All posts by admin

End to false promises: Why COP27 must be a true African COP

 

Climate Change and Energy Transition negotiations should be about people.  A just transition cannot be achieved if the majority already affected by climate change and are likely to be affected by the energy transition as a mitigation measure are not heard on the negotiation table

By Moses Kulaba

The 2022 United Nations Climate Change Conference, more commonly referred to as Conference of Parties (COP), was held from 6 -18 November 2022 in Sharm El Sheikh, Egypt. This year’s COP was branded as the African COP since it  happened on the African continent.

Interestingly, this was not be the first COP on the African continent (Africa has hosted other COPs before in Morocco, Durban and Nairobi) and if going by the precedent set by past COPs, climate change commitments and targets were never honored especially by the world leading countries in terms of carbon emissions even after the Paris Agreement. The COP26 promised funds which never came.

In most cases the African political leadership was often disjointed in terms of a common position grounded on the realities of the continent’s people, livelihoods, and economies as the least contributors to the climate crisis.  Furthermore, the people’s voices and grievances are often excluded in the negotiations and processes thereafter. The net result has been a technical process which has led to a potentially slow but catastrophic climatic journey to oblivion, with Africa bearing the brunt of climate shocks and stress.

Despite being the least polluter, Africa faces the worst vagaries of climate change and energy transition risks. Previous IPCC reports indicate that Africa is experiencing more rises in temperatures and sea levels than anywhere else in the world. In the next decade, Africa will experience intense heat waves of up to 5 times more than ever recorded, more uncertain rainfall, droughts etc. Africa is facing significant total disruptions and mitigation and adaptation is required to reduce overall risks of climate change.

Currently, East and Horn of Africa is experiencing the worst drought in over 40 years, with between 22 million to 50 million facing starvation and over 3.4 million children already malnourished. The March to May rains were the lowest in 70 years which has resulted in multiple cycles of crop failure and loss of millions of livestock which are essential sources of livelihood.

For Africa, the potential risks of global warming and climate change are everywhere and daily risk that we face. With a total Forest cover of about 7,13,789 sq km which is 21.71% -24.6% of the geographical area of the country, Tanzania is one of the largest remaining carbon sink. Tanzania’s forests contain more than 2,019 million metric tons of carbon in living forest biomass. Yet, it is estimated that between 1990 and 2010, Tanzania lost 19.4% of its forest cover, or around 8,067,000 ha. At this rate, we could lose half of our forest cover by 2030.

A sudden rise in the Ocean Sea levels by around 3 feet is enough to partially submerge Zanzibar. National Geographic scientists estimate that the islands of Zanzibar and Mafia are likely to disappear under water by 2100 due to a rise in sea level triggered by global warming. Globally, sea level has risen about eight inches since the beginning of the 20th century and more than two inches in the last 20 years alone. Every year, the sea rises another .13 inches (3.2 mm.) New research published on February 15, 2022, shows that sea level rise is accelerating and projected to rise by a foot by 2050.

It was this reason that I argued for CoP27 and any future negotiations on Climate Change and Energy Transition negotiations to be meaningful, they should be about people.  A just transition cannot be achieved if the majority already affected by climate change and are likely to be affected by the energy transition as a mitigation measure are not heard on the negotiation table.  Tangible results for Africa can only be achieved by;

Making climate change technology available

Make climate change technology available and cheap on the African continent. The unit cost of several low emission technologies has fallen since 2010 and innovation policy packages have also enabled the costs to go down. Both innovation systems and policy packages have helped to overcome the distributional, environmental, and social impacts potentially associated with global diffusion of low technology. Unfortunately, this investment and technological advancement are not evenly distributed. They are scantier in less developed countries and Africa in general.

As that transition is happening, Africa is being left behind, but it is rushed and expected to catch up at a similar pace like its developed counter parts. Therefore, a just transition in real sense is required that allows or enables Africa to benefit in the ongoing climate change technological advancement.

Africa should not only be a market but also a producer of climate change mitigation technology. As a matter of essence and fairness, let production of these be based on the African continent to make use of existing technology input resources, adding values, and creating jobs.

Harnessing Africa’s Oil Gas and Coal, without locking into a fossil future

Allow Africa to exploit its fossil resources in the short term as it gradually transits. Africa has vast deposits of coal and is largely an emerging producer of oil and gas. There are different views on the continent on the future of gas as a source of energy. The question that is often asked is whether gas can be described as ‘a clean’ fossil. But based on its energy poverty status, growing population and sustainable development goals. It is evident that Africa will continue to rely on oil as a source of energy for a longer foreseeable future than its developed counterparts.

The emerging African political leadership consensus appears to support the continued investment and use of gas as a transitional source of energy to bolster their energy mix plans to meet increasing energy demand required to propel Africa into the future. It is true that statistical data shows investment and deployment of clean and renewable energy has been increasing globally however the pace has not yet reached a tipping point to overtake fossil based sources on the African continent.  It is therefore imperative to have a balance that allows Africa to use its gas for development but is careful not to lock itself into a non-sustainable gas or fossil future.

Africa has vast deposits of coal. The recent Russia Ukraine war showed that despite earlier predictions, the use of coal as a source of energy may now have a longer lifetime than earlier predicted, as European Countries such as Germany planed to re-fire their coal plants as a way of diversifying away from reliance on Russian gas, meeting current energy demand and securing their future energy security. This therefore meant that perhaps this can allow Africa to exploit and benefit in the short-term demand, with or without totally losing out and locking itself in a coal carbon future. This could be a risky bet but worth trying as strategies are developed for a gradual phaseout.

Leveraging Africa’s transition minerals

There is need to leverage Africa’s transition minerals to drive economic prosperity and smooth domestic transition. Africa is endowed with vast deposits of minerals which are critical to the clean energy technology required in support of the energy transition and road to net zero. Africa produces less oil but more minerals. According to statistical data between 48% to 70% of cobalt (which is used in the manufacture of batteries for electric car vehicles and phones) and 4% of copper and 1% of lithium is found in the DRC. Tanzania, and Mozambique account for 45% of global graphite, with Tanzania ranked alone ranked to have around the 5th largest global reserve.

Historically, Africa has been a source of materials for global progress.  Unfortunately, minerals in Africa have been largely a source of misery and death.  The heart wrenching stories of mineral driven conflicts in Eastern DRC is well documented. A just transition, therefore,  cannot be achieved if Africa’s minerals are exploited to serve the technological advancement and energy security elsewhere. Africa’s resource rich countries should not be bystanders in this potential energy revolution. This time around Africa must be thinking about how to position itself, so it doesn’t find itself riddled with the resource curse which has bedeviled the continent for so long.

Pegging  Africa’s development on Africa Agenda 2063

Capping global warming at 1.5°C requires a transition to clean energy by 2030 and that global emissions reach net zero by 2050. This is barely less than eight years from now and many African Countries will not beat this deadline. Africa  can not be rushed into an energy transition. To have a just transition in Africa, governments and Africa people’s participation is critical in setting the agenda for the COP negotiations and securing targets that are feasible.

Africa needs to develop or redefine its vision and mission on climate change and energy transition. This redefined vision may be slightly different from the global vision but aligned to Africa’s vision, needs and development determinant factors or drivers of development. For example, setting Africa’s energy transition targets to Agenda 2063 could plausible idea.

Implementing NDCs and NAPs at government level

At government level, implementation of the Nationally Determined Contributions (NDCs) and National Adaptation Plans is critical At the previous COPs, the NDCs were lauded as a major breakthrough demonstrating global political commitment by member states towards climate change mitigation and adaptation. Unfortunately, in many African countries these plans have largely remained unimplemented. Leveraging financing of the NDCs will be an essential game changer in turning the tide against climate Change.

Financing Climate Change and the transition

One of the major obstacles holding back efforts to combat climate change is finance  and finance!. A just energy transition for Africa cannot be achieved without financing. Globally, there is sufficient liquidity and capital to finance climate change. In 2010 developed countries committed provide USD100 billion annually towards climate change. Unfortunately, this promise has not been honored. Much  of what is available is not reaching the African continent.

Africa requires and faces acute shortage in access to energy. Around 759 Mln people in Africa still lack access to electricity. According to the UN Road Map to 2030, it requires only 35bln annually to bring electricity to the 759 million who lack it in Sub Saharan Africa. Indeed, with as low as USD 25 bln annually spent, can raise all 2.6bln people who have no access to electricity, yet Africa seems not to get this money. CoP27 should be where this stain of shame in the fight against climate change is put to an end.

Financing Africa’s climate change and energy transition pathways is mutually beneficial to both Africa and the developed world. By virtue of its location and current low levels of emission, Africa so far is the largest existing carbon sink and buffer that so far can help save the globe.

Africa is not ready to finance a just transition because governments have a limited fiscal space to finance it due to debt servicing pressures and competing priorities for social expenditures. Developed countries must provide financing which was committed and follow by curbing illicit capital and financial out flows from Africa to enable the continent to use it to finance the transition.

Curb illicit financial flows from the continent.

For Africa to be ready for climate change and energy transition, there’s need to seal the existing  loopholes that are facilitating Illicit Financial Flows from Africa to the tune of U$ 89 billion annually (according to the 2020 United Nations Conference Trade and Development report). Much of these outflows trace their destination to developed countries and tax havens whose headquarters are located in developed countries. They are facilitated by weak governance structures, tax avoidance and white collar corruption. If these loopholes are closed, Africa could effectively meet and exceed its financing gap of U$ 70 billion for renewable energy.

In a nutshell, give Africa the financial means to deliver on climate change. Provide cheap technology for Africa to deliver on renewable energy. Facilitate Africa to add value to its green minerals so countries such as Tanzania, DRC and Zambia can share the benefits from their mining resources. Provide Africa with adequate timelines to catch up with  its developed counterparts and most importantly listen to our voices at the COPs if we are to collectively deliver on climate change and targets to net zero.

**A modified version of this article also appeared in the Citizen Newspaper of 10th November 2023 to coincide with the COP27

The Future is Green: How Can Tanzania Harness its Renewable Energy-Opportunities and Gaps

With high winds potential that cover more than 10% of its land and solar energy levels ranging from 2800 to 3500 h of sunshine per year and a global horizontal radiation of 4–7 kWh/m2/day, Tanzania is just a step away from becoming a reckonable giant of renewable energy and leap jumping into a clean future

By Moses Kulaba, Governance Analysis Centre

Tanzania, like other developing countries, is striving to adopt different ways of ensuring affordable and accessible energy supply to its socioeconomic and political sectors to achieve renewable energy development. To secure affordable and accessible energy in the country, renewable energy is termed as an alternative energy source because of it is environmentally friendly. If renewable energy is produced and utilized in a modern and sustainable manner, it will help to eliminate energy problems in Tanzania

According to reports, Tanzania has a lot of renewable energy sources such as biomass, solar, hydropower, geothermal, biogas, wind, tidal, and waves. These sources are important for decentralized renewable energy technologies, which nurture the isolated nature of the settlements and are environmentally friendly. Despite their necessity, renewable energy sources are given low priority by both government and Households[1].

Tanzania’s power sector is dominated by state-owned TANESCO (Tanzania Electricity Supply Company Limited). TANESCO owns most of the country’s transmission and distribution network, and more than half of its generating capacity. Tanzania’s electricity generation comes mostly from natural gas (48%), followed by hydro (31%), petrol (18%) with solar (1%), and biofuels (1%). The traditional dependence on hydropower combined with the droughts that are affecting the country, often result in power supply shortages[2].

The World Economic Forum (WEF) reported the total sum of global investment into renewable energy has increased. This was supported by a 28% annual increase in investment from the United States (U.S), in 2019 totalling $54.6 billion[3]. Renewables cannot totally replace fossils such as oil, but increased investment shows increased potential contribution in the energy mix.  The International Energy Agency (IEA) estimates annual clean energy investments will more than triple by 2030.

With its vast resources and location, there are opportunities for investment in its abundant solar and wind potentials. Perhaps, it is argued, the country can leverage its strategic position to scale up investment to generate more and at the same time position as a major supplier and user of renewable energy sources.

However, there are gaps such as financing, infrastructure, storage, and government facilitation which potentially limit investment, scale up, use and benefiting from this potential. The cost for initial investment is high and the returns on investment could be slow. Exploration efforts have largely emphasized hydropower projects, and other renewable energy such as solar, thermal, wind, biomass, and biogas are under-utilized due to different socioeconomic and political reasons

Further, some of African political leaders, such as expressed by Uganda’s President Yoweri Museveni, have argued that renewable energy is not sustainable to meet the future global population energy demands. It cannot even meet or drive Africa’s development agenda.  Renewable energies such as solar and wind are largely dependent on whether and climatic factors. A solar farm requires huge tracts of land, and this can or may potentially spark off a new wave of land grabbing by solar energy investors and land conflict across the continent. Africa could also be a bystander in renewable energy technology. For Africa to benefit, investment in technologies and production of equipment, such as solar panels and wind turbines must be on the continent.

But CSOs such as power shift Africa and Anti Coal Coalition[4] argue that investment in renewable energy is economically viable, will create jobs and increase access to energy to the poor and rural areas where access to the national could be difficult. Significantly, it will help Tanzania achieve its domestic transition and unlocking the country from a fossil future.

The government, along with other renewable energy stakeholders, should complement existing policies and strategies to address issues related to renewable energy development to ensure timely and sustainable utilization of the available resources. Also, there is the need to provide a sound business and investment environment to local and foreign people who can provide capital towards renewable energy technologies and development. There should be more training and awareness made available to the public about how to invest and use renewable energy. Tanzania can and must benefit from the transition by upscaling its potential and starting to roll out implementation. Stalled projects should be implemented.

Tanzania’s potential in Wind and Solar Energy

Wind energy

Tanzania has areas of high wind potential that cover more than 10% of its land[5]. This is equivalent in size to Malawi and has greater potential than the US state of California, as reported by the World Bank report. There are areas with annual average wind speeds of 5–8 m/s[6] . These exist along a coastline of about 800 km with predominant surface winds, moving from south-east to northeast. Based on the current research works, Tanzania has a lot of wind energy resources in the areas of Great Lakes, the plains, and the highland plateau regions of the Rift Valley. Wind energy evaluation indicates that areas such as Makambako (Njombe) and Kititimo (Singida) have sufficient wind speed for grid-scale electricity generation, with average of wind speeds 8.9 m/s and 9.9 m/s at the height of 30 m, respectively[7]. Small-scale off-grid wind turbines along the coastline and in the islands also possess great potential in Tanzania.

By 2017, at least four companies had expressed interest in investing in wind energy in Tanzania to build wind plants with a capacity of more than 50 MW. These companies include Geo-Wind Tanzania Ltd in Dar es Salaam, Tanzania; Wind East Africa in Singida, Tanzania; and Sino Tan Renewable Energy Ltd. and Wind Energy Tanzania Ltd. in Makambako, Tanzania. Wind farms with capacities of 100 MW in Singida would be constructed under the corporation of the Six Telecoms Company in Singida, Tanzania; International Finance Corporation in Washington DC, The United States of America; and Aldwych International in London, the United Kingdom. The project would cost US$286 million[8]. Compared to other renewable energy resources that attract investment, most of the people have been trying without success to produce electricity from the wind energy. Thus, only the government and private companies are the ones who are involved in power generation assessments from wind energy resources[9] [66]

Solar Energy

In Tanzania, solar energy is used as a source of power by 24.7% of the households with access to electricity. Potential solar energy resources are found in the central parts of the country[10] [1]. There are high solar energy levels ranging from 2800 to 3500 h of sunshine per year and a global horizontal radiation of 4–7 kWh/m2/day [1,70]. According to the World Bank, Tanzania has a solar energy potential greater than that of Spain and wind energy potential greater than that of the US State of California. With such great potential for solar energy resources, Tanzania is naturally appropriate for producing solar energy as a feasible alternative source for modern energy supply and rural electrification.

The solar energy market in Tanzania has drastically grown and increased over the last few years. Currently, the potential solar energy resources in Tanzania are used in different parts such as solar thermal for heating and drying and photovoltaic for lighting, water pumps, refrigeration purposes, and telecommunication. Solar energy is used mostly in rural areas with about 64.8% compared to urban areas with only 3.4%. The regions of Lindi, Njombe, Mtwara, Katavi, and Ruvuma lead in the use of solar power electricity in Tanzania[11]. Despite the increasing market for solar energy applications, there are fewer signs that the government is expecting to include solar PV in the national electricity mix in any substantial way in the future

[1] Obadia Kyetuza Bishoge: The Potential Renewable Energy for Sustainable

Development in Tanzania: A Review, 2018 accessed at : https://www.mdpi.com/2571-8797/1/1/6/pdf#:~:text=Tanzania%20has%20a%20lot%20of,are%20environmental%20friendly%20%5B1%5D.

[2] https://www.trade.gov/energy-resource-guide-tanzania-renewable-energy

[3] https://www.weforum.org/agenda/2020/06/global-clean-energy-investment-research/

[4] https://www.theguardian.com/world/2022/aug/01/african-nations-set-to-make-the-case-for-big-rise-in-fossil-fuel-output#:~:text=African%20nations%20expected%20to%20make%20case%20for%20big%20rise%20in%20fossil%20fuel%20output,-Exclusive%3A%20leaders%20expected&text=Leaders%20of%20African%20countries%20are,documents%20seen%20by%20the%20Guardian.

[5] Tanzania Invest. Tanzania Has High Potential For Renewable Energy Projects, US Consulting Firm Indicates. TanzaniaInvest. 2015. Available online: https://www.tanzaniainvest.com/energy/tanzaniahas-high-potential-for-renewable-energy-re-projects (accessed on 15 April 2018).

[6] Kasasi, A.; Kainkwa, R. Assessment of wind energy potential for electricity generation in Setchet, Hanang, Tanzania. Tanz. J. Sci. 2002, 28, 1–7.

[7] Energy Charter Secretariat. Tanzanian Energy Sector under the Universal Principles of the Energy Charter. 2015. Available online: https://energycharter.org/fileadmin/DocumentsMedia/CONEXO/20150827- Tanzania_Pre-Assessment_Report.pdf (accessed on 8 May 2018)

[8] The Minister of Energy. The Speech of the Ministry of Energy and Minerals on the Estimates of the Revenue and Expenditure for Financial Year 2018/2019. 2018. Available online: https://www.nishati.go.tz/hotubaya-bajeti-ya-wizara-ya-nishati-kwa-mwaka-2018-19/ (accessed on 15 January 2018)

[9] The Economist. A World Turned Upside Down—Renewable Energy. 2017. Available online: https://www. economist.com/briefing/2017/02/25/a-world-turned-upside-down (accessed on 4 May 2018).

[10] Sarakikya, H. Renewable energy policies and practice in Tanzania: Their contribution to Tanzania economy and poverty alleviation. Int. J. Energy Power Eng. 2015, 4, 333. [CrossRef]

[11] https://www.thecitizen.co.tz/News/33pc-of-Tanzanians-have-access-to-electricity–report/1840340-3900298-9elccaz/index.html

Energy transition risks. Can Tanzania’s Gas and Coal remain stranded assets?

 

Tanzania has vast deposits of natural gas and coal. The looming energy transition will potentially have significant economic impacts on fossil rich countries and potential new producers such as Tanzania.

By Moses Kulaba, Governance Analysis Centre

The urge to curb Climate Change is here, and energy transition to cleaner energy is coming. These will affect countries differently. Fossil rich countries stand to lose most as countries transit from fossil fuels to clean energy. With the Russia-Ukraine war, current oil producers may enjoy a windfall benefit in the short term, but long-term demand cannot be guaranteed.  Fossils such as new oil and coal could remain stranded, as investments cut back. Yet, the energy transition also provides a potential opportunity for countries with viable deposits and potential suppliers of natural gas, if gas will be considered a clean source of energy, relevant for driving countries energy mix in the midterm and longer term.

With vast deposits of Natural Gas, so far discovered along its shores, Tanzania could benefit from the energy transition. At about 57 trillion cubic feet (tcf) Tanzania’s deposits are massive and considered of high quality, with low carbon.  However, this will be dependent on whether the global energy trends and discourse on energy transition can generally reach a consensus that gas is a clean source of energy, investment can be attracted, infrastructure can be developed and both domestic and international markets can be assured. Determining the potential for use of natural gas in achieving the country’s energy mix targets and securing its energy security will be key. Defeating international competition from established players such as Qatar and Algeria and new potential large producers such as Mozambique will equally be essential. If the global climate change movement reaches consensus and declares gas as a fossil fuel and polluting source, this will render Tanzania’s gas reserves to remain stranded.

The International Oil Companies (IOCs) interested in Tanzania’s gas are still optimistic that the project will take off. Although the over the past year’s negotiations were slow, the IOCs have not left, and this gives some hope that the Country could somehow navigate around the sensitive climate agenda and deliver its gas before 2030. The risks are there, and the negotiations for the development of the Liquefied Natural Gas (LNG) project in Mtwara must move faster before the gas is locked underground.

Tanzania’s coal as a stranded asset?’

Tanzania has vast deposits of coal. Tanzania’s coal is considered one of the best grades in the world. With the war raging in Ukraine over the past months, Tanzania has experienced a record boom in its exports to Europe since March 2022.

Globally, there has been an upsurge in the demand and prices for thermal coal reached above $400 per tonne up from $176 per tonne last year and around $75 in 2020. Europe is willing to pay more than twice the price for coal last year. This therefore gives Tanzania the opportunity to exploit its coal and benefit in the short-term demand, with or without totally losing out before a coal carbon future.

According to Mr Rizwan Ahmed, the managing director of Tanzania based coal miner Bluesky Minings and Jan Dieleman, President of Cargill Ocean transportation division, as European countries look everywhere, including far places for thermal coal. They are willing to pay twice the price and the Tanzanian suppliers plan to ramp up its production and double its exportation during this window.

According to the Mining commission and reported by Reuters and the Citizen Newsapers, Tanzania expects to double its coal exports this year to around 696,773 tonnes while production is expected to increase by 50% to about 1,364,707 tonnes.  Tanzania-based miner Ruvuma Coal had so far, exported at least 400,000 tonnes of coal via a trader to countries including the Netherlands, France, and India since November 2021, as per trade data reviewed by Reuters. Since November 2021 when Mtwara launched its first ever coal shipment, up to 13 vessels of coal had been loaded up by September 2022.

Tanzania has hinged its development pathway to an industrialised nation on harnessing its coal and gas potential. The two consecutive Five Year National Development Plans (2015-2020 and 2021-2026) identified the Natural Gas and Coal projects as strategic projects to deliver the country onto its development goals and to a Middle-Income Country. The project revenues and increasing access and supply of energy through to gas to electricity.

The government is considering building a railway that would link the coal-producing Ruvuma region to Mtwara, according to the acting executive secretary of the Mining Commission, Yahya Semamba.

Mitigating climate change concerns and the steadily moving trajectory towards energy transition away from fossil-based energy sources however offers a dilemma whether the government can achieve these objectives.

Tanzania’s development dilemma in the context of energy transition

In the wake of the looming energy transition to clean energy, the rekindled interest in coal because of the Russia-Ukraine war may not be guaranteed in the longterm. The war has accelerated interests in Africa’s thermal coal and gas but at the same time it may accelerate the energy transition in Europe as governments look for other cleaner alternatives including heavily investing in renewables to secure their cleaner future.

The government therefore needs to balance its excitement over bumper coal exports and use the extra revenues from the booming coal exports to invest in a cleaner energy system which will guarantee its country a place a clean energy future.

Securing financial investment in coal mining, and the market demand for coal, will be challenging in the future, as most (financial) institutions are now advocating for clean energy and sustainable finance. Indeed, according to the International Energy Agency (IEA) petroleum companies are the current leading investors in research and development for clean energy.  They don’t want to be locked out of the future and are spending their revenues carefully and locking into future energy markets with diligence.

Therefore, if the government of Tanzania still wants to benefit from its coal resources, it will need to take swift action to allow its extraction. Or, if it wants to participate in the energy transition, it will be compelled to leave its coal as a fossil fuel stranded in the ground. A tight policy choice that government may find difficult to partake. A divesture in investment from coal by large investors could cause potential disruptions in investment flows to Tanzania as a new producer, disrupt development projections.

Moreover, Tanzania is a signatory to international climate change obligations such as the UNFCC (1996) and Paris Agreement on climate change (2018), whose it must oblige.  According to the Nationally Determined Contribution (NDC) Tanzania has committed to reduce green gas emissions economy wide between 30%-35% relative to the business As Usual (BAU) Scenario by 2030[1]. Tanzania has committed to promoting climate resilient energy systems and exploring options for energy diversification. By doing so, Tanzania must balance its development imperative and climate change obligations. These will require political will, resources, and preparation. The government will also need to harmonise its NDC targets with the targets of its National Energy Systems Master plan which seek to increase the off take of gas to generate power into the national grid as part of the National energy mix.

Further, Tanzania is facing several challenges related to weak institutional, financial; poor access to appropriate technologies; weak climate knowledge management, inadequate participation of key stakeholders, and low public awareness which have significantly affected effective implementation of various strategies, programs, and plans[2].  The opposing voice against gas and coal is getting louder and this may have an impetus on whether these g projects move on. Government will have to address these moving forward

The energy transition debate therefore offers a potential dilemma for Tanzania. As alluded above, Tanzania is a potential supplier of critical minerals needed for the clean energy transition at the global level.  But also, a significant new producer of natural gas and fossils such as coal.

 

 

 

 

 

 

 

[1] URT: Nationally Determined Contribution, pg

[2] URT: Nationally Determined Contribution, pg3

Tanzania’s Transition Minerals potential opportunities, risks, and dilemma in context of Climate Change and Energy Transition

 

While critical minerals offer potential opportunities, there are also latent risks for countries such as Tanzania. These risks range from policy gaps, supply chain governance risks, geopolitics of consumer nations, investment and revenue management risks

By Moses Kulaba, Governance Analysis Centre

Critical Minerals and Energy Transition: Tanzania’s potential

Globally, the zeal to mitigate climate change and keep global warming under 1.5 degrees Celsius by reducing net carbon emissions from fossils by 2030 and transition clean energy by 2050, has picked momentum. According to scoping study report by the Natural Resources Governance Institute (NRGI)[1] , based on data from various geological surveys and government reports show that Tanzania has a wide variety of critical or transition minerals deposits relevant to the future technological transition to clean energy.  Critical mineral deposits found in Tanzania include Graphite, Rare Earth, Cobalt, Copper, Iron, Nobium, Lead, Lithium, Manganese, Diamond, Nickel, Titanium, Uranium, Vanadium, Tungstein, Lead, Bauxite and other gaseous minerals such as helium. Over 18 million tons of graphite reserves (estimated to be the 5th largest reserve in the world) are present in mostly in Lindi, Morogoro and Tanga Regions. An estimated 1.52 million tons of nickel deposits have been discovered in Kagera region and about 138 billion cubic feet of helium is present at Lake Rukwa Basin. This is said to be the second largest helium deposit in the world.

The discussion on energy transition and its implications to the Country has not picked momentum within Tanzania. The potential contribution that these minerals could make to Tanzania’s economic development in the context of energy transition may be known in some circles but not widely discussed.

There has not yet been a specific categorisation of these minerals as critical or strategic. To date minerals in Tanzania are still largely classified as metallic minerals, industrial minerals, and energy minerals. Perhaps, this is due to the limited public understanding of the strategic and critical nature and role some of these minerals will play in defining the global future.

Energy Transition Opportunities for Critical Minerals

Globally, there is a surge in interest in critical or transitional minerals as a pathway to meeting Net zero targets The World Bank estimates that overall demand for at least some critical minerals vital for industrial energy transition will increase significantly over the next 30 years (by 2050).  For instance, copper and aluminum are cornerstone minerals for all electricity-related technologies, since electrical equipment such as motors, transformers and cables use copper to conduct electricity and heat.  Copper, nickel, lithium and cobalt are key elements for batteries used in many of the new technologies. An electric vehicle, for instance, typically contains lithium-ion batteries, which requires lithium, nickel, manganese and cobalt-bearing minerals. Solar panels and wind turbines are made with nickel, graphite and copper. Telecommunication devices we use, such as phones and laptops, require a wealth of minerals, including tantalite, wolframite, graphite, bauxite, etc.

World economic powers and foreign companies have already picked interest and acquired stakes in Tanzania’s Critical Minerals, significantly highlighting what may potentially be a race to control the supply chain into future. So far companies from Australia, China, Canada, Europe and US are known to have interests in Tanzania’s critical minerals. This provides Tanzania with a potential opportunity to leverage its extractive sector (particularly critical Minerals) to benefit from the forthcoming energy transition. With deposits of critical minerals, such as graphite and Helium, Tanzania’s critical minerals subsector could be a game changer.

Energy transition risks in critical minerals

While critical minerals offer potential opportunities, there are also latent risks for countries such as Tanzania. These risks range from policy gaps, supply chain governance risks, geopolitics of consumer nations, investment and revenue management risks

The future of Foreign Direct Investment in mining risks

The investment boom in critical minerals will affect the future of foreign direct investment in Tanzania’ s other major mineral resources such as gold and gemstones. This is already felt in the type of mineral licenses that are being granted. According to NRGI critical mineral scoping study report, 90% of the total exploration licenses in 2005 were granted for gold. By 2020, 70% of exploration licenses granted were for critical minerals. Clearly, investors’ interest for critical minerals is currently surpassing that for gold and other major minerals.

Tax and revenue risks

 Over the past years Tanzania has tried to increase its domestic revenue mobilisation efforts from the mining sector. Tanzania’s DRM efforts, among others, focused on tax reforms to curb tax evasion and maximising benefits from the minerals sector through value addition.  Currently, the mining sector contributes 547 trillion[2] to the total government revenue collections. Between 2018/19 mining companies contributed around 421 trillion TZS (183 billion U.S. dollars) to the revenue collected by the government, while oil and gas companies contributed approximately 177 trillion TZS (77 billion U.S. dollars)[3].

However, the NRGI scoping study found there are gaps in the current Tanzania Development Strategies and Mineral Policies. An independent or separate policy on critical or strategic minerals may not be necessary but aligning the current framework to tap in the energy transition opportunities is essential. Government can benefit more from encouraging/investing in processing of the critical minerals at home, thus capturing and retaining high values from the resource extraction of the value chain. Where the local volumes cannot economic viably support, Tanzania can explore partnering with other Countries in the region. The potential revenue contribution from the critical mineral’s subsector is largely unknown. Critical Minerals are just minerals. If the government doesn’t strategize, the windfall benefits from the energy transition could be missed. There are also significant governance (corruption) risks in critical minerals supply chain which could undermine government’s efforts to maximise revenues[4].

To realize the opportunities offered by this resource wealth, Tanzania needs to take a deeper look at its policy and legal frameworks to ensure proper governance of the sector and a clear identification of its position through a well-tailored strategy on critical minerals. If not well managed, the interest in controlling the critical mineral’s supply chain could benefit more the developed (user) Countries than the supplier countries such as Tanzania.  The new search for critical minerals could also mean more new marginal lands opened up for exploration and mining (large scale and artisanal), sparking off a new wave of land-based conflicts. The boom could also be short lived new alternatives to critical minerals emerge to support clean energy technologies emerge.

 

[1] NRGI: Critical Minerals and Energy Transition: Findings from Tanzania’s Scoping Study of Critical Minerals Potential and implications for Tanzania, 2021

[2] https://allafrica.com/stories/202104300627.html

[3] https://www.statista.com/statistics/1272116/contribution-of-mining-oil-and-gas-to-government-revenue-in-tanzania/

[4] https://eiti.org/events/critical-raw-materials-times-uncertainty-why-good-governance-matters-energy-security

Tanzania proposes radical amendments to Mining and EITI Laws

The government of Tanzania has proposed radical amendments to its current Mining and Extractive Transparency Initiative (EITI) laws, sending harrowing concerns amongst civil society actors.

According to the proposed Written Laws Miscellaneous (Amendments (No 4) Act of 2021 the government plans to amend sections of Mining Act (CAP 123) by adding a definition of gross value to mean the market value of Minerals or minerals at a point of refining or sale or, in the case of consumption within Tanzania, at the point of delivery in Tanzania

The amendment also seeks to add a section on compounding of offences (under a section 132A) relating to penalties, where a person admits in writing that he has committed an offence under the Mining Act.

Significantly, the government proposes for establishment of a special arrangement that allows effective government participation in a mining or special mining license. The proposed section reads “Without prejudice to the provisions of subsection (1), the Government and a holder of a mining license or special mining license may, for the purposes of ensuring Government’s effective participation in the mining operations as contemplated in this section, establish a special arrangement in a manner prescribed in the regulations”

According to civil society actors, the government could be seeking to extend its negotiation framework with Barrick to other Mining operations. A special arrangement which is not defined could also be dangerous and subject to abusive practices which may not be beneficial to citizens, civil society actors argue.

The government proposes to amend the Transparency Extractive Industries Transparency and Accountability) Act 2015 (CAP 447) by reconstituting the number of the members constituting the Multi-stake Holders Group (MSG) from a maximum of 15 to nine (including the Chair). The radical amendment the government representation from 5 to 4 and Civil Society and Company representatives from 5 to 2 each.

If passed, this government representatives an absolute majority and effectively tilt the balance of decision making in favour of government. There can never be fairness and independence a setting as proposed, argues civil society

The MSG composition and power of each of the three constituencies (Government, Civil society, and Companies) is protected by the Extractive Industries Transparency Initiative (EITI) standard, which is a global transparency norm the government signed up to and upon whose spirit the government enacted the TEITA Act in 2015

According to the EITI standard 2019, the MSG is an independent body comprising of representatives from the government, civil society, and companies, tasked with the oversight of the implementation of the EITI process in the implementing Country. The EITI requires effective multi‑stakeholder oversight, including a functioning multi‑stakeholder group that involves the government, companies, and the full, independent, active, and effective participation of civil society.

The government is obliged under the EITI standard to ensure there is no that there are no obstacles to company or civil society participation in the EITI process. Civil society have an elaborate Civil society protocol, guaranteeing their unfettered participation. The EITI 2019 standard is however silent on the minimum or maximum number of members of the MSG.

Adversaries and proponents alike believe, the biggest anomaly in the TEITA Act was that the MSG was defined as a government body’ and therefore technically putting it under the ambits of government’s control and subject to government operational procedures and standards. The government wants to expand it sphere of control over the MSG, they argue.

In the past, interference with the MSG was considered as a breach of the EITI standards and governments found to be in breach were sanctioned. This was the case with Azerbaijan and Myanmar.  It is not clear what position the international board will take. However, the government while determining on the nature of amendments it wants to make, may have to consider whether the independence of the MSG in performing its oversight task will be compromised. The rationale for the amendment will need to be elaborate and robust enough to stand public and international scrutiny.

Tanzania’s removal of penalties on transfer pricing: What did government seek to achieve?
Tanzania Finance Hon Mwigulu Nchemba

In this year’s (2021/22) budget speech Tanzania’s Minister for Finance, Mr Mwigulu Nchemba, made a surprising announcement that government would/had scrapped the 100% penalty for transfer pricing. The announcement was surprising as transfer pricing or mispricing in international transactions and currently a point of discussion globally as one of the leading enablers of illicit financial out flows and capital flight from developing and extractive rich countries.  From a Tax justice perspective, the government’s decision was received as a slight slip in the gains scored over the past 10 years.

According to Global Financial Integrity (GFI) and the Mbeki High-Level Panel Report on IFFs latest reports, shows that IFF’s from the African continent have been increasing with losses estimated between USD50 Million and USD 80 Million over the past years. Corruption and the extractive sector has constantly provided a major conduit for tax avoidance and illicit resource outflow from Africa

Transfer pricing is an accounting practice that represents the price that one branch, subsidiary or division in a company charges another branch, subsidiary or division for goods and services provided. Transfer pricing allows for the establishment of prices for the goods and services exchanged between a subsidiary, an affiliate or commonly controlled companies that are part of the same larger enterprise.

A transfer price is based on market prices in charging another division, subsidiary, or holding company for services rendered. Transfer pricing can lead to tax savings for corporations.  However, companies have used inter-company transfer pricing to reduce the tax burden of the parent company. Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.  This is what is also often referred to as transfer mispricing which is problematic for tax collection purposes. We have discussed this concept in detail via another publication via: https://gepc.or.tz/how-to-curb-transfer-pricing-tax-dodging-and-illicit-financial-flows-in-extractive-sector/

Why were heavy penalties imposed in Tanzania’s statutes?

Heavy penalties were imposed for transfer pricing  in Tanzania’s tax statutes because many companies dodged taxes through complex structures and subsidiaries in foreign jurisdictions which made it difficult or impossible for government to track transactions for tax purposes.

According to Financial Secrecy Index (2018) reported that Tanzania lost billions of shillings through potential transfer arrangements between mining companies.

The government was not explicit why it had taken this dramatic decision and therefore left experts and civil society actors bewildered and speculating. The reasons given were pointing towards improving Tanzania’s investment climate. The investment motive was more than the tax revenue imperative.

The potential hefty penalty for transfer mispricing was an inhibiting factor for attracting foreign investments as companies feared or found it difficult to structure their businesses with an international network of subsidiaries and branches anchored to Tanzania making sourcing for foreign financing and sourcing or procurement difficult.

The difficulties in determining market price or an arms price in transactions between related parties and establishing without any iota of doubt whether a given transaction was a mispricing arrangement and illicit in the face of Tanzania’s statute may have been another factor.

The Minister made another drastic announcement.  Effective 2021/22 the Minister responsible for finance was empowered to grant tax exemptions on specific projects without full cabinet approval.

The Minister proposes to restore the power of the Minister to grant income tax exemption on projects funded by the government on specific projects, grants and concessional loans if there is an agreement between the donor or lender with the government providing for such exemption. The measure would streamline and make it efficient for such exemptions to be provided as it has been a pain sticking point for many projects.

The government was attempting to address bureaucracy in approving exemptions and waivers which was a major stumbling blocks to investment and vitality to the success of some strategic projects. This was certainly a welcomed change for players in the construction and large-scale investment projects. At the time of presenting the budget some big and strategic projects were in offing. These included the OreCorp Nyazanga Gold Mine project in Mwanza, Kabanga Nickel project, the ongoing Standard Gauge Railway project and the East African Oil Company project (EACOP). The government announced a specific exemption of VAT on imported and local purchases of goods and services for East African Crude Oil Pipeline (EACOP). The government aimed to ensure the costs of EACOP are minimised.

However, by doing this, the government is walking a very tight rope and contentious terrain with a significant risk of returning to bedeviled fiscal policy regime era which dogged its tax revenue collection efforts in the early 2000s.  Hon Jerry Slaa, Member for Parliament for Ukonga Constituency in Dar es Salaam posted a passionate that perhaps the Minister may have been deceived or even this dangerous paragraph may have been smuggled into the Minister’s Speech. He passionately appealed to the Minister does not sign off this years financial appropriation bill which this provision. It is a dangerous route to take with potential risks.

In our opinion, for these latest decisions to be effective government will have to

  1. Strengthen its monitoring and surveillance capacity to ensure the international companies do not structure their operations and tax arrangements in a manner that facilitates tax avoidance and evasion.
  2. Strengthen its (TRA’s) International Tax department to detect in advance and reverse any transactions of a potential transfer pricing arrangement before they happen.
  3. Improving data collection capabilities to establish the true arm’s length price for potentially contentious transactions, such e-commerce, services, and intellectual property.
  1. Increase transparency around exemption by perhaps requesting the Minister to publish the list of all exempted projects and values within a short period of 30-90 days after approval, clearly stating the purpose and rationalisation for the exemption.
  2. Retain some mechanism for punishment for noncompliance to the commensurate level deterrent enough to the induce compliance.

Highlights of Tanzania’s Budget 2021/22

Projected Total Budget 36.6% Trln (3.2% increase) Domestic 26.0 Trln (72%)
Expected GDP Growth 5.6% Grants 2.9 Trln (8%)
Inflation forecast 3.3% Development 13.3 Trln
Tax to GDP ratio 13.5% from 12.9% (2020/21 Recurrent 23.0 Trln
Debt to GDP ratio projections 37.3% Domestic Loans 5.0 Trln (14%)
Projected Budget Outturn 2020/21 86% – 95% External Loans 2.4 Trln (6%)

** The key challenge to government will be to raise domestic revenues in the face of shrinking grants and concessional loans and the COVID 19 pandemic which is stiff affecting key sectors such as tourism.

Uganda signals new impetus to Mining with a bill in offing

The Uganda government has signaled a new impetus in the mining sector with multiple reforms and political weight over the next five years yielded to transform, its previously dormant mining sector. The government plans to scale up its work in the Mining sector. As part of improving its geological data, the government recently announced commencement of aerial surveillance of Karamoja, which is one of the areas highly believed to be mineral rich. This will improve the quality of real time Mineral and geological data.

The Ministry plans to table the new Mining Bill in Parliament soon. Civil society organisations such as the Natural Resources Governance Institute (NRGI) have worked with the Ministry experts on this, and will be monitoring the developments, debate, and the outcome from this bill.

Civil Society and expert advice to government has been that Uganda needs to have a legislative environment which attracts large investments into its mining sector but also ensures citizens benefit from extractive resources. NRGI will be engaging with new Parliament, by providing some capacity building support and making technical presentations on the extractive sector governance during Uganda’s new journey.

On the12th of May, President Yoweri Museveni was sworn into office after a tenacious election period. Despite the violence and contestation, President Museveni was declared winner for a sixth term. Since 2006, the President has constantly anchored his economic development cards on the Country’s oil wealth as a conduit to pursue his long-term development agenda and pathway to a middle-income status. The tilt towards developing the country’s mining sector expands this vision further.

Under a new mining policy passed in 2018 Uganda proposed to maximse gains from its mining sector by automatically making value addition mandatory and owning shares in every mining company granted a mining lease. This policy was a major shift from the previous policy framework where the mining companies owned 100% of ownership with government being relegated to a  spectator.

The old policy regime was characterized by abuse, land conflicts, speculation and nuisance business practices which denied government maximum economic benefits. According to the Uganda Chamber of Mines and Petroleum (UCMP) there are over 800 mineral licenses, with over half held small companies and speculators. Uganda’s Mineral rich areas such as Karamoja are awash with prospective mineral license holders and artisanal miners. The current policy framework was not backed by commensurate enabling law.

With a comfortable majority in parliament, the President has lee way to use the advantage of numbers to push through policies that favour his vision. While  changes among the ministers are expected,  there is no expected much change regarding technical staff in the key government ministries, agencies, and departments. This may be of advantage as these technocrats can now focus on achieving this new ambition. Can Uganda pull it off?  As extractive sector stakeholders will be following the developments with keenest and wishing Uganda success.

 

Uganda-Tanzania East Africa Oil Pipeline: signed deal yes, but hurdles lie ahead.

Samia, Museveni witness pipeline project final actsThe East African Oil Pipeline project received significant boots in April 2021 with Uganda with a series of key oil infrastructure related agreements signed between the government of Uganda and Tanzania and the oil companies for the East Africa Crude Oil Pipeline (EACOP) project to transport crude from Uganda to the Tanzania port of Tanga.

According to the government communications, these agreements signal Final Investment Decision (FID) which could be announced soon with production, expected around 2025. There has been already significant work going on at the oil sites in Hoima and as one of the Company officials remarked, work has started. The project is very important to the East Africa region as it promises great economic benefits to the governments and their citizens in the form of jobs, revenues, and other associated economic linkages.

Despite this rekindled hope, shortly after the signing of these agreements, it was evident that multiple uncertainties still lie ahead.

The details of the signed agreements remained undisclosed and technical experts involved in the negotiations remained secret on essential information on key fiscal terms surrounding the tariffs.

The project financing arrangement remains a quagmire.  Few days after signing of the agreements, several banks in France where the lead investor Total is based announced that they were staying away from the financing of the pipeline. The French banks included, BNP Paribas, Société’ Générale and Credit Agricole, Credit Suisse of Switzerland, ANZ of Australia and New Zealand and Barclays.

According to earlier government reports, The Standard Bank of South Africa, China’s ICBC and SMBC of Japan are lead advisors of the EACOP financing. These were under immense pressure from their counterparts Bank Track, Reclaim Finance and Energy Voice for what they described as pushing responsible financing of projects worldwide. According to these banks and activists EACOP’s environmental credentials were failing.

The Uganda government announced that it was not bothered by announcement, describing it as not new. However, the announcement by the banks signalled that the project could be still facing serious negative diplomacy from environmental activists and other political interested actors regionally and globally.

President Museveni described the project and the agreement signing occasion as an act economic liberation. This followed the political liberation which in his view happened some decades ago when Tanzania helped exiled Uganda political groups to take power in Uganda and change the course of history. With the hurdles still to overcome, it was evident that perhaps the financial, environmental, and political woes were not over, and the project was yet to fully get on track.

Tanzania political transition: new era, new opportunity

In March, East Africa was gripped with shock upon the sudden death of Tanzania’s President John Pombe Magufuli. Over the past five years, President Magufuli towered like a political colossus, led with a nationalistic approach, and pursued reforms which sent zillion sentiments across many frontiers. He threw out Accacia, Barrick’s Mining subsidiary in Tanzania, for tax evasion and dubious practices that he descried as stealing against Tanzanians. Enacted new mining laws and renegotiated a 50/50 sharing deal with Barrick which has since been mirrored as a template in other Countries far away such as Papua New Guinea. However, his style was considered as a possible deterrent to potential investors and perhaps disruptive to the extractive sector.

The transition to the new President Ms Suluhu Samia Hassan was peaceful and lauded as a new era for a new opportunity. President Samia has promised to set Tanzania to a new path. Few days into office, President Samia observed that all was not very well as earlier perceived. New investments in the sector were low. The volume of Mineral exports had fallen. Despite the Mererani wall, Tanzanite, the precious gemstone from Mererani, was still being stolen. Negotiations for conclusion of the lucrative LNG project had stalled. The tax laws were impeding and the enforcement style by the Tax Authorities had seen many companies’ close shop. The President has since called a truce with the private sector and declared Tanzania is fully open to investment.

Despite her aspirations, President Samia has insurmountable hurdles to climb. The mining reforms were passed in law and therefore amending or uprooting these will require parliamentary approval. The amendments were so popular with the Tanzanian public and this could be touch political gamble to make.

Nonetheless, Tanzania still has an opportunity to excel. The Country’s extractive wealth lies in Minerals such as gold.  The Country has vast deposits of what are considered critical minerals such as rare-earth, lithium etc which are vital to industrial use during the energy transition. With a revived and careful political navigation Tanzania could still attract potential investors and comfortably reap more benefits from its extractive wealth.

Were 2020/21 National Budgets Ceremonial? A commentary of how this year’s budgets missed the Bigger Picture

National budgets are statements of how the government plans to raise and spend public money. They are based on fundamental economic parameters which inform planning.  Looking at the budget proposals and given the unusual current economic realities that the Finance Ministers found themselves in, this year’s budget can be described as largely ceremonial after all. In This brief commentary, we show why.

By Moses Kulaba; Governance and economic analysis centre

On Thursday, 11th June 2020, the Finance Ministers in Tanzania, Kenya and Uganda presented their annual budget estimates for the year 202/21.  While Tanzania pitched its budget as one for nurturing industrialisation for economic transformation and human development, the Kenyan Budget was presented as a budget for growth while Uganda’s budget was presented as one for consolidation and continuity towards achieving the Five-year development plan.

Conservatively defined, a national budget is a statement of how government plans to raise and spend revenue or public money collected from various domestic and external sources. Domestically, the government largely raises revenues through taxation and externally through borrowing and grants.

Looking at the budget proposals and given the unusual current economic realities that the Finance Ministers found themselves in, this year’s budgets can be described as largely ceremonial after all.  The macro economic parameters of which the budget projections were based are hollow when subjected to the test of COVID 19. There were all indications that the Ministers would soon come back to parliament asking for supplementary budgets before the end of this financial year.

Indeed, the Finance Minister, Mathia Kasaija told Uganda’s Parliamentarians, that the COVID 19 pandemic had necessitated changes to the budget and he would come back seeking  approval for a supplementary budget to reflect the true realities. A similar sentiment was echoed by Kenyan legislators and policy experts, who expected the Treasury Minister, Mr Ukur Yatani, to return to parliament sooner than later with a more aligned budget.

The Daily Nation newspaper summed up the Kenyan National proposals as a ‘Budget for bad times’, while the Kenyan Standard described it’s a ‘Nightmare budget’, stressed with Corona virus, lost jobs, empty coffers, shrinking revenues, huge debts, funding gaps, which all combined to under cut the treasury’s ambitions. In summary, the budget added more pain to the already suffering Kenyans.

So what was contained in the budgets which make them peculiar, largely symbolic and ceremonial.

Key items of the budget frames

Budget Item Kenya Tanzania Uganda
Economic Growth projections 2.5 % 5.5% 3.1%
Total Proposed  Budget 3.4trln ($27Bln) 34.88tln ($20bln) 45tln ($12Bln)
Domestic Revenue 2.79trln 24.07trln 25.5trln
Deficit ( to be financed thru external borrowing, grants and other measures) 840.6bln (7.5% of GDP) 10.81trln 20 trln
Latest National Debt &  Debt to GDP 63% (6.4trln) 55.43tln (27.1%) USD 13.3bln (Approx 43.6%)  

 

From the figures and proposals contained in the budget speeches, it was evident that the finance Ministers were reading from a script of optimism and perhaps missed a big picture.  Tony Watima, an economist writing for the Standard Newspaper’s ‘Business daily’ concluded that positioning of the Kenyan budget as pro-growth was misguided. Stabilisation should have been the tenor of this year’s National budgets.

The East African was franker in its editorial when it wrote; ‘Finance Ministers owe Citizens the truth on budgets’. The Editor noted that despite the unusual circumstances, the Finance Ministers struck an optimistic positive, calculate perhaps to lift the spirits of a region weighed down by the ripple effects of varying levels of COVID 19 related to lockdowns.

Given, the recent changes to the budget policy and public finance requirement, clearly the Finance Ministers, perhaps could be excused. They were caught between the law and COVID 19, the Finance Ministers found themselves in a tight corner. Having prepared the budget statements before March, they had to present what they had.

The Kenyan Constitution, for example, requires the government treasury to disclose to the public spending plans two months before the end of the financial year. In Kenya, a court ruling directed that the treasury publishes the finance bill earlier so parliament can debate in parliament. The Annual Budget Policy Statement (“the BPS”) was issued in February 2020 and as the CS rightly pointed out, the economic environment had vastly changed from what they found themselves in June. Similarly, in Tanzania and Uganda, the budget policy framework papers were passed months ago.

Realities of COVID 19 on the economies

The negative realities of COVID 19 on the economies are everywhere.  The key economic sectors have all been affected. Within a short span of three months, nearly 1 million Kenyans had lost jobs, several companies had closed operations while many were on the edge. Revenue collections had plummeted and some revenue streams were on the verge of total disappearance. Kenya, East Africa’s largest economy was in free fall with rising unemployment and disruption in major economic sectors. Uganda’s economic fundamentals were in tatters while Tanzania appeared to live in self-denial of the current and long-term adverse economic effects of COVID 19. The Minister admitted that COVID19 had affected the economy but was upbeat that measures had been taken to circumvent the pandemic.

Kenya’s Finance Minister was more optimistic with an estimate of the growth at 2.5% in 2020 and 5.8% in 2021. Pre-the pandemic the economy was projected to grow at 6.1% up from 5.4% in 2019. The IMF projected that global economies were expected to contract by as much as 3% growing to 5.8% in 2021 and Kenya was expected to grow at 1% in 2020.  Kenya’s revenue collection by April 2020 was Ksh 20.1 Billion-lower than the same month last year and below target. The fiscal deficit in 2019 was 8.3% up from 6.3% in 2018.

In Uganda revenue collection by April 2020 fell by Ush789.8bln below targeted Ush1.8trln. This was the largest deficit ever recorded in a single month. With the lockdowns, there was no way URA could meet its target. Tourism and business sector was largely affected.  80% of agricultural businesses and 41 Manufacturing had reduced production and employment. Yet, these contribute to the largest share of tax revenue. Agriculture accounts for 45% of exports and employs 64% of all Ugandans. Uganda expected to receive US128bln grants from donors but had only received Ush28bln. All projections were below target.

In Tanzania, the affected areas included tourism, business (wholesale and retail), traditional export crops such as cotton, cashew nuts and coffee. On 8th of June, just three days to the budget day, Tanzania’s Dar es Salaam Stock Exchange (DSE) recorded zero tradings at its equities counter. This signified an economy under distress and barely recovering from loses of COVID 19. Yet, Tanzania’s Finance Minister projected an increase in revenue collections from 14.0% in 2019/20 to 14.7% in 2020/21.

Response measures are taken

The governments undertook some fiscal and tax administration reforms and provided some stimulus packages aimed at cushioning the economies against the pandemic. However, when deeply analysed, the measures were based on shaky economic grounds, expensive in revenue foregone, difficult to achieve and can not guarantee to reverse the negative impacts of COVID 19.

Summary of some COVID 19 related response measures taken in 2020/21 budgets

Kenya Tanzania Uganda
Concessional Loans from External Lenders (IMF & WB) amounting to USD 739Mln and USD1Bln Negotiated debt relief of USD14.3Mln and potentially up to USD25.7Mln under IMF Catastrophe Containment Relief fund. Ongoing negotiations with other donors Concessional Loans (IMF & WB) –USD100Mln in 2020 and 90 Mln in 2021 and negotiation for debt relief.
Reduction of CBR from 8.25% to 7% and Cash Reserve Ration from 5.25% to 4.25%-Releasing 35bln to commercial banks Reduction of BoT Discount rate from 7% to 5% , Lowering statutory Minimum Reserve Rate (SMR) from 7% to 6% Reduce BoU Central Bank Rate from 9% to 8%
Turn over tax rates reduced from 3% to 1%, Allowance for restructuring and rescheduling of distressed loans by commercial banks and lenders Reduce the cost of Mobile Money transactions by Increasing daily minimum transfers from 3Mln to 5Mln and Minimum balance from 5mln to 7 Mln Extension of time to file Income taxes or presumptive tax  for six months
KSH 10 Bln for Kazi Mtaani Vijana Program targeting 200,000 youth, recruitment of teachers and health workers Zero-rating of import duty on raw materials for COVID 19 Manufacturers sanitizers, PPE Masks Local Manufacture and purchase of PPE for free distribution to all Ugandans
Reduction of VAT from 16% to 14%, Reduction of Corporate tax from 30% to 25% 100% allowable deductions on contributions in support of government’s COVID 19 response Ush130bln for vulnerable but able-bodied persons affected by COVID19
Reduction of PAYE for low earners of up to Ksh 24,000 per month Allowing loan restructuring and rescheduling, VAT exemption on Agricultural Crop insurance Ush1.045bln to UDB for low-interest credit to manufacturers agribusiness
500 mln for purchase of locally made hospital beds and 600mln for purchase of the locally assembled vehicles Abolishment of over 144 levies charged by MDA and Local Authorities for an improved business environment. Ush138 to UDC to facilitate public-private import substitution investment
Ksh18.3bln to support local manufacturing, 3bln for Agric Credit Guarantee schemes, 400 million in food and non food commodities to household affected by COVID 19 Subventions to TANAPA, NCAA, TMWA to meet their operational expenses,  Increase minimum threshold of Primary SACCOS liable to income tax for 50,000,000 to 100,000,000 Provide Credit through SACCOs and Micro-Finance Institutions

 

What was missed?

The plans and fiscal reforms were taken as if the economy would be normal.

The trend shows that the finance Ministers planned normally and even increased their budgets estimates, despite the odds and indications that the outturns were likely to be suppressed by COVID 19. The law firm Bowman’s noted that Budget speeches did not necessarily provide any solutions to the perineal challenges the countries faced and in some ways simply repeated what we have heard before.

What have been the budget trends?

Country 2017/18 2018/19 2019/20 2020/21
Kenya Ksh 2.3bln Ksh 2.5bln Ksh3 trln Ksh 3.4trln
Tanzania Tsh 31.7trln Tsh32.4trln Tsh 33.11trln Tsh 34.88trln
Uganda Ush 29 trln Ush 32.7 trln Ush 40.487trln Ush45 trln

 

The actual budget out turns has fallen short of projections. Kenya, which is the biggest economy in the region has missed targets for the past eight years. In 2018/19 Tanzania recorded a shortfall in budget outturn only achieving 88% of its targeted revenue collection. Tanzania had collected 26.13trln (93.4%) of its budget by the end of April 2020. Uganda Tax Revenue Authority had perennially missed its targets. In the current environment, it is very unlikely that the economy will bounce back before 2021 and by all accounts, 2020 was going to turn out the tough year.

In Uganda, the budget was not significantly different from the previous Budgets.

Table of Uganda’s sectoral allocations

Sector Allocation Approved Budget 2020/21 % share Approved budget 2019/20 % share
Works  & Transport 5,846.00 12.85% 6,404.60 15.82%
Security 4,584.68 9.90% 3,620.80 8.94%
Interest Payment 4,086.50 8.98% 3,145.20 7.77%
Education 3,624.06 7.97% 3,397.60 8.39%
Health 2,772.91 6.10% 2,589.50 6.40%
Energy & Minerals 2,602.60 5.72% 3,007.20 7.43%

 

In Kenya, the 10 bln stimulus packages offered youth employment under the Ajira Mtaani program appears generous. However, experiences from the past indicate that stimulus packages never trickle down to the real people who need them. This was the case with the maize stimulus package passed during the maize shortages in 2017. The scandals that have rocked the National Youth Service program for years further underscored the weakness of Kenyan institutions in managing affirmative budget programs such as these. Kenya’s imposition of tax on pensioners was clearly off the mark as it indicated that perhaps the government was robbing from the elderly to reward the youth and wealthy.

The agricultural sector which had already been devastated by the floods and locusts a received a raw deal in Kenya and Uganda. The post-COVID 19 scenario presents the region with significant food insecurity. There is likely for a surge in food prices, squeezing further on the household incomes.

Yet, in Uganda, the Ush 1.3trln (2.9%) budget allocated to the agricultural sector was equivalent to that allocated to Uganda’s Public administration. Uganda’s Parliament accounted for Ush 667.78bln equivalent to half of the total budget allocated to the Agricultural sector. 

As Ms Salaam Musumba, a Ugandan political activist said, people, expected a clean cut for political niceties such as for conferences, meetings, benchmarking on foreign travels, health care abroad, etc. However, this was not reflected in the budgets.

In Kenya, the Governors, MCAs and their political handlers account for a substantive portion of the recurrent budget. Kenya’s parliament received a budget twice that of the entire Judiciary. In 2020/21 some political offices such as that of former Prime Minister even received 100% budget (Ksh 71.9Mln) allocations for first time since they were created.

Generally, East African public services are bloated with public servants and money guzzling politicians and their handlers, who have become too expensive for governments to carry, yet, politically costly to offload. As a net effect, the recurrent expenditures have increased tremendously to take care of this political baggage and the entities associated with this. The Finance Ministers could do nothing to reduce taxpayers of this burden.

In Tanzania, the government did not provide much booster to the tourism sector which is a leading foreign earner. The sector has faced the largest hit from COVID 19. The government instead took away powers to collect tourism-related revenues from the authorities Tanzania National Parks Authority (TANAPA), Ngorongoro Conservation Area Authority (NCAA), Tanzania Wildlife Management Authority(TWMA) to Tanzania Revenue Authority (TRA). The revenues collected from these authorities would be directly remitted to the consolidated Fund and disbursed back through normal government budget channels. The government would provide some subventions to keep the operational and development expenses of the authorities afloat.

The Finance Minister acknowledged that Tanzania’s flagship projects aimed at putting Tanzania back to a spurring economic path faced 11 risks including COVID 19, which had affected the global economies and financing environment. The government planned to raise and spend Tsh 12.78 trln (27%) of the budget on mega infrastructure projects. According to the Minister, an evaluation conducted in April showed that the Country had not been badly affected by the pandemic, allowing it to raise its growth forecasts and maintain firm financing for its mega-development projects.

However, the truth is that the real impacts of COVID 19 on countries such as Tanzania, which are not interlinked to the global financial systems take a while to be registered and will likely be evident in the 4th Quarter of this financial year and 1st to 2nd Quarter of the new financial year 2020/21 as distressed economic sectors and business begin filling distressed tax returns for income and corporate tax purposes.

Political –economy risks underestimated

The budgets underestimated the political risks that were associated with the national general elections taking place in Tanzania (2020) and Uganda (2021) during this year’s financial year. Election seasons are largely characterised with politicking and less to production. Investment decisions and external donor commitments tend to be staggered as foreign investors and donors weigh the political barometer and wait for the electoral results and policy directions of the new government.

The electoral environment in East Africa has often been adversarial and conflictual. In Uganda and Kenya, the political environment before and during elections is often characterised with political turbulence and violence to the extent that the fundamentals of the economy, such as insecurity and government paralysis rocks the key production and business sectors of the economy.

Although, the Kenya general elections will take place in 2022, the political tension that characterises Kenya’s electoral politics had been building before being slowed down by the COVID 19 in March. It is likely as soon the lockdowns are eased, Kenyan politicians will be back to their usual political tirades and overtures. Tanzania’s Finance Minister acknowledged that political instability in the neighbouring countries, region and globally was an external risk. It did not acknowledge that it was an internal risk too and did not provide any mitigation against this risk on the economy and investment in 2020/21.

Clearly, the budgets were based on a positive scenario that COVID 19 would end soon. But given the trends, we can ably project that the journey of return to full economic recovery will be quite long. The likely upturn under a suppressed Corona Virus environment would be towards the third quarter of 2021.

Under a suppressed COVID 19 situation, the economy was still expected to shrink further by 1%.  In a worst-case scenario, the economies would shrink by at least 2% significantly affecting the key revenues sources. Governments would lose further revenue through the stimulus packages offered. For example, Kenya expected to lose cumulatively Ksh172bln to cushion vulnerable Kenyans and the economy from the vagaries of COVID19.

It was no wonder that the editor for the East African concluded, that coming against a backdrop of a back to back missed targets by the taxman and uncertainty around COVID 19 and global economy, this year’s budgets are either based on an informed optimism or simply a bluff. We conclude that this year’s budget estimates were symbolic and the Ministers would return.

Recommendations or take waypoints for budget stakeholder.

  • Tax Payers-Ready for engagement with government on real measures that will save
  • Investors- Take precautionary measure and monitoring the economic trends, avoid taking decisions which will worsen the situation further.
  • Governments-Remain conservative in expenditure and open for re-negotiation with taxpayers and adjustments of the budgets to fit the unusual 2021
  • Citizens- Expect changes in the budgets as the effects of COVID 19 bite harder, minimise luxurious consumption and expect a tight budget.

Indeed, as noted by the legendary Economist and tax theorist Adam Smith:

There is no art which one government sooner learns than that of draining money from the pockets of People-Adam Smith