Foreign Direct Investment and the mining sector in Tanzania

1.0 Introduction

FDI is made to get a permanent involvement in a foreign endeavor with the intent of holding an effectual voice in its direction. It is a concern investing in another state, which frequently takes the signifier of puting up local production installations or the purchase of an bing concern. It is usually undertaken by transnational endeavors ( MNEs ) . FDI has grown greatly both in dealingss to merchandise and in absolute footings during the last two decennaries or so. The growing is one of the most dramatic marks of globalisation ( Ngowi 2001 ) .

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Foreign direct investment-Wikipedia, defines FDI as long term engagement by state A into state B. It normally involves engagement in direction, joint venture, transportation of engineering and expertness. There are three types of FDI: inward foreign direct investing and outward foreign direct investing ensuing in a net FDI influx ( positive or negative ) and stock of foreign direct investing which is the cumulative figure for a given period. It is a step of foreign ownership of productive assets, such as mills, mines and land. Increasing foreign investing can be used as one step of turning economic globalisation. Once a house undertakes FDI, it becomes a transnational endeavor ( the significance of multinational is being “ more than one state ” ) .

1.1.2 Mining

Mining is the extraction of valuable minerals or other geological stuffs from the Earth, normally from ore organic structure, vena or ( coal ) ridge. Materials recovered by mining include base metals, cherished metals, Fe and diamond. Mining in a wider sense comprises extraction of any non-renewable resource ( e.g. crude oil, natural gas, or even H2O ) . Mining of rock and metal has been done since pre-historic times.

Modern excavation processes involves prospecting for ore organic structures, analysis of the net income potency of a proposed mine, extraction of the coveted stuffs and eventually renewal of the land to fix it for other utilizations once the mine is closed ( Mining – Wikipedia ) .

2.0 BACKGROUND

2.1 Distribution of FDI in Tanzania harmonizing to the Sector of the Economy

In Tanzania, up to 2001 the largest sector for FDI is believed to be the fabrication sector which accounts about 33.5 % of the entire FDI stock, the 2nd largest sector for FDI was believed to be mining sector with approximately 28 % of entire FDI stock by the same twelvemonth. In fabrication sector, nutrient and drink histories much of FDI, whereas in the excavation sector, gold excavation industry is the largest individual sub-sector in footings of FDI. Tanzania has copiousness of mineral resources which made excavation sector to being able to pull mineral geographic expeditions and investing. On the other manus, during 1990 FDI in excavation sector was improved by the revised, investor- friendly investing and excavation codification introduced in 1998, which was good received by international investors. Since, 1990 there has been singular growing in the excavation sector. Previously, South Africa and Ghana were the taking states in Africa in footings of the figure of geographic expedition activities but from, 1998 Tanzania started to be the prima state in Africa. In Region wise much of FDI stock are concentrated in Dar-es-salaam since it is the largest metropolis, Mwanza and Shinyanga parts are taking the 2nd opportunity among the top receivers of FDI chiefly because they are endowed with abundant natural resources, particularly minerals ( Kabelwa,2006 ) .

Noteworthy development in the excavation industry in Tanzania has been experienced with the opening up of six big graduated table gold mines at Nzega, Geita, Bulyanhulu, North Mara, Buhemba and Tulawaka. Since so, more than 15 mineral chances of gold, Ni and U have besides been developed into assorted phases of geographic expedition.

In 1997, Tanzanian Government established the mineral policy which guides development of the Mineral Sector. This policy was strongly influenced by the national policy instruments that addresses issues of poorness and economic development, and integrated mineral sector reforms as one of the several related constituents which, when combined, offer a multi-sector attack to poverty decrease and economic growing. The Mineral policy of 1997 provided a program for development schemes for the Mineral Sector in Tanzania.

2.2 The Mining Sector in Tanzania

Mining in Tanzania started as far back as the pre-colonial epoch. The public presentation of the industry over the old ages has been determined by assorted political, societal and economic political orientations and assorted policies. The excavation sector in Tanzania includes both small- graduated table operations characterized by the deployment of manual and fundamental engineerings ; and big graduated table mechanized excavation dominated by nine ( 9 ) major mines: six for gold and one each for diamonds, coal and Tanzanite. Gold histories for 90 per centum of the value of Tanzania ‘s mineral exports ( SID, 2009 ) .

Table 1: Mineral Militias in Tanzania.

Types of Mineral

Measures

Gold

2,222 metric tons

Nickel

209 million metric tons

Coal

911.0 million metric tons

Phosphate

577.04 million metric tons

Gypsum

3.0 million metric tons

Soda Ash

109 million metric tons

Limestone

313.0 million metric tons

Tanzanite

12.60 dozenss

Diamonds

50.9 million carats

Iron Ore

103.0 million metric tons

Copper

13.65 million metric tons

Beginning: Geological Survey of Tanzania, 2007

The excavation sector, although little, contributes about 23 % of GDP and is an of import earner of foreign exchange ( www.tanzania.go.tz ) . Recent investings, peculiarly in gold excavation and geographic expedition have led to the rapid enlargement of the sector, and Tanzania is now on mark to go an of import manufacturer in the African context. Other mineral resources include diamonds, colored gemstones, coal, salt and limestone ( EIU, 1997c ) .

FDI flows were non-existent in the early 1990 ‘s, but alterations in the investing Torahs have led to an addition from US $ 12 million in 1992 to US $ 183.4 million in 1999. Since Tanzania liberalized its economic system two decennaries ago, the excavation industry has seen a series of new Acts of the Apostless and policies put in topographic point to pull foreign investing, the underlying nonsubjective being to advance the large-scale extraction of the states mineral militias. In 1996 the Tanzanian authorities issued New Investment Policy, which was followed by the Tanzania Investment Act No. 26 of 1997. The chief purposes were to increase the transparence of the legal model, deregulate the investing procedure, make a one halt investing bureau and supply for transferability of capital and net incomes. In add-on to that, the Tanzanian authorities attempts to advance private sector led to mineral development. These attempts were assisted with Mineral Policy of Tanzania of 1997.The policy ensured that the wealth generated from mining supports sustainable economic and societal development every bit good as minimize or extinguish inauspicious societal and environmental impacts of excavation activities. Besides the 1997 Mineral policy of Tanzania aimed to ease development of mineral resources that would lend significantly towards income coevals, employment creative activity, societal and economic substructure development ( peculiarly for rural countries ) , increased foreign exchange and authorities grosss every bit good as cut downing poorness.

Exploration and development of the mineral resources, including crude oil and gas sub-sectors, in Tanzania, autumn under the supervising of the Ministry of Energy and Minerals. But, despite all the positive statements of inducements, there were indicant of maltreatment by foreign investors. In 2003, the authorities, for case, had to take revenue enhancement inducements on crude oil imports for excavation companies, due to the fact that some of the foreign companies accorded the inducements, have been mistreating them by importing crude oil and selling it in the unfastened market. There were besides concerns as to whether the authorities has effectual and practical standards for publishing and taking inducements. There had been, hence, some calls for a reappraisal of the standards used in publishing inducements to foreign investors ( CUTS, 2003 ) .

3.0 THEORIES OF FOREIGN DIRECT INVESTMENT

3.1 Market Imperfection

FDI is defined as direct result of imperfect market. The market imperfectnesss may originate in one or more of several countries for illustration, merchandise distinction, direction accomplishments, and authorities imposed market deformations. The rise of transnational house can be pointed to a assortment of market imperfectnesss that prevent the wholly free flow of goods and capital internationally. These imperfectnesss include authorities ordinances and controls, such as duties and capital controls, which impose barriers to free trade and private portfolio investing. These are factors that inhibit markets from working absolutely. The market imperfectnesss account of FDI is the 1 favored by most economic experts. In international concern literature, the selling imperfectness attack to FDI is typically referred to as internalisation theory.

With respect to FDI, market imperfectnesss arise in two fortunes: when there are hinderances to the free flow of merchandises between states and when there are barriers to the sale of know how. ( Licensing is a mechanism for selling know – how ) . Barriers to the free flow of merchandises between states decrease the profitableness of exporting, comparative to FDI and licensing. Hindrances to the sale of know-how addition the profitableness of FDI relative to licensing.

Therefore, the market imperfectnesss explanation predict that FDI will be preferred whenever there are barrier that make both exportation and the sale of know-how hard and/or expensive.

3.2 Transportation system Cost

Multinational houses arise because of the demand to short-circuit imperfectness in intermediate merchandise markets by internalising the market across national boundary line. For case, when transit costs are added to production costs, it becomes unprofitable to transport some merchandises a long distance. This is peculiarly true of merchandises that have a low value to burden ratio and can be produced in about any location ( e.g. cement, soft drinks, etc. ) , for such merchandises, comparative to either FDI or licensing, the attraction of exporting lessenings. Therefore, transit costs entirely help explicate why some companies have undertaken FDI instead than exporting.

3.3 Location

There are four factors that are relevant to the location- specific theory of FDI, which involves the multinational in seeking locations such that the differences between benefits and costs are maximized. The four key factors are: –

Labor costs

Real pay costs which happen when there are differences between labor in developing state and industrialised states. That is, when a transnational company decides to put in a state on which labor costs are low compared to its state of constitution.

Marketing factors FDI determination by transnational company may take topographic point due to assorted grounds such as markets size, market growing, phase of development and the presence of local competition.

Trade barriers-sometimes host states may enforce trade barriers to promote local investings from place industries. In other fortunes host states may make up one’s mind to take trade barriers. When trade barriers are removed by host states transnational companies are acquiring a opportunity to develop their industries in the host states.

Government policy of the host state may hold consequence on the investing clime of the state. This may take topographic point either straight through financial inducements, pecuniary policy or the regulative government. Besides, may take topographic point indirectly through the prevalent societal environment.

4.0 ANALYSIS OF THE CURRENT SITUATION OF FOREIGN DIRECT INVESTMENT ON THE MINING SECTOR IN TANZANIA

From 1990 the Government began to promote FDI in mining germstone, gold, and other minerals, and this resulted in the Mineral Policy of Tanzania being introduced in 1997, followed by the 1998 Mining Act. This provides ( with the 1997 Tanzania Investment Act ) the present statutory model for FDI in the excavation sector.

The policy and operating model is investor-friendly. In many ways it is “ best of its sort ” in footings of supplying a positive supporting environment. The revenue enhancement and investing allowances are attractive. The ministry is comparatively efficient and supportive and all necessary certifications are usually obtained within two hebdomads. The FDI model is therefore strongly positive. The industry every bit good as the Ministry, is hopeful that Tanzania will go a important international excavation location in the hereafter, making employment and exports, thereby moving as a drive sector for alteration. The chief countries for betterment are the remotion of limitations on land ownership, and substructure in the chief excavation countries ( UNCTAD, 2002 ) .

The crude oil ( Exploration and Production ) Act of 1980 acknowledging the high costs and unsure consequences of geographic expedition and development seeks to supply an attractive operating environment for international oil and gas companies.

As respects inducements in add-on to the standard financial inducements these include zero import responsibilities on any purchased equipment and full allowance for unrecovered geographic expedition costs incurred under earlier production sharing understandings ( PSAs ) . An attractive characteristic is that international companies in this sector can choose to keep their operating histories for their Tanzanian activities in dollars and to pay their Tanzanian revenue enhancements and charges in dollars at the prevalent exchange rate.

This constitutes a dollar footing for investing, capital outgo and purchases of the planetary oil and gas industry. The policy appears to be effectual in promoting FDI in the emerging Tanzanian hydrocarbon sector.

4.1 SWOT ANALYSIS

4.1.1 Strength

Tanzania ‘s extractive industry is presently characterized by a rich mineral gift, increasing FDI and policies and Acts of the Apostless that are geared towards promoting foreign investing at any cost. The excavation sector in Tanzania is therefore one of the fastest turning sectors in Tanzania with an mean growing rate of 12 per centum per annum.

There has been a enormous addition in prospecting in mining following the policy alterations undertaken by the authorities since early 1990s. These policy alterations have included attempts to make an enabling environment for investing in the excavation sector through:

Introduction of a competitory excavation policy and an every bit competitory mineral statute law ;

Review and streamlining of revenue enhancement ordinances on excavation activities ; and

Constitution of a sound macroeconomic model.

4.1.2 Failing

However there are consistent and turning mutters of discontent about the excavation industry. The main ailment is that the investings are non of benefit to Tanzania but are alternatively being used to reassign the state ‘s resources out of the state.

In add-on to that, although there are successes in the excavation industry in Tanzania, but these successes have proved failure harmonizing to the concerns of certain stakeholders, their feeling is that, the excavation sector could be lending much more to the national treasury than it presently is. Besides, the legislative and legal governments around the excavation sector, it is argued, seem to tilt more towards promoting foreign investing than to advancing and safeguarding the involvements of the wider population. There are besides concerns over the harmful impacts of the industry on the environment and political relations. Furthermore, the fraught issues of the supports of those people who have been moved from their places and farms t o give manner to excavation activities remain unsolved. Furthermore, there is small or no grounds to demo that the addition in the extraction of the state ‘s natural resources has really contributed to a decrease in poorness degrees.

4.1.3 Opportunities

The impact of FDI on the quality of occupations is seen to hold been positive in the state ; the figure of occupation chances has non grown fast adequate to absorb the increasing occupation searchers. At the sector degree, the impact of FDI on the quality of occupations is observed to hold been positive in all the sectors except the fiscal, where it is negative.

4.1.4 Menaces

The Tanzanian Government has limited capacity to guarantee that the state ‘s resources are decently exploited and it has already attempted and failed to pull off several mines in the yesteryear. The authorities has jobs maintaining path of the exact sum of mineral exploited, and how to find the expected revenue enhancement and royalties.

Inequality in society is farther declining by large-scale corporate excavation operations. In most instances, people from the local communities around the excavation country remain unemployed, while the minority working for the excavation companies enjoys a good income and high life criterions. Furthermore, wages paid to people in Tanzania are still low compared to other states in Africa like South Africa. The same occupations assigned to aliens could merely be given to Tanzanian in such a manner rigorous in-migration Torahs and processs are required.

Besides, deficiency of equal tools, expertness and organisational apparatus required to supervise and back up a modern, market-driven mineral sector. Low integrating of the sector with other sectors of the economic system, low part to the GDP compared to the sector growing and environmental debasement.

In add-on to that reaching of FDI in excavation undertakings brought legion challenges. Large-scale excavation are blamed for the diminution in employment due to utilize of advanced engineering which herding out small-scale excavation operations.

5.0 PERFORMANCE AND IMPACTS OF FOREIGN DIRECT INVESTMENT ON MINING SECTOR

5.1 Economically

The mineral sector is one of the fastest turning sectors in the state in absolute footings. It is fastest turning besides in footings of its part to the economic system and export activities. Between 1997 and 2001, this sector has grown at an mean one-year rate of 16.2 % . Its one-year part to the GDP rose from 1.7 % in 1997 to 2.5 % in 2001 ( URT, 2001 ) .

In nominal footings, export net incomes generated in the sector increased from US $ 29.7 million in 1996 to US $ 311.9 million in 2001. This addition was chiefly attributed to the immense capital invested by large excavation companies ( CUTS, 2003 ) .

The recent growing of gold production in Tanzania has marked a transmutation of its export sector. Before independency in 1961, Tanzania ‘s exports were dominated by agricultural merchandises including java, tea, Anacardium occidentale nuts, baccy and sisal.

Recent net incomes from gold excavation have contributed about US $ 750 million per twelvemonth in foreign exchange and revenue enhancement parts from gilded production. Gold excavation is besides one of the largest beginnings of revenue enhancement gross for Tanzania at 3.6 per centum of one-year aggregations. These grosss have helped to pay for indispensable manufactured imports.

Besides, big graduated table excavation contributes much as the beginnings of a state ‘s foreign direct investing. This has enabled the authorities to significantly increase the volume of domestic investing.

5.2 Socially

Employment in the sector has besides increased. The gross from the sector is from revenue enhancements, prospecting royalties and excavation licence fees. Large mining companies have been the most dependable beginning of authorities gross from the sector. This is because tracking of production volumes and exports from large excavation companies is comparatively easy, compared to the small-scale mineworkers whose informal nature of operations make them hard to maintain path of ( CUTS,2003 ) .

Employment in the sector has besides increased such as employment ensuing from gold excavation in Tanzania which is rather important. The sector creates more occupations than the state ‘s public-service corporation sectors combined, which includes gas, electricity and H2O. The economic encouragement from this is increased by the employment multiplier, estimated to be about three per centum in Tanzania.

Harmonizing to figures from Tanzania Investment Centre, different Numberss of entire employment for 13 sectors between September 1990 and September 2000 were

Table 2: Employment in assorted sectors

Sector

EMPLOYMENT CREATED

Agribusiness and Livestock Development

41,934

Natural Resources

23,908

Tourism

21,353

Manufacturing

111,066

Petroleum and Mining

8,981

Construction

8,843

Transportation system

6,983

Servicess

9,035

Computer

46

Fiscal Institutions

1,320

Energy

90

Human Resources

368

Entire

235,322

Beginning: Tanzania Investment Centre 1990-2000

Establishing on the above estimations crude oil and excavation was the 6th out of 13 sectors. Therefore, we can reason that FDI has contributed positively to occupation creative activity in Tanzania including the excavation sector.

Apart from employment creative activity, FDI in Tanzania taken an illustration of Kahama Mining Corporation Ltd ( KMCL ) in Bulyanhulu, has provided US $ 5.48million lodging loan strategy to build over 800 modern houses at subsidised costs. Harmonizing to KMCL ( The Financial Times, January 31, 2001 ) the strategy initiated to alter the bad lodging state of affairs in the country.

Furthermore little graduated table excavation in Tanzania contributed to poverty relief and rural occupation creative activity. Incomes and the money from little graduated table mineworkers is go arounding locally and lending to secondary economic activities that followed excavation such as stores and services. Generally it is said that small-scale excavation generates an estimated three occupations for every one person straight involved in excavation. It has enabled Tanzanian to roll up capital and to put in more stable concern such as stores, eating houses and guesthouses. It is agreed that it is one of the plan which has been able to shoot income in rural countries, stimulate hard currency flow and cut down poorness.

6.0 REASONS FOR FAILURE OF MINING SECTOR IN TANZANIA

In add-on, to the above account on challenges and menaces of FDI on excavation sector, Tanzanian authorities has failed to guarantee that the state ‘s resources are decently exploited and managed for the benefit of the citizens. Among of the grounds for the failure is the limited capacity of the authorities to form and pull off proficient resources economically. Apart from that, the authorities has job of maintaining path of the exact sum of minerals to be exploited.

Furthermore, corruptness is a outstanding characteristic in the Tanzanian populace sector which discourages investing in the sector.

7.0 Decision

This essay has attempted to explicate the possible impact of FDI on excavation sectors in Tanzania. It has get downing with specifying FDI and excavation, historical overview of FDI, prior and station reforms how FDI was being implemented. Theories of FDI as transnational scheme used by MNC to happen inexpensive beginnings of productions and markets have been explained. Analysis of the current state of affairs of FDI on excavation sector, in Tanzania, shows that the sector is turning and going stable economically. The sector has performed good socially and economically and it has a batch of benefits such as gross coevals, capital formation and employment coevals.

However for Tanzania to go one of the best performing artists in the sector, hardworking and investing is required from its stakeholders. Furthermore, the authorities has to concentrate on bettering assorted facets of the industry such as answerability and transparence with peculiar respects to the nature of contracts and understandings signed with investing spouses. The authorities and its stakeholders have to adhere to human rights and careful direction of the environment in order to guarantee sustainable development.

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