Walking a fine line to avoid the resource curse

Tanzania’s huge offshore gas resources could provide a revenue stream that would finance a good deal of its development needs. But it has to walk a fine balance between avoiding the ‘resource curse’ yet making the sector attractive to foreign investment.

The discoveries of large oil and gas reserves in the deep sea off Tanzania in 2010 and 2012 opened up a whole spectrum of possibilities. The very substantial new revenue stream this development promised could, if properly managed, further raise the living standards of the population as a whole.

Income from royalties would supplement tax revenues and allow the state to expand and deepen its services in the health, education and housing sectors and the stimulus to the economy – as it has done elsewhere where windfall revenues has been properly harvested – could prove a boon to large and small enterprises which in turn would create more jobs.

Onshore processing facilities for both oil and gas would attract large investments further boosting local economies as well as transferring skills and kick-starting supplementary industries.

The positive effects would transfer to the construction industry, inject new energy in banking and insurance and have an overall positive effect on other infrastructure.

It is not surprising that the news of the hydrocarbon discoveries was greeted by great enthusiasm by both the public and the state.

On the other side of the coin was the ever present danger of ‘the resource curse’ that has blighted so many African countries that were blessed with natural resources but failed to use these to develop their nations and instead allowed a destructive cycle of corruption and cronyism to eat away the revenues while their countries remained underdeveloped.

Broad spectrum

The Natural Wealth and Resources Act of 2017, as well as other Acts, guarantee that the use of natural wealth and resources will benefit Tanzanian citizens, and ensures that all arrangements or agreements by the government protect the interests of the people of Tanzania.

While the legislative reforms aimed to increase the benefits and control of natural resources by the state and Tanzanian citizens, some considers them as imposing excessive control and regulation, and creating uncertainty and limited security for private investors, thus likely to affect future petroleum exploration prospects in the country.

Investors are driven by risks and returns after factoring in the provisions set out in the fiscal regime, making its stability and predictability in foreseeable future an important aspect.

Win-win relations

The need for a balanced and win-win contractual relations, however is central to avoiding the pitfall of natural resource curse for a nation, while ensuring the international investors a more stable operating environment and a social license to operate.

The vast and diverse natural resources, particularly the extractives have the potential to generate substantial financial resources in the future if the recent reforms will attract further investments in the sectors and seal loopholes for leakages in tax revenues.

The hydrocarbon discoveries off Tanzania encapsulate the fine line that governments must walk to ensure that the benefits of their natural resources go largely to their citizens while at the same time, not erecting barriers to the investment that is needed to exploit those resources.

Donald Mmari, Lucas Katera, and Jamal Msami are from REPOA