Published on Africa Can End Poverty

Tanzania can benefit from natural gas by empowering people

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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.

1. Shanta Devarajan and Marcelo Guigale, How Africa can extract big benefits for everyone from natural resources.


Jacques Morisset

Lead Economist and Program Leader, World Bank

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