SAS No.

Social Accountability Report Social Accountability Session Report on The Contribution of Foreign Direct Investment to The Contribution of Foreign Direct Local Economy in Tanzania: Achievements, Investment to Localand Economy in Tanzania: Challenges Prospects Achievements, Challenges and Prospects held at Held at Tanzania Global Learning Agency Tanzania Global Learning Agency
Report by: John Mathew Mnali Report by: Ag. Director of Investment Promotion John Mathew Mnali Tanzania Investment Centre Ag. Director of Investment Promotion Tanzania Investment Centre August 2012

on

August 2012

Report Contents: 1. Executive Summary 2. Background 3. Laws governing investment in Tanzania 4. Attractive Investment Climate in Tanzania 5. Sectors for investment in Tanzania 6. Trends of registered investment projects in Tanzania 7. Contribution of FDI to the Economy 8. Challenges of FDI inflows in Tanzania 9. Efforts to address challenges FDI inflows challenges 10. Plenary discussion 11. Conclusion and recommendation 12. References ..2 ..3 ..4 ..6 ..7 ..8 ..13 ..15 ..15 ..16 ..18 ..20

Executive Summary This report is prepared by Tanzania Investment Centre following a presentation given during the Social Accountability Session number 3 organized by Tanzania Country Level Knowledge Network (CLKnet).The topic on board was The Impact of Foreign Direct Investment to the Local Economy. The presentation aimed to underscore achievements, challenges and prospects of Foreign Direct Investment (FDI) inflows to Tanzania. It is through this presentation the participating stakeholders had an opportunity to discuss thoroughly about the topic with a view to propose to the government to review investment policies that will enable FDI inflows to have positive impact to the local economy in Tanzania. The session gathered participants from government institutions, academia and researchers, NGOs and the private sector. The presentation started with the background of the Tanzania economy in mid 1980s, followed by investment legislations that are in place, investment climate that prevails in Tanzania, the priority sectors for investment, institutions that supports investment, incentives that are extended to investment projects, the trends of registered investment for the period of 1990 to 2011, the sector distribution of the investment in Tanzania, the contribution of FDI to the local economy by citing the impact created by the telecommunication industry in Tanzania. Lastly, it was followed by the conclusion and pointed out the challenges and strategies that have been employed to resolve those challenges.

1. Background

Since 1986, Tanzania has embarked into various economic reforms which aimed to transform the economy from centrally planned public owned economy into market driven private sector led economy. The government recognises that it has the role to facilitate the private sector and other economic agents to actively and effectively invest in productive and commercial activities in order to accelerate economic growth and development. The Government do this mainly through putting

favourable policies in place, provision of a conducive investment environment for local and foreign investment, promotion of institutional changes conducive to the development of the private sector, stimulating investors confidence through transparent, effective and efficient administrative processes in government
Various economic reforms undertaken by the

government aimed to put in place laws and policies that will facilitate investment

conducive

environment for local and foreign projects.

institutions and to put in place an appropriate legal and regulatory framework. The major policy and structural reforms carried out played a significant role in improving the business and investment environment in the country.

2. Laws Governing Investment in Tanzania

During mid-1980s in recognition of the important role towards creating an

During mid-1980s government initiated a number of investment related laws and policies in recognition of the important role towards creating an enabling environment for the private sector development.

enabling environment for private sector development, Tanzania enacted a

number of investment related laws and policies, undertaken financial reforms, liberalised its trading regime; put in place an attractive investment package; and undertook a number of initiatives to

promote and develop the private sector. Some of the laws were such as:

Tanzania Investment Act No. 26 of 1997 aimed at guiding investment activities in Tanzania except for the mining and oil exploration projects;

The Village Land Act No. 5 of 1999 which provides for the management and administration of land in the village and for related matters;

The Land Act No. 4 of 1999 which provides for basic law in relation to land other than village land, the management of land settlement of disputes and related matters;

Banking and Financial Institutions Act No.12 of 1991 which intends to harmonise the operations of all financial institutions in Tanzania. To regulate credit operations and to provide for other related matters;

Mining Act No. 5 of 1998 which provides for mineral mining, trading and any other related matters;

Capital Markets and Securities Act No.5 of 1995 which provides for establishment of capital markets and securities authority (CMSA) for the purpose of promoting and facilitating the development of capital markets and securities in Tanzania.

Export Processing Zones Act 2002 provides guidance on the set up of processing zones, export requirements and other related matters;

Special Economic Zones Act 2005 which involves investment in other sectors than manufacturing for both export and local markets;

Foreign Exchange Act, 1992 to administer and manage matters related to foreign currency, securities, payment, debts, import/export, transfer of funds and other related matters;

Petroleum (Exploration and Production) Act 1981 which governs investment in the petroleum exploration and production sector;

Public Private Partnership Act, 2010 which provides for investment in the public private partnership projects such as investment in the Infrastructure Sector;

Value Added Tax Act, 1997 which provides for the imposition of value added tax on supplies of goods and services and related matters;

Immigration Act, 1997 for control of immigration in Tanzania and for matters related to immigration.

3. Attractive Investment Climate in Tanzania.

Tanzania like many other countries across the globe has managed to build and maintain attractive and predictable investment climate through several actions. This has been implemented as a result of:

Tanzania

Investment

Act

1997,

which

provides

protection

against

nationalization, access to credit from domestic sources and right for investor to transfer capital and profits after having paid all the taxes required by law in Tanzania. Their active memberships to investment guarantee agencies such as Multilateral Investment guarantee agency (MIGA), African trade Insurance Agency (ATIA); and International Centre for Settlement of Investment Disputes. National Investment Steering Committee chaired by the Prime Minister is entrusted with the role of investment policy formulation and resolving problems of investors on a fast track basis with the view to improve business environment and foster economic growth through increased investment.

Also the Government through National Business Council organizes round table meeting that are chaired by the President so as to discuss, resolve investors matters while advising government on areas that need improvements.

One stop shop facilitative role offered by TIC through stationed senior officials from Ministries/government department who assist investors to obtain various approvals, licenses and permits on matters related to immigration, registration of companies, business licensing, land, labour, taxes and other facilitation matters.

Tax incentives which provide exemption of import duty to capital goods including establishment facilities for investment by 90% and reduced VAT on projects capital goods including deemed capital goods to 10%, assistance to obtain land for investment, automatic immigration quota of up to 5 expatriates at the initial stage of the project and strategic investor status granted to projects that put up investment in remote and marginalized regions, create massive employment to local people, inject enough capital that can have an impact to the economy, transfer of technology and its contribution of foreign exchange earnings.

4. Sectors for Investment

Tanzania promotes and facilitates investment in various sectors. These sectors includes agriculture and livestock, natural resources, tourism, manufacturing, (back up services for petroleum and mining sectors), commercial building, transportation,
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services, financial institutions, telecommunication, energy, human resources, economic infrastructure and broadcasting sector.

5. Trends of Registered Investment Projects in Tanzania

The major institutional and legal framework carried by government since mid 1980s resulted into an increase inflow of foreign direct investment. Such increase has been evidenced by an increased number of registered projects and its ownership, value of investment capital injected, employment and number of countries that has increased investment flow to Tanzania. Such positive results brought by FDI have also contributed to GDP growth and provides stable inflation rates since 1997 to 2011 figures.

5.1. Projects registered by TIC from 2005 to 2011

Attractive laws and predictable investment climate has attracted increasing number of both FDI and domestic investment that were registered by TIC; in 2008 the centre registered a total of 871 projects compared to 550 projects registered in 2005 an increase of 36%. However the impact of global financial crisis leads to the registration of 572 and 509 in 2009 and 2010 respectively. Overall the registered projects received a robust response stock inflow amounting to 4706 projects from 2005 to 2011.

Figure 1:

Registered Projects by TIC 2005 - 2011

Source: TIC Database According to the UNCTAD reports on FDI inflows globally, there has been an increase inflow of foreign direct investment (FDI) to Tanzania of 12million USD in 1992 to unprecedented record of 1095million USD in 2011 while the FDI stock amounted to 388million USD in 1990 compared to 7823million USD in 2011.

The

World

Investment
Major institutional and legal framework carried by government since mid 1980s resulted into an increase inflow of foreign direct investment

Report published in 2012 shows that Tanzania took the lead in attracting Foreign Direct Investment (FDI) in

the East African region during the past 1 year, attracting the record of $1.1 billion
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equivalent to (TSh1.76 trillion). The same report has highlighted that between June 2011 and June 2012, Tanzania overtook Kenya- the regions biggest economy, indicating the high confidence among foreign investors in Tanzania. The same report has shown that for the past three years, Tanzania has attracted about 47 percent of all FDI flows in the five East African countries.

Figure 2:

FDI Inflows to Tanzania from 2006 2011

Source: UNCTAD World Investment Report -2012 5.2. Ownership of Projects Registered by TIC 1990 2011 Tanzania Investment Act provides three types of project ownership as follows. An investment project may be whole owned by Tanzanians or by foreign nationals or the project may be jointly owned by Tanzanians and Foreigners (Joint Venture). According to the TIC registered projects for the period 2005 - 2011 Tanzanians have been playing a leading role in terms of establishing investment projects, followed by Joint Venture projects and lastly foreign nationals as shown in a pie chart;10

Figure 3: Ownership of Investment Projects 2005 - 2011

Source: Tanzania Investment Centre 5.3. Leading Countries that have invested in Tanzania Most of the investments from abroad (FDI) originate from the United Kingdom due to the historical background. Tanzania was a British colony that is why it is well known by investors from UK than other parts of the World. From the figure above it shows that 23% of registered projects originate from UK, 15% from India, another 15% from Kenya, Netherlands 10%, China 10%, USA 10%, South Africa 7%, Canada 5%, Germany 3%, and Oman 2%.

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Figure 4: Ten Leading Companies Invested in Tanzania 2005 2011

Source: Tanzania Investment Centre 5.4. Employment Generated by Investment Projects from 2007 to 2011

TIC registered projects have projected to create new jobs every year as follows;

Table 1: Projected Number of New Jobs Created 2007 - 2011 Year 2007 2008 109,521 2009 56,615 2010 43,640 2011 79,101

Jobs created 103,958

Source: TIC Database Steady GDP growth and lower inflation rates as a result of implemented institutional reforms and legal framework has been instrumental towards attracting investors to invest in Tanzania.

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Figure 5:
8 7 6
GDP growth rate %

GDP Growth Rates and Inflation 1997 -2011

18 16 14 12 10
Inflation %

5 4

8 3 2 1 0 6 4 2 0

97

98

99

00

01

02

03

04

05

06

07

08

09

10

19

19

19

20

20

20

20

20

20

20

20

20

20

20

YEAR

GDP growth rate

Inflation

6. Contribution of FDI to the Economy (A case of Telecommunication Industry)

In Tanzania more than 25% of the TIC registered projects are owned by foreign affiliates/companies that have operations in Tanzania in sectors such as agriculture, manufacturing, tourism, telecommunication, services, petroleum and mining just to mention a few. Its impact to the local economy has been in terms of job creation, government revenue, transfer of technology and skills, capital invested and foreign exchange earnings.

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Specifically, the telecommunication sector has contributed significantly to the employment creation of both direct and indirect jobs. The indirect jobs includes Tanzanians selling cell-phones, airtime, cell phone battery charging services, providing calls services, money transfer and so forth. The industry has improved the communication services compared to the previous situation prevailed 20years ago. It is this industry which has enabled rapid mobile technology penetration to the villages, mobile telephone banking services across Tanzania. Moreover the telecommunication sector has contributed significantly to the government tax revenues.

The data below shows an increase of service subscriber reaching over a half of Tanzanian population equivalent to about 24million in 2011.

Table 2:

Total number of Mobile Phone Users 2010 8,670,536 4,477,510 6,021,091 1,700,528 24,827 86,965 2,396 20,983,853 2011 10,278,081 5,263,330 6,834,301 1,374,057 7,461 220,932 1,708 23,979,870

Service provider VODACOM TIGO AIRTEL ZANTEL MOBILE SASATEL TTCL MOBILE BENSON TOTAL

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7. Challenges of FDI inflows in Tanzania

According to the World Investment Report (WIR) issued by the United Nations Conference on Trade and Development, focusing on the past twelve months ending June, 2012, shows that for the past three years, Tanzania has attracted about 47 percent of all FDI flows in the five East African countries. Despite the increasing figures of FDI inflows yet Tanzania face a number of challenges that requires deliberate measures in order to attract and retain more investors. Some of the challenges are lack of adequate and reliable power, poor infrastructure especially feeder roads, lack of designated areas for investment projects (such as farming land, industrial plots) where investors may acquire for investment purposes and negative image of Africa propagated by western media about the continent.

8. Efforts taken by the Government to Address the Challenges

The government has taken some efforts to tackle the challenges in the view of attracting investors. Some efforts that have been undertaken includes attracting investors in the energy sector as a priority of government plans, the ongoing efforts to establish a land bank whereby TIC is working hand in hand with other stakeholders in this area. In addition the government has put in place a new PPP legislation which aims to attract public private partnership projects such as infrastructure projects. Lastly, the government has kept on creating awareness through embassies and other organizations such as TTB, TANTRADE, TIC, EPZA etc to its outward mission about the Tanzania investment climate and opportunities in the country.
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9. Discussions from the Participating Stakeholders

Soon after an account from the presentation, participating stakeholders had an opportunity to contribute their views as a way forward to guide government through review and amendment of policies that can enable significant contribution of FDI inflows to the local economy. Participants underscored several issues that need to be done to support spillover effect of FDI to the local economy as below:-

9.1. Integrity Leadership Tanzania like many African countries lack leaders with integrity to administer government matters that have impact to the economy at large. Participants requested Tanzanians who gets an opportunity to play a leading role in Government institutions to be patriotic for the benefit of the nation at large. 9.2. Mechanism to collect government revenues It was explained that, despite the fact that, Tanzania Revenue Authority has improved its technology and broaden tax base over time, yet it lacks appropriate mechanism to tape government revenues compared to our neighboring Kenya. 9.3. Discrimination of tax incentives across sectors Tanzania like many countries offers tax incentives in order to attract FDI flows. However, there is a need to assess that there are sectors that will attract investors even without incentives so as to circumvent loopholes that can be created in such sectors.
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9.4. Employment creation by FDI projects It was explained that, it is high time for the government to attract FDI that will create quality employment to the local people. 9.5. Availability of land for investment The participants underscored the importance of designated land for investment so as to avoid land disputes between investors and local people. 9.6. Transfer of Skills and Technology

Stakeholders observed that transfer of skills and technology is not one of the prerequisite for an investment project to be established in Tanzania, hence no any investment project is forced to transfer skills and technology. There is a great need to amend governing investment laws and agreements so that right skills and technology can be transferred to benefit the local economy within a particular time.

9.7.Change of Management Name of Hotel Operators and Public Awareness Participants were informed that, change of hotel management companies (ie. Hotel names) that has been done by hotel operators in Tanzania, does not imply that hotel owners want to evade taxes hence does not affect the revenue collections; the stakeholders strongly suggested the importance of TIC in sensitizing the public on many matters including activities carried by TIC, change of management names by Hotel operators and its impact to revenue collections.

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9.8. Granting more Mandate to TIC Undoubtedly the participating stakeholders expressed the crucial role of FDI to the economic development especially to the developing country like Tanzania. They recommended TIC to be given more mandate to undertake facilitative role that can enhance investment projects to realize their investment plans. This can be done through effective and efficient Facilitative Centre in-housed with technical Human Resources and allocating enough budget as well as land that will enable investment projects to take off. Participants indicated the need to concentrate on resolving existing challenges rather than undertaking massive promotion campaigns. 9.9. Critical Contribution of Researchers and Academia The stakeholders gave plea to the researchers and academia to share findings of their research work with the public and also requested them to conduct research that will endeavor into policy reviews. 10. Conclusion and recommendations FDI inflows have a significant contribution to the economic growth of Tanzania. It is therefore recommended that: It is high time to have review of Tanzania Investment Act No. 26 of 1997 together with Tanzania Investment Policy 1996, its Regulations and any other related Investment Acts/Policies so as the local economy can benefit from the FDI flows.

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There is a need to have a strategic and comprehensive promotion and facilitation of investment that need to achieve the interest of Tanzania.

Tanzania needs to abandon the fragmented approach hence adopt working together attitude for the National interest. Policy gaps in the TIA, 1997 needs to address issues related to employment, transfer of skills and technology, repatriation of capital, foreign exchange, business linkages and capital injection of FDI inflow to Tanzania so that its contribution to the economy can be viable.

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REFERENCES 1. United Republic of Tanzania (1997): Tanzania Investment Act, 1997 Act No;7 2. United Republic of Tanzania (1996): Tanzania Investment Policy 1996 3. United Republic of Tanzania (2011): The Tanzania Five Years Development Plan, 2011/2012 2015/2015 4. United nations Conference on Trade and development (UNCTAD): World Investment Report 2012 5. Tanzania Investment Centre: Tanzania Investment Guide 2010 and Beyond 6. United Republic of Tanzania (2011): The Economic Survey of Tanzania 7. United Republic of Tanzania (2011): Finance Act 8. www.clknet .or.tz

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