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Tanzania can benefit from natural gas by empowering people

Jacques Morisset's picture

If you are looking for a house in Dar es Salaam, hurry up. With the recent discovery of massive natural gas reserves, 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. Today Tanzania sits on about 15 trillion cubic feet of proven natural gas reserves, equivalent to approximately US$150 billion at current prices, or 6 times Tanzania's current GDP.

These proved and potential reserves can be a game changer for Tanzania. Yet, extracting and producing is not a simple affair. Massive up-front 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.

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 merits 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. Multinational companies can also help develop training programs and linkages with local suppliers. Setting those obligations upfront in contracts –through smart PPPs-- is vital. Don't expect that this industry will create many permanent direct jobs after the construction phase. The project publicized recently by British Gas forecasts up to US$35 billion in FDI but only 200 workers will run their operations.

Second, the construction phase is expected to exceed 7 years. This means that the Government will not receive large amounts of fiscal revenues before 2021-22. Not only will expectations have to be managed during this long transition but there is a risk that policymakers will mortgage future revenues for immediate consumption. Safeguards should be implemented right from the start.

If Tanzania wants to avoid the famous curse associated with natural resources, the lesson from experience is straightforward: transparency. All negotiated contracts with producing companies, the selection of projects, and payments must be monitored and audited by an independent body and ultimately disseminated to the public at large. The Tanzanian authorities appear sensitive to this commitment. The country is scheduled to comply with the Extractive Industries Transparency Initiative  in 2012 or 2013. The Parliament will be associated, and technical assistance is underway to help design and implement the right institutional and legal framework. Those steps are welcomed but might not be sufficient because Tanzanian institutions are weak and corruption relatively widespread (Tanzania is ranked 100th out of 180 countries by the 2011 Corruption Perceptions Index developed by Transparency International).

Ultimately, there is no better accountability than that from citizens. Along those lines, two World Bank economists --Shanta Devarajan and Marcelo Guigale -- have recently argued that the best incentive would be  to distribute the financial benefits from natural resources to everyone (for example by making people co-owners of the extracting company)1.  While provocative, this proposal is based on the idea that people will monitor better their policymakers and make them accountable when deviations from good governance will directly impact on their wallet.  Any misappropriation of funds will automatically translate into a monetary loss.

Additional cash will also provide opportunities for poor households to invest directly in education (like a voucher or cash transfer) and in productive activities (see World Bank First Tanzania Economic Update). Arguably, 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. 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 it 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.

This revolution has been spreading out to Tanzania and many households are now mobile money customers. 
At the beginning of next decade, there should be no technical obstacles to empowering people with the financial management of natural resources –only political constraints. Let us hope that this option will be part of the debate around natural gas that has just begun in Tanzania.
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1. http://blogs.worldbank.org/africacan/node/1993. Shanta Devarajan and Marcelo Guigale, How Africa can extract big benefits for everyone from natural resources.

Comments

Submitted by Philippe on
What about the impact on the environment of this drilling? Does it involve fracking? If so, what about water use and water pollution?

Submitted by Anonymous on
Tanzania is known as a "haven" for money laundering. From 2000-2010-over $2.9Billion lost to tax evasion, money laundering. Laws exist to curb these criminal activities, however, to date the ruling party/rulers remain UNWILLING to Enforce any law on the matter. Not only that. There is an ongoing 20 year daylite robbery going on at the central bank, a project of few Tanzanian officials and their elite friends. Billions looted. My point is if there is no good governance in Tanzania, the people of Tanzania will continue to suffer because Tanzania is entrenched in Corruption. Like one local businessman said, corruption is the economy in Tanzania. In order for all the people of Tanzania to benefit, there has to be rule of law, good governance. Tanzania is 3rd leading Gold producer in region, 3rd leading development Aid recipient in the world, & has the 3rd largest slum population in the Africa.

Submitted by Anonymous on
Good balanced article!! To respond to comments of a second poster... Your comments are pure Kenyan smear campaign, when will you stop hating Tanzania....Read your paper today? how many lives have been lost in Mathare slum incident in Nairobi.

Submitted by Anonymous on
The second person, anonymous, you have a point that Tanzania is corrupt, but the rest are just useless incorrect comments. However, mind you, TI measures the "perception" only. Certanly, speaking of corruption, Tanzania is not the way you want to put it. If you hate the country for your reasons, then find somewhere else to direct your anger. Then, what region are talking about? Calling the whole of Africa a region? Hopeless! Speaking of a region that Tanzania belongs to, is East Africa where Tanzania is the only gold producer. Correctly, Tanzania is the 4th largest gold producer in Africa after South Africa, Ghana and Mali. Study your geo-politics again and update your data. Secondly, Tanzania is not the 3rd largest recipient of development aid in the world. You have to redefine that "development" aid to qualify your statement (remember how much Egypt gets) and say that the researcher was talking about 50-year period, which then makes no-sense at all because the country does not receive that much aid today as you wish. You mean that MCC's US$698 million for five years - is that a big deal to you? Speaking of slums, where have you seen such a thing in Tanzania? Is there anything in Tanzania that can be compare to Kibera in Nairobi? yes, we need better housing for majority of Tanzanians, but come on, claiming that Tanzania has the third largest slum population in Africa is stupid.

Submitted by Anonymous on
Money Laundering-the report “Illicit Financial Flows from Africa: Hidden Resources for Development,” by Global Financial Integrity, states that Tanzania has lost $8.9 billion over the past four decades through illicit means. Kenya lost $7.3 billion while Uganda lost $6.4 billion over the same period. Illicit means are defined as money laundering, tax evasion, government graft & other illegal operations. In 2002, there was a report by ISS regarding money laundering in SADC region, it mentioned Tanzania's Attorney General's chambers, MoF, MoD, the police force as conspirators. The Judiciary and the police are mentioned as the most corrupt institutions in Tanzania in 2010 LHRC report. US State Department Human Rights 2011 report states that often Tanzania officials engage in corruption with impunity. Slums-UN reports estimate that in fact 92% of Tanzania’s urban population live in slum conditions – more than 11 million people – which would make it the third largest slum population in Africa. One doesn't need to be in denial or have permanent blindfolds because one is devoted to a system that is feeding them. Instead of defending a corrupt system why not save the country from it? While over 80% of Tanzanians are barely able to put food on the table. Tanzania people need to wake up! Pointing out WHAT&WHO is eating the country does NOT make one less patriotic! Tanzania has to reach its potential, unfortunately with a corrupt system, only few will benefit. ALL Tanzanians deserve a chance in life. They deserve Justice, human rights, and good governance!

Submitted by Anonymous on
Development AID -The top recipient of developmental aid is Iraq, with $9.115 billion in donations. Number two is Afghanistan, with $3.951 billion in donations received. Number three is Tanzania, with $2.811 billion received in donations." Above date from Visual Economics. AND yes, by the way, there is an ongoing 20 year daylight robbery going on at the Bank of Tanzania. Articles on it have been suppressed by the Tanzanian government. The founder of the nation, Mwalimu Nyerere was an educator. In the words of a Tanzanian friend, "its an insult to Mwalimu, what has become of Tanzania. Rushwa kila kona. You know what Tanzania is called Fisadistan" Trying to save your country doesn't make one less patriotic!

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