28 December 2012

Tanzania: Why Local, Foreign Investors' Eyes Were On Mtwara

This year, all eyes for investors, both local and foreign, seemed to have been on Mtwara region and off coast. With the recent discovery of massive natural gas reserves, some, in fact projected that affordable houses will soon become a rarity.

The cost of living in African countries with abundant natural resources (Angola, Gabon, etc) is among the highest in the world. The CEO Roundtable of Tanzania also came out to express optimism that the discovery of vast deposits of natural gas has the potential to lift the country from the category of least developed countries to a modern and prosperous, gas fuelled economy.

The forum's Chairman, Mr Ali Mufuruki, said as a private sector, they believed that a bright future beckoned if the country would manage the newly-found resource well. "If we can work together in a smart way, if we can together build bridges between the public and private sectors to marshal the resources and policies we need to extract economic value from the natural gas, a bright future for our country is within reach," he told roundtable members, cabinet ministers, diplomats and MPs.

Mr Mufuruki highlighted the gas finds as one of the 2012 events that have the potential to impact the economic growth trajectory of the country. He said the year would be remembered as the one when the private sector made a bold decision to take charge of its own destiny, adding that a new-look Tanzania Private Sector Foundation is envisaged soon -- as a result.

By September, the government had raised its estimate of recoverable natural gas reserves to 33 trillion cubic feet (tcf) from 28.74 tcf following fresh and big offshore discoveries. The government has already expressed optimism that the gas finds would help to transform the largely farming, mining and tourism driven economy. The World Bank's Jacques Morisset infact came to opine that these proved and potential reserves could be a game changer for Tanzania.

Yet, extracting and producing is not a simple affair. Massive upfront investments (larger than the country's current GDP of US$22 billion) and new technologies are necessary, while benefits will typically spread over 25 to 30 years. Short of cash and expertise, Tanzania will have to partner with global companies. Potential candidates (British Gas, Statoil) are already knocking on the door.

He said that roughly, the host country can expect to get around 40% of total revenues depending on the tax regime and the share production agreement. This means for Tanzania around 7% of its projected GDP or about 1/3 of its current fiscal revenues if all above reserves can be exploited. These fiscal resources, while considerable, will not be sufficient to transform Tanzania.

Two points merit further attention. First, the focus on extracting the maximum fiscal revenues should not come at the expenses of negotiating other potential benefits in terms of connective infrastructure and synergies with the local economy. Gas companies could build roads, railways, houses, power plants that might also be used by local communities Additional cash will also provide opportunities for poor households to invest directly in education (like a voucher or cash transfer) and in productive activities.

Arguably, he said, such distribution of resources will also lead to an improvement in the living conditions of poor households. This can occur through higher imports (for example clothes from Asia) but also through higher demand for domestic products (food, water, etc.) that will help them to satisfy their basic needs. Such consumption drive is important because it contrast with the behavior from elites that are more likely to save those resources and invest them abroad.

To him, from a macroeconomic perspective, such spending will generate a Keynesian multiplier impact that could propel the economy on a faster growth trajectory. Assuming that the State distributes half of its natural gas revenues to people -say around US$1.5 billion, and that their saving rate is 10% and their import propensity equals to 20%, the potential boost GDP growth would be equivalent to 3-4% in the short term and over 20% in the longer term.

This simulation is only illustrative since it omits to account for prices and exchange rates movements, as well as capacity constraints. Transferring money from natural resources may seem unrealistic on practical grounds. But, as stated by Shanta and Marcelo, "debit cards with biometric information cost only a few dollars; the money can also be transferred by cell phone".

The mobile revolution has transformed the lives of Africans, providing not just communications but also basic financial access in the form of phone-based money transfer and storage. At the beginning of next decade, there should be no technical obstacles to empowering people with the financial management of natural resources. Let us hope that this option will be part of the debate around natural gas that has just begun in Tanzania.

The current investment in oil and gas exploration in Mtwara region has exceeded 300 million US dollars (about 450bn/-). According to the Mtwara Regional Commissioner, Mr Joseph Simbakalia, the recent discoveries and rich potential for oil and gas have put the region on the verge of becoming a new and future growth pole of the country's economy. He said several billions of shillings were expected to flow into Mtwara for investment in the development of associated materials supply, engineering services and logistics support services.

He made reference to the implementation of anchor projects of Mchuchuma Coalto- thermal power generation as well as the liganga iron and steel complex, which are poised to attract as much as US$ 3 billion. "An indicative cumulative cash flow from the projects shows that investments will exceed US$ 1 billion after two years and top US$ 9 billion within the first 10 years," he said. He said the region's middle income market is estimated to exceed 20,000 people over the first 10 years.

However, he cautioned that existing experience both from within the country and outside indicates that such massive investments rarely benefited the people. Already, he said, Tanzania is currently the third gold producing country in Africa. Current total investments in Tanzania's gold sub-sector exceed one billion dollars with annual gold export exceeding a billion dollar mark.

On an optimistic note though, he said, the multi-million resource seeking investments can have insignificant redistribution impact to the host national economy unless properly guided to provide forward, horizontal and backward linkages. He urged that it was pertinent to determine well in advance the requirements for physical infrastructure in order to facilitate the good start and smooth operations of investments and reducing the cost of doing business.

He urged that it would be prudent to involve the international investors in determining their needs for skilled manpower as part of a mutually beneficial corporate citizenship plan. In good news for one of the world's poorest countries, the World Bank predicts that Tanzania's economy will grow 7% in 2012/13 if the global economy recovers. Major recently discovered gas deposits are expected to boost domestic growth in the medium-term, and further gas exploration is planned.

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