Political Risk Mitigation in the Tanzania Gold Mining Sector

Primary Analysts: Demyan Plakhov and Cynthia Yi
Researchers: Nathan Leili, Calvin Wong, Trevor Zaple
Team Leader: Marko Gombac

Current and prospective foreign investors examining the Tanzanian gold mining sector should consider potential obstacles posed by economic instability and a hostile government that implements inconsistent policy. The majority of risks associated with the gold mining sector are due to the Tanzanian government, led by President John Magufuli, imposing legislation that increases ownership of the mines with the aim to boost its domestic economy. Recent legislation has passed where companies are required to give up a minimum of 16% ownership of their company’s shares to the Tanzanian government. This decreases the company’s projected profits and, while being compensated for their stake, reduces their control over the gold mine reserves. Although the policy environment is unpredictable, it is apparent that the current Tanzanian government is moving towards a protectionist stance. Therefore companies should prepare for further restrictions and bans as demonstrated by the recent ban on exporting ores of minerals.

Furthermore, the government has openly and actively engaged in tax disputes with foreign mining firms. Additionally, the tightened regulatory framework surrounding the mining industry makes it difficult for foreign firms to conduct business in the country. To minimize political and legal disputes, it would be beneficial for companies to work with local lawyers to confirm that the licenses and contracts abide by the local regulations as they have more familiarity with local issues. Foreign investors can register with the Tanzania Investment Center (TIC) to build relationships with local companies and citizens. TIC also helps facilitate investments by providing assistance in obtaining permits, visas, and land access. Other mitigation strategies include combating sudden policy changes through the Tanzanian legal system or going to the International Centre for Settlement of Investment Disputes (ICSID) for a fair judicial process.

In the case of disputes arising when companies receive restrictions or notices of arbitration, they should first attempt to organize a civil negotiation with the government. This has been proven to be a viable method in the past when Acacia Mining received notices of arbitration in July and Barrick Gold, a major shareholder, began negotiations with the government of Tanzania which lasted for a month to resolve the dispute in an efficient manner.  An alternate option to combat sudden policy changes is through the Tanzanian legal system. However, Tanzania’s legal system is the third most corrupt institution globally  which does not make this the most reliable approach to resolve legal matters. After these options have been exhausted, businesses can turn to the International Centre for Settlement of Investment Disputes (ICSID) for a fair, albeit lengthy, judicial process.

Small-scale gold mining tends to be a sensitive area with a majority of the regional EAC (East African Countries). Although Zambia is encouraging small scale mining operations, other countries like Uganda and Mozambique are cracking down, citing security problems with respect to illegal miners and the need to prioritize licenses for larger-scale operations. Zambia has started issuing small-scale gold-panning licenses as of September, and the Zambian Mines Minister Christopher Yaluwa has also suspended the licenses of several gold mines in eastern Zambia for operating illegally. There is fear in some quarters that mining licenses were allegedly granted to inexperienced firms in a less-than-transparent manner. On a more regional basis, the EAC has called for an overarching set of legislation that harmonizes mining regulations across East Africa, an effort that may fly in the face of the more unpredictable Tanzanian approach on how to run national mining industries.

Conversely, Uganda’s friendlier attitude to investors has come at the cost of local labour unrest, as some 70,000 “artisanal gold miners” were removed from their lands after the Ugandan government granted two domestic investors licenses to those lands. The artisanal miners have since claimed that there is no evidence that gold exists in the area they were relocated to. The Ugandan government further indicated that these miners present a security concern, pointing out that some of them are in the country illegally.  Moreover, the Ugandan gold industry has been has been in the spotlight of negative publicity recently due to the government’s partnership with the Belgian businessman Alain Goetz in running African Gold Refinery (AGR), a regionalized company focusing on refining and trading gold. Nevertheless, Goetz and AGR are under investigation in Uganda for money laundering, a move that jeopardizes the country’s recent change in risk status. Since 2014, Uganda had been on the Financial Action Task Force on Money Laundering’s list of ‘risky countries to invest in’ due to issues surrounding money laundering. It was only until recently that Uganda status had been lifted in November of 2017.

Kenya is signaling their acceptance of foreign mining investors to partner with their mining industry, which was officially brought under government ministerial regulation in 2013.  Consequently, the World Bank ranked Kenya as the third-most improved economy in terms of ‘ease of doing’ business, highly contrasting Tanzania. Utilizing Kenya’s welcoming of foreign investment, Acacia Gold is one of the companies currently implementing exploration projects in potential gold fields. Investors seeking entry into the mining sector in Tanzania should therefore take these regional developments into consideration as indicators of potential offsets to projects in Tanzania itself. Similarly, using other states offerings as bargaining leverage is a viable tactic to pacify the potentially overbearing Tanzanian government.