements, national social security schemes, bilateral
economic relations. This is simply because; the softs will perfect
the physicals. The rule of thumb is to start with soft which gives
a roadmap to accomplish physicals. If you do the inverse, it takes
ages of time to improve physical infrastructures. Thanks to Western
for helping to improve softs and China for physicals.Infrastructure
Improvements in Extractive Industry Operating Areas.In many
developing countries, infrastructure improvements are needed where
the extractive industry is commissioned. Roads, water and
electricity within those vicinities have to be upgraded for the
companys operations and surrounding communities. Since in most
cases the companies are the ones to implement those
infrastructures, the companies tend to by-pass local villages.
(Frynas, 2001).However, other mines have distributed road, water
and electricity to the surrounding communities and accelerated the
economic growth. The improvements of resource-rich countries
policies have included percentage of revenues to remain within the
extractive industry, oil and gas areas for infrastructure
improvement.There is ongoing debate between the extractive
companies, World Bank and resource-rich countries to see the need
of making corporate social responsibilities mandatory rather than
voluntary. During contract sealing, the contract should address the
needful infrastructure within the areas where the operations are
going to take place. These costs can either be deducted during
operations as part of the revenues to be accrued by the government
or allowed to be accumulated in initial investment capital. 2.6
Downstream Industries and ServicesDownstream Industries are
services, manufacturing or processing plants needed to complete
chain value of all activities needed in extractive industry or
other industrial processing from upstream, middle stream and
downstream activities.For instance, at extractive industry sites
the downstream for extractive industry engineering services,
crushing services, smelting, laboratories and transportations make
a complete cycle to perfect the extractive industry operations and
end product (refined gold dore).The emphasis of having these
downstream industries will speed up the contribution of extractive
industry to the surrounding community by buying all supplies and
consumables in the operating country rather than importing from
overseas.The profit from extractive industries takes time to mature
due to nature of the industry and when they reach closure period,
they create revenues deficit. There is a need to create these
industries to bridge the above deficit and balance the maturity
time of extractive industry payback to the communities. The booming
of extractive industry can be re-invested into industries that
process and add value before exported and contribute to poverty
reduction (Ross, 2001). The east African development strategies,
has insisted to have value addition regulations of natural gas, oil
and minerals in order to increase value and provide more jobs in
the region. Extractive industry Act of Tanzania (2010), insisted
Lapidary industries and gemstones business to be under indigenous
control.The smelter Processing industries for value addition of
resources extraction like gold, copper and nickel, LPG Plant and
the like, will add the amount of revenues. Small industries for
spare parties, Lubricants, Chemicals, by products from oil and gas
such as plastics, fertilizers and gas cooker, are among the
downstream industries needed within the region. The supply of food,
Personal Protective gears, motor vehicles for transportation of
goods and employees to extractive industries have been rejected in
most developing countries because they lack required international
standard. The revenue has to be used to construct modern industries
and meet the required standards by extractive industries which have
been the case for them to import those consumables and supplies as
local countries have failed to meet those standards.
3.0 ConclusionHaving natural resources is not a guarantee for
the country to have sustainable development but is a springboard
for the country to stride towards having sustainable development.
The natural resources are initial capitals to be utilised as an
engine to drive other economic sectors. In 2001, Sub-Saharan Africa
Extractive Industries accounts for 57 percent of total merchandise
export. At that time, oil and diamonds account for 97 percent of
Angolas export and approximately 65 percent of its GDP and Nigeria
petroleum generated 85 percent of Nigerias foreign exchange
earnings. Of all these records the region remains among the poor
countries.The East Africa partner states will not be exceptional if
good governance in natural resources and integration of other
economic sectors are not considered. As of now, Sub-Saharan region
is doing better having countries with fastest growing economy in
the world and Nigeria has outweighed South Africa and become the
leading economy in Africa. These new shifts of development were
attained after considerations of good governance of revenues
collection and re-investment from extractive industries.The program
of sovereignty / wealth account helped to control the revenues from
the extractive industries and the same were used to institute soft
infrastructures and ultimately directed into other economic
sectors. The utilization of revenues from extractive industries to
boost and prepare conducive environment of other sectors, have
changed the economic trend of Nigeria and most of Su-Saharan
countries.The empirical studies entail the causes of resource curse
and Dutch disease as a two much relaxation in dealing with other
sectors and two much dependence on natural resources which at the
end paralyses other sectors.Therefore, it is possible for East
African Countries to eradicate poverty if and only if, revenues
derived from Extractive Industry shall be re-invested to strengthen
other sectors and improve both soft and physical infrastructures.
Extractive Industries are not sustainable by themselves, therefore
cannot bring sustainable development by themselves, unless the
revenues derived are re-invested (integrated) into other
traditional economic sector to make them robust. Thats the optimal
contribution the extractive industry can do.This drives a point on
board that; there is no need of waiting the facets of extractive
industries discoveries for the country to develop. East Africa
partner state can use traditional sectors properly to develop and
supplement those discoveries to accelerate the traditional
sectors.Agriculture, services, telecommunications, ports, railway
and the like are there to remain forever and continue generating
revenues while extractive industries are for a certain period of
time accompanied with commodity price volatilities.Strengthen your
traditional economic sector and when there is extractive industry
discovery; use the revenues from extractive industry to keep
strengthening your traditional economic sector. Extractive Industry
is a temporary assembly where all careers convene to work together
to produce single line product at a specific solid years. This
temporary assembly needs to be properly organised so that everybody
becomes beneficiary before the assembly disperses. The philosophy
behind this is to make sure the win-win situation among the trio:
country, investor and employees both locals and experts. The issue
of local contents in policies and Acts, import and export
procedures, price and capital transfer, permanent residence,
experts permit, MDAs, PSA, sovereignty wealth fund and the like
need national attention before sealing the contract for the region
to reap from its resources. The danger of single story of
extractive industry is obvious.Let the truth be told that, the
extractive industries cause development and as well poverty to the
countries of origin.The Governments everywhere like to talk about
the positivity of extractive industry only. The danger of this is
that, the people will get the other story from unreliable sources
and bring chaos, looting or demonstration unnecessarily. To the
extent that the authorities will be obliged to start denying the
information surfaced from unreliable sources.Lets tell the people
both sides of the story of extractive industry to make sure that
whenever there will be negativity; people will be prepared to
accept those predicaments because they have been told before about
let say price volatility like currently where the barrel of crude
oil is around 43 dollars. The cost of exploration and extractive
industry which takes time for the country to get returns and the
like.
APPENDECESReferences 1. Campbell, B., Hatcher, P., Lafortune,
A., Sarrasin, B. (2003). Factoring in governance is not enough:
extractive industry codes in Africa, policy reform and corporate
responsibility. Document submitted to the Extractive Industries
Review.
2. de Ferranti, D., Perry, GE. Lederman, D., Maloney, WF.
(2002). From natural resources to the knowledge economy: trade and
job quality. Washington, DC: The World Bank.
3. Frynas, JG. (2001). Corporate and state responses to anti-oil
protests in the Niger Delta. African Affairs 100(398):27-54.
4. Onorato, WT., Fox, P., Strongman, JE. (1997). World Bank
Group Assistance for minerals sector development and reform in
member countries. Washington, DC: The World Bank Group.
5. Power, TM. (2002). Digging to development? A historical look
at extractive industry and economic development. Washington, DC:
Oxfam America.
6. Ross, ML. (2001). Extractive sectors and the poor.
Washington, DC: Oxfam America.
7. Weber-Fahr, M. (2002). Treasure or trouble? Extractive
industry in developing countries. Washington, DC: World Bank and
International Finance Corporation.
8. TPDC Report (2013). The status of natural gas discoveries.
Dar es Salaam. Tanzania Ministry of Energy and Minerals.9. World
Bank Extractive Industries Review, (2003).Striking a better
Balance.Vol.1.Washington, DC
10. Extractive industry, Minerals and Sustainable Development
Project (2002).Breaking new ground: extractive industry, minerals
and sustainable development; executive report, London.
PART TWOThe effect of Mineral Policy and Regulation on the
Exports of Gemstones in Tanzania: Case Study Tanzanite Exports.
By Eng.Gilay Shamika, an expert in extractive industry
1.0 INTRODUCTION1.1 Policy Concept
Policy is like architectural drawing showing the whole structure
of the house needed either by owner or tenant. If is for owners
residence, the drawing will base on the wants and needs of the
owner at a pace but for renting, the drawing may need some time to
be adjusted to allure and encompass the renters needs and wants,
which were not specifically according to the owner pre-requisites.
The owner is compelled to change the drawing to satisfy the tenants
otherwise the tenants will turn down the deal.Like architectural
drawing, Mineral policy is the guidance showing the roadmap of the
specific country towards the demand, supply and allocation of both
minerals and the revenues collected from extractive industry. The
extractive industry policies evolve in response to geological
resources, politics circles, economics events and advancements in
technology. All these in totality are dictated by the wants and
needs of the investors. Like tenants, the investors wants and needs
may compel the country to adjust the policy as a threshold action
for the influx of investors in the country. Even if the country is
endowed with abundant minerals, if is not internally
industrial-consumer of its natural resources, it will be swayed by
investors and therefore it will not withstand its resources
expectations and intent, to the extent that, a stand-alone mineral
police will not be possible rather it will confer its minerals
policy based on FDI, investors-oriented documented policy.The
solution to this is to be focused in changing our economy into
industrialized economy; increase industries internally to use the
available minerals. The United States, Canada and Australia are all
major mineral-producing countries with good to excellent geological
prospective. Their dream is to turn into net consumer and importer
of minerals for their industries instead of exporters. China has
already managed this, Brazil is on the track.
InvestmentThe investment issue has become a global central point
of all mineral policies regardless of the level of the economy of
the country developed, developing and transition economies.
Investment and government extractive industry policy are closely
linked. Even the most highly geologically prospective nations will
have difficulty in attracting foreign investment without adequate
national policy, regulatory and fiscal systems. Over the past few
years the level of mineral sector investment has increased in real
terms, and those nations that have put into place regulatory
systems which reduce or allow a company to manage risks at an
acceptable level have, for the most part, enjoyed increased levels
of investor interest.The most difficult thing is to balance the
will of the government vis--vis the common wananchi/citizens
perceptions on the incentives given to investors. The governments
call incentives while wananchi/citizens call it loopholes and
become vocal and enraged with those incentives. To spur investments
and at the same time having policy which pleasing wananchi, needs
time as a bargaining tool. For instance Mtwara northern part of
Tanzanias saga after educating them the situation is calm.
Academically, there are two schools of thought aired
internationally. Which one should start in country policy, economic
democracy (China model) or political democracy (Western model)? And
who should decide the West or country itself? The masterminds of
these thoughts among others from Africa are Ngozi Okonjo Iweala and
Dambisa Moyo the author of DEAD AIDS TO AFRICA, WINNER TAKES ALL
and HOW WEST LOST TO CHINA.
1.2 Extractive industry RegulationRegulations are like house
decorations. The decorations are done to perfect the appearance of
the house (policy). Some of the decorations are needed to widen the
relaxation of the dwellers (like regulators- officials vested
power) and make life worthwhile without confronting terms and
conditions of the rent fees and also with no changes to the erected
house (Extractive industry Act so to say). Decorations like
painting can be done by tenants at any time whenever there is a
need without prior consent of the owner or with just informing the
owner. That means there is flexibility in doing decoration to easy
and smoothing the recurring deeds.
In real sense basing on the above assimilation, extractive
industry act is supplemented with extractive industry regulations,
rules, administrative orders, administrative guidelines and other
regulatory devices. Such regulations, rules and administrative
orders normally derive directly from a power granted in the
extractive industry act to a specific government officer.
Typically, the Minister for Energy and Minerals and, or
Commissioner for Minerals, is granted the authority to issue such
regulations/rules/orders to easy and smoothing the responsibilities
needed with limited time for decisions.
To replace or amend a extractive industry act is a politicized,
complicated and time- consuming process. Typically, an amendment to
a extractive industry act will take long time; more commonly it
will take many years so to say. Regulations, on the other hand, can
often be changed very quickly and with limited political input.
Thats why, lawmakers are wise to consider which subject matter
should be in the extractive industry act and which topics are
better placed in regulations. Many extractive industry acts lay out
only the fundamental framework of the mineral-sector regulatory
system. The details are provided in the regulations. Now you can
see the correlation of regulations logic with decorations logic
above.
1.3 Extractive industry Development Agreement (MDA)Extractive
industry Development Agreement (MDA) is like a single tenants
special agreement with landlord in a house with other tenants. You
might have a large house with different tenants in that house. But
one tenant has some exceptions with regards to others. May be, he
has rent three rooms and he promised to pay annually while the rest
have single rooms and pay after six or three months. The one
occupied three rooms, asks to be considered by landlord not to do
general hygiene of the surroundings because of the afore mentioned
reasons (occupied 3 rooms and pay annually), the agreement is
reached with landlord and communicated to other tenantsthose who
are vocal and objected this agreement are told to occupy three
rooms and pay annually, like their fellow and they would be
considered the same agreement. But coz they cant have such
financial muscles to stretch, the agreement is not in their favour.
The agreement or favoritism so to say is based on the financial
capability of the tenant and the beneficiation of the landlord two
ways traffic.
MDAs are of no exceptional compared to the above digestion, MDAs
are part of extractive industry regulations of its own kind.MDAs
are agreements reached between large projects investors and the
government on specific areas particularly fiscal terms. The
administrative officers granted power, discretionary upon their
satisfaction, reach that agreement coupled with vast privileges to
investor and the country. Sometime the officers may abuse the power
conferred to them and reach unfavorable agreement to country. Thats
why checks and balance had to be strengthened to thwart such faults
or remove MDAs negotiations into regulations and make it a topical
in enacted Extractive industry Act.
However, governments use agreements to help regulate large mines
but handle smaller operations under specific provisions in the
general extractive industry code. In many instances, even when an
agreement is in place, some or all of the extractive industry code
may still apply to the operation. In most cases what agreed are on
the fiscal regime perspectives (like waive of taxes and exemptions
on imports tariffs) but other operations still apply to the
Extractive industry Act.
Extractive industry, oil and gas projects may be the subject of
many types of agreement. At the upper tier is the agreement, or
agreements, between the mine, oil or gas project and the
government. A second tier of agreements may define the nature of
the mine, oil or gas project vis--vis the owners or controlling
interests, i.e., such as a joint venture or shareholder's
agreement. On the third tier will be agreements between the mine,
oil or gas project and its financiers, suppliers, contractors,
labour and so forth. Additionally, there is trend in some
jurisdictions for mine, oil or gas project to enter into agreements
with local communities, landowners, land-users or indigenous people
by the guidance of the authorities within the country.
1.4 Extractive industry ActExtractive industry Act is like a
physical permanent erected house. The building passes different
stages, from architectural and engineering drawing to setting,
building foundation and walls, and ultimately finishing. Since this
operations entails time and resources consuming, the needs and
wants to build the house requires comprehensive and thoroughly
considerations before starting that exercise. Similarly the
intention has to be clear if the house is for owners residence or
for renting. If the intention changes on the course or short time
after building, the whole processes are futile and it will take
time and cost to demolish the permanent structure and seek other
building permit from relevant authorities of which the concrete
reasons had to be scrutinized.
Extractive industry Act needs time and resources to be enacted
and is permanent for a solid period of time. Like house, the needs
and wants of the Act, have to be lectured, scrutinized, sensitized
and ultimately well linked with policy and regulations for smooth
implementation. Thus, as a general observation, important policy
matters are addressed in the extractive industry Act while
administrative details are embodied in regulations. Since laws are
more difficult to change than are regulations, the subject matters
addressed in the law are usually considered as more stable than
those found in the regulations. There are some mineral sector
regulatory topics where enhanced stability is perceived by most
governments as useful. These are placed into the regulations but
accompanied with balance and checks stipulated into the Act.
PRIMA COBWEB CONCEPT AS AN INTEGRAL OF FUNDAMENTAL DEVELOPMENT
OF EXTRACTIVE INDUSTRY SECTOR CONTRACTUAL, FISCAL, LEGAL AND
REGULATORY FRAMEWORKSIn light of the above concepts, you can see
how potential each concept is to perfect the building. Likewise, in
order to perfect the win-win situation in extractive industry, the
linkage of police, regulation, investment, MDAs and Acts are the
supreme ground work to be done. The PRIMA Conceptual frame work
addresses this importance; PRIMA is the abbreviation of POLICY,
REGULATION, INVESTMENT, MDAs and ACTS. Generally the Extractive
industry sector is built on these I called PRIMA or Five Foundation
Blocks of Extractive industry sector. Nothing can be said in
extractive industry sector which is not inclusive in PRIMA.The
experience shows that non-linkage of PRIMA is the source of
resource curse or dutch disease. That means the Extractive industry
sector need comprehensive approach which links all PRIMA and make
it like cobweb where any loopholes whether deliberately or
incidental created will be captured PRIMA COBWEB!!
PRIMA COBWEBPOLICYREGULATIONINVESTMENTMDAs/PSAsACTS Fig: 01. The
Cobweb of Five Foundation Blocks of Extractive Industry
Like a cobweb, where is not easy to find the starting point to
untie the cobweb, Prima cobweb concept address the same logic, that
extractive industry sector is nothing rather than PRIMA
comprehensive linkage(cobweb). PRIMA Cobweb do not provide
contractual and fiscal regime loopholes either done by Government
officials or colluding with investors. The linkage provides balance
and checks. The policy and Act may be appropriate but if MDAs are
inadequate, then the importance of good policy and Acts are
irrelevant. Similarly, if MDAs are good but policy and Acts are
not, non-MDAs operators, will relax. PRIMA COBWEBprovides to and
fro! The end of one block is the starting point of another block.
Likely, in order to laydown one block, you have to start from the
beginning to see if other blocks are aligned with the one you want
to fix. It provides a too way traffic and mirror image of each
one.The decision-makers and other authorities need to make sure
PRIMA blocks are inter-linked for the extractive industry to reap
the intended expectations.
2.0 DATA ANALYSIS IN ESTABLISHING ADEQUATE DECISION MAKING ON
TANZANITE EXPORTS POLICY.Data source: The data were accrued by the
researcher from varies reliable sources. Data comprises exports of
rough, standard cut and beads cut tanzanite but some of the records
were missing to cover the whole particular year. The sum for each
year is the average data.
Data authenticity: The data under review has some irregularities
from its source. Some of the data for certain months were not
complete, and the units of weigh used are either gram or kilogram
and has denied conversion of carats into either gram or kilogram.
Data assumption: Assuming these irregularities wont affect graph
trend and interpretation.
2.1 Graphical Presentation of Given DataA: Volume of Tanzanite
Exports
Graph interpretation: 01: The graph shows the export of rough
depends on market trend and not the ban.The fluctuation is due to
market needs and not ban because before total restriction(2010) the
export was low compared to progressive years where the ban
applied.
Graph interpretation: 02: The export of standard cut improves
progressively.This signify that, the lapidary industry grows from
its infancy level to maturity stage coupled with trust of overseas
buyers.However, the iceberg of this implication is that, most are
exported as pre-form and not real standard cut.The pre-form is done
purposely to comply with the act but also there are orders which
need the pre-form.Pre-form is regarded as Cut but can serve to
purpose as beads cut docomply by just cut one side to have
provision of cutting into other shapes after export.
Graph interpretation 03: Beads cut serve two purposes; it is the
most simple cut and secondly can be re-shaped into other
shape/cut/style( bead cut is sometime called interim cut).By
applying drastic measures of ban, it is easy to switch on beads cut
which are apparently made above one gram from low,meadium and
rarely high quality rough.The cost of beads cut is less and most
important can be re-shaped again into other cut.Therefore the trend
of graph is due to market demand and shoot up on 2013 encompases
both demand and business tricks (interim shape for compliance)
Graph interpretation 04: The graph includes the sum of standard
cut and beads cut to analyse the total cut exports.The combination
also fall into the trend of separates of the two; Improving demand
of cut tanzanite and capacity building of the lapidary
activities.Furthermore,beads cut is sometime used to circumvent the
ban internationally.
Graph interpretation 05: The volume of rough exports is twice as
much compared to Standard cut tanzanite.The Government anticipated
the Cut to yield more earnings because is made from high quality
gems but graphs on value analysis.below interpret the contrary.On
other hand, the trend of cut volume increase progressively
therefore much attention is needed for capacity building in
Lapidary industry.The demand of rough is dictated by market demand
and not a ban,thats why the fluctuations occur at any year while
Cut is dictated by both ban compliance and demand, continuos
increase.
Graph interpretation 06: The combination of Standard cut and
beads cut, did well on 2013.This implies that the businesspersons
conform to the ban but taking into consideration the two purposes
of beads cut, the interpretation remains covertly since it serves
as a cut and also as a implicit rough.
B: Value of Tanzanite Exports
Interpretation of graph 07: The trend shows, though the volume
of sales of tanzanite is importance for increasing royalty but what
matters most is the quality of the Tanzanite exported. On 2010 the
weight exported was 146,236.97gm and resulted into royalty of
824,000.07USD, while the export of 2013 with weight of 458,447.71gm
gave royalty of 785,114.44USD which is less than 2010 although the
volume has doubled. Another implication is that, the ratio or
correlation of weight of rough versus its royalty is like 1:2; One
gram exported gives two USD of royalty if factors present during
these exports, remain constant. This is due to royalty percentage
taxed and the multiple effect of the gemstone pricing method i.e.
whenever the weight of the single stone increases, its price
multiplies. Two stones each with 2grams will be sold together with
les price compared with one stone having 4grams if 4Cs are the same
with those two separate stones. Thats why the price of gems is
arranged according to the size (weight ranges) of a single stone.
Thus, the graph tells us, most of the roughs sold are not under
1grams thats why they revealed this trend.
Interpretation of graph 08: The trend shows, the volume of
sales/export is direct proportional to cut royalties accrued. This
cements the trend of the logic of quality that is when the 4Cs are
appropriately matched, the results are superb. For each cut gram
exported gives one dollar of royalty if the factors governed the
sales in those years under review remains constant. Similarly the
graph tells us most of the Cut tanzanite exported has good quality
but mostly in small size after cut and polish. Thats why even the
multiple price effect is tarnished. Lastly the royalty percentage
(1%) plays another role of the trend; one percentage is so small to
couple with the high quality and high price of the export, to earn
high royalties. The cost of cut and polish at Arusha varies between
1 to 2 dollars by carat. That is to say, the total accrued
beneficiation; royalty, cut and polish cost and salary of cutters
in totality outweighs the beneficiation of rough in reality? The
trend denies even if you add those GDP beneficiations.
Interpretation of graph 09: The effect of high volume of rough
exports, carat weight of rough per stone (price multiple effect)
and royalty percentage charged on rough (5%), all together escalate
the royalty of rough by far compared to Cut tanzanite royalties.
The trend shows persistence of the rough exports before and after
ban, and its privileges on the side of royalties accrued. The graph
also interpret that, the royalty of rough though is higher than
that of standard cut, the standard cut royalties increases by two
times annually while for rough there is fluctuations. The general
interpretation of the graph is that, there is competing trend
between the two and for businesswise it means let the two naturally
trade themselves. Dont drop any on the way.
Interpretation of graph 10: The trend of total cut (combination
of standard and beads cut) has the same interpretations like graph
09 above.
3.0 Discussion of ResultsRough Tanzanite Exports:From the
graphs, there is statistically and academically conflicting trend
between rough and cut exports in terms of which one has to be given
green light or statutory go ahead. Rough volume and value for the
period under review, outweighs volume and value of Cut, both before
and after ban follow up. Similarly, since 2010 through 2013, the
implication shows the export of rough is not impeded by ban rather
by market demand. This is proved by the surging of the volume on
the due course. This is to say, rough tanzanite exports is
substantially important since more order is being placed regardless
of the ban. If you find the mean standard of the exports from 2010
through 2013, rough tanzanite shows maximum mean compared to Cut
tanzanite. Mean standard is used to measure the stability of the
market against any impediments.Again, the market demand coupled
with 5% royalty compared to 1% royalty of cut, has much to do to
the government in revenue collections and meeting the budget target
of either zonal or ministry office. Basing on the above analysis,
satisfying the customer demands that is business philosophy. The
businesspersons will do everything to fulfill the demands available
anywhere and whether lawfully or unlawfully (smuggling).The
interpretations have also made unconfirmed call on beads cut, which
might be used by some businessperson to circumvent a ban. To avoid
this, the allowance of rough business has to be reviewed. Secondly,
meeting the government target that is real good governance because
the government will meet the needs of citizens and internationally
hailed. High volume of rough coupled with 5%royalty earns more
revenues by far compared to cut exports.
Cut Tanzanite ExportsThe volume and value of Cut export improves
progressively which means the Lapidary industry is gaining the
momentum from its infancy stage. Though the volume and value are
far less compared to rough, the trend shows hope and resolute of
the business. Therefore it needs shoulder-to-shoulder attention
from the authorities in keeping building capacity.More important,
Cut exports conform to ban restrictions. Since ban assertion, Cut
export has been improving progressively regardless of the market
demand (free of market speculation/niche market). Though the volume
of cut tanzanite export is less and again considerably affected by
1% royalty, on the other side, the economic multiplier effect of
the lapidary industry is of great importance. At Arusha the cost of
cut and polish is estimated to be around 1 to 2 dollars per carat,
although mostly, the business is done by bargaining the lump sum
for the whole lot to be cut and polished. People have invested in
lapidary facilities and employed workers. This implies, emphasis on
Cut exports needs much momentum to encourage those who have shown
initiatives and support the growing market of cut and polished
tanzanite.In a broad note: The graphs interpretations cement that;
it will be academically dishonest to stop any among the two exports
rough and cut tanzanite.The aforementioned interpretations declare
that, both rough and cut exports have comparative and competitive
advantage in improving gem industry in our country. Each one
bridges the gap left by the other.Additionally; The gem business is
very delicate and is the mixture of traditional and professional
skills and knowledge. There are traditional or customary and
contemporary gems customers. The traditional customers are the ones
who never have alternatives/substitutes, if they want tanzanite,
they will always look for it. But these customers are minority; The
contemporary customers are many and they dont bother swaying from
one kind of gem to another. What they need is the durability and
colour. If they miss tanzanite (blue), they opt other blue gems
like Sapphire, Kyanite or Iolite; The bad thing also of
contemporary customers is that, they choose who to cut, design,
polish, and set their jewelries. That means they want rough stones
and choose cut styles.This business is very delicate and always
EVOLVE and NOT PLANNED. Its booming and fade up is not
professionally forecasted in most instances.Thats why many
countries have decided only to prepare places and people who what
to do this business and let them regulate the trend of business
without the government intervention. The government should only
research, which ways are appropriate to collect the revenues but
not how to control the business.The countries which opted to
control the business, they started building capacity in lapidary,
jewelries setting and decorations industries. After that they
waived import tariffs and some countries chosen people to run the
business without paying taxes. The taxes will be deducted from
errands rendered due to those activities related to gem business
and other more programs .
CONCLUSION AND RECOMMENDATIONGenerally my conclusion is to
maintain status quo, for the aim of having freewill export in
future after both trades reaches maturity stage. Progressive
intensification of ban on rough with specific timeframe and
guidance to develop lapidary capacity is a right decision so as to
keep encouraging lapidary activities and growth of Cut exports,
subsequently regulating timeframe and relaxation for rough export
to meet demands available. The existing situation has encompassing
both rough and cut export in a competitive way coupled with
business tricks. Better rely on the current status quo. Keep
insisting a ban but provide the current allowance for rough and cut
while building capacity for lapidaries. With time both businesses
will regulate themselves. Future Plan for Tanzanite One Stop Centre
For Gemstones Business: the need to have gemstones bourse at Arusha
where selling and buying will be effected under the guidance of
Government officials. TANSORT and TMAA have to oversee and regulate
the prices and permits.Treasury Reserve: Since tanzanite is only
found in Tanzania, there is a need to reserve tanzanite as a
government treasury but also keep some of Tanzanite in a museum so
that when the deposits perished, the future generation will have
something to see and become tourists attraction and researchers
attention.