Among the greatest economic news in..

Insight:....

Saturday, 13 October 2012 09:54

Among the greatest economic news in Tanzania this time around is the continuous discovery of commercial quantities of various natural resources. The greatest news of all is the announcements of oil and gas discoveries in various parts of the country. These parts include Songo Songo Island, Mnazi Bay, Mkuranga, Kiliwani and possibly around Lake Tanganyika. There are a multitude of companies involved in this newly discovered economic undertaking. They include but not limited to Tanzania Petroleum Development Corporation (TPDC), Songas Limited (Songas), Pan African Energy Tanzania Limited (PAT), Maurel et Prom (M&P) and Norway’s Stat Oil. Reports indicate increased visits by prospective investors in this sector at various Tanzanian representations abroad. Various activities are going on in the bid to exploit these none renewable natural resources. As part of commemorating the 13th anniversary of Mwalimu Nyerere’s death, it is worth reflecting his views on exploitation of natural resources for the country’s development. The point should not be to please and romanticize Nyerere for the sake of doing so. The point is to reflect why this visionary leader and greatest son of this land thought along the specific school of thought and the relevance of the same today. Nyerere’s school of thought Nyerere’s school of thought on exploitation of natural resources is one of waiting until when the country is ready to make most out of the resources. His line of thinking was one of making sure that the exploitation of these resources first and foremost benefits the country and its people especially the poor. He belonged to the school of thought that subscribes to state ownership and control of such resources. He would have wanted the government to own majority share in such lucrative ventures. He would also have loved to see as much local content as possible in all the nodes of the long oil and gas exploitation chain. For example, he would have loved to see Tanzanian sons and daughters occupying not only the casual labourers’ positions but also the white collar jobs. Nyerere would have been happier to see, as far as possible, various kinds of local factor inputs being used in the whole chain of exploiting the resources including domestic value addition. Most importantly, Mwalimu would have liked to see the revenues from these resources used with the highest possible level of integrity and prudence for the country’s development. Short of the above, Mwalimu would have waited forever to exploit the natural resources. In our contemporary times, the question of waiting indefinitely does not seem to be an option as we have begun the game. The question is, are we adequately prepared? The discussion below sheds some light. Fiscal regime It is important for the fiscal authorities and by extension the Tanzania Revenue Authority (TRA) to understand very well the oil and gas fiscal regime. Among others, exploration costs – both fixed and variable – should be clearly known as should quantities exploited, sold, dynamic unit prices and therefore taxable profits from time to time. Most of companies involved in the oil and gas venture are by and large multinational. There is therefore a need to foresee transfer pricing challenges in taxation context. Capacity to deal with potential harmful transfer pricing in oil and gas production and sales transactions should be in place well in advance. Transparency issues The Extractive Industry Transparency Initiative (EITI) does follow up in the extractive industry to verify revenues paid by mining companies to the government. It is unfortunate that by design, EITI in Tanzania takes a minimal approach of verifying at the point of payment only. Ideally, an effective EITI should follow a commodity chain approach by scrutinizing all nodes of the chain so as to identify where the county may be cheated. It is important therefore to critically question and answer ourselves as a nation on whether we are ready and capable to scrutinize the whole oil and gas commodity chain including negotiations; contracts; exploration; production including optimal extractive amounts so as to avoid oversupply and flooding the market thereby lowering prices amidst fixed costs and reducing profits and associated tax revenues; sales volumes; unit selling price; unit cost; unit profit; taxes; profits; dividends for shares if at all as well as royalties. Management of oil revenue Assuming that revenues from oil and gas pipelines will be tapped, the next stage will be having the needed oil and gas revenues management skills. This is important because oil and gas are finite and non-renewable resources will not be here forever. The issue here is sustaining the benefits that would have been accrued beyond the lifespan of these resources. There is a need to invest the much awaited revenues in many carefully calculated and diversified portfolios so we gain maximum benefit even after these finite resources are long gone. Intergenerational thinking is important in this aspect. Concepts such as oil fund as is the case for Norway for example and even newly born South Sudan should be worked out proactively rather than reactively. Way forward Whereas we cannot and should not afford to wait indefinitely to exploit the mineral resources in general and oil and gas in particular, we should take very strategic, clearly calculated and cautious approaches in this very holy undertaking. Tanzania should ensure that more than the minimum threshold of what takes for a country and its people to benefit as oil and gas economy are in place sooner than later. However, this should be done very carefully. It is important to remember that it takes a process not an event for Tanzanian-type economies to be ready to benefit from oil and gas. Let us walk through the process step by step. Learning from genuine friendly countries with track record of experiential knowledge like Norway is extremely important if oil and gas exploitation in Tanzania is not to fall short of the good aspects in Nyerere’s school of thought. Source: The Citizen The author is a senior lecturer, researcher and consultant in Economics and Business at Mzumbe University Dar es Salaam Business School. pngowi2002@yahoo.com +255 754653740