Barrick Gold is back in business in Tanzania, but for how long?
Barrick Gold Corporation announced its effective return to business in Tanzania on January 24, 2020, after nearly three years of enormous disruptions. The company’s announcement followed the establishment of a framework agreement with the authorities in October 2019, and subsequent ratification in January this year.
The framework agreement constituted a consensus on settling all disputes (mainly financial and environmental) arising from Acacia’s operations, and the associated liabilities, including those affecting the company’s personnel, both in their official and personal capacity.
Speaking at an event to formalize the ratification of the agreement, Professor Palagamba Kabudi – Foreign Affairs Minister, and leader of the Government Negotiation Team - described the entire contracts renegotiation journey with Barrick as arduous and frustrating. However, he hailed the outcome as a “major victory.”
President Magufuli, in his remarks, echoed Kabudi’s message, and referred to the agreement as a marker of new beginning. The government’s description of the agreement as a major victory is anchored to its three main elements; the “key principle” - 50/50 - sharing of economic benefits, 16 per cent (undiluted) free carried interest in all three mines that are managed by Barrick (Bulyanhulu, North Mara and Buzwagi), and representation in the joint management company – Twiga Minerals Corporation Limited.
The agreement between Barrick and Tanzania is expected to deliver a significant, overall increase in the actual share of government’s proceeds from the company’s investments in the country. This article raises a number of critical questions regarding the efficacy of the agreement, based on the information that has been made public both by the Government of Tanzania, as well as Barrick.
Minister Kabudi`s explanation of the 50/50 principle for sharing of economic benefits has been without any caveats. But Barrick’s recent press release has indicated that this arrangement will become effective “after the recoupment of capital investments.”
This is an important contractual condition given that Barrick had to buy Acacia out of Tanzania, and thus incurred significant debt. Besides, the disruption of business over the last three years affected the company’s cash flow and may have led to accumulation of debt or slow than usual repayment. These costs will inevitably push back the activation of the 50/50 principle for a number of years.
Another key limitation of the 50/50 principle is its broad definition. The draft framework agreement that was released by Barrick last year showed that the calculation would include direct and indirect government taxes, royalties, fees and the 16 per cent free carried interest. While the free carried interest has been described as a boon, its utility may be overrated. Recent injection of new capital through Acacia buy-out, and losses suffered by the company over the last three years will definitely affect the company’s profitability.
Unless the company turns profit, the government’s 16 per cent share might not amount to anything larger than political currency. Nevertheless, there might be a steady stream of income if the government managed to negotiate a reasonable cost recovery limit. Ghana’s 10 per cent free carried interest has failed to meet revenue expectations for years, to the extent that the arrangement has been considered “useless.”
Tanzania’s representation in the joint management company – Twiga Minerals Corporation Limited – is meant to ensure the country has “full visibility and participation in operating decisions.” But this intention is somehow contradicted by the contents of the draft framework agreement which indicated that government’s influence over decision-making would be limited by its shares.
In spite of this concern, the government will need to use its representation to improve the monitoring and auditing of costs, including oversight over decisions to inject new capital. Barrick’s announcement that $50 million has been budgeted for exploration this year shows the company’s intention to expand its investment in the country, but the plan has implications on the terms of the recent agreement, and should be scrutinized carefully.
The government negotiation team made notable concessions in its engagement with Barrick. It agreed to lift a ban on export of concentrates, allow international arbitration (Singapore or UNCITRAL), waive a requirement on local floating of shares and shelve a demand for the company to invest in promoting local beneficiation.
While some of these requirements (beneficiation & local arbitration) should not have even been imposed in the first place due to feasibility reasons, this level of concession will only be meaningful if the agreement achieves the ultimate goal of delivering significant increase in overall government take.
The most important lesson for the government from the entire dispute with Barrick is the importance of investing in comprehensive and reliable data. The impasse in negotiations, to a large extent, arose from contestations over facts and trends in mineral composition, price and mines profitability. Research shows that Tanzania Mineral Audit Agency (now defunct) succeeded in improving cost audits and thus government revenues. Government has to ensure the capacity that TMAA had developed isn’t lost in the ongoing transition.
The protracted nature, and political rhetoric associated with the dispute between Barrick and the Government of Tanzania must have heightened public expectations about potential returns from the recent agreement. Therefore, the future stability of Barrick’s operations in the country is dependent on the efficacy of the current agreement. There is a saying that the “lifespan of anything good in Tanzania is five years.” Unless the agreement is good enough, it won`t survive the next administration.
Civil Society Organizations and opposition political parties played a key role in building a case that led to the government’s decision to go after Acacia (now a defunct entity) in 2017. These actors have already voiced their criticism of the current agreement by pointing to its supposedly generous terms, and government’s failure to consult the parliament, contrary to the law. The government has, so far, ignored these voices. Barrick needs to broaden its cycle of engagement, beyond the government and host communities, as it seeks to rebuild the value of its businesses and reputation in Tanzania.
Dastan kweka is an independent analyst, and alumnus of the Natural Resource Governance Institutes’ (NRGI) Summer School (2015)