Tuesday Sep 16, 2014
| Text Size
[-]
[+]
Search IPPmedia

20 hard questions behind gas fiasco

10th February 2013
Print
  How much do we know as a nation about gas business? Was the Mtwara violence fueled by foreign forces? Were Mtwara people fully informed on how the gas business is transacted globally?
The Minister for Minerals and Energy, Prof. Sospeter Muhongo
MP Hasnain Mohamed Murji

It was a festive season, just two days after millions of Tanzanians joined others in Christmas celebrations, but to the people of Mtwara -- the forgotten region in the southern part of the country and home to massive gas reserves -- it was a day for protest, calling for details on how their recent find of natural gas would benefit the people.

Before December 27, 2012 chaos in Mtwara, which has been marginalized in terms of development during the past five decades, no one imagined that the natives in these regions -- once considered the polite and non-violent -- would one day riot against their government.

Indeed, December 27, 2012 became the source of heated debate across Tanzania, reminding the nation that natural resources like gas, oil and minerals could apart from creating wealth, also bring violence and instability. The violence continued till January, 2013, forcing the government, which had earlier refused to talk to Mtwara demonstrators, to return to the negotiation table.

When these bloody skirmishes erupted, the government and the ruling party were quick to blame the opposition parties for inciting the communities living around the gas-rich regions to riot against the proposed state-owned project to construct $1.2 billion 524km gas pipeline from Mtwara to Dar es Salaam city.

The Minister for Minerals and Energy, Prof. Sospeter Muhongo, called those rioting people naïve and non-patriots whose motive was to tear apart a country that has been united solidly for the past five decades.

In his seven-page statement issued to counter the outbreak of gas resistance, the minister defended the Chinese-funded gas pipeline saying it would save the country about $1 billion annually, which is the current spending in importing heavy furnace oil to generate electricity in Tanzania.

In the words of the Minister and all who support this project, there are more economic gains than losses, while to those who oppose it, this is another white elephant project planned by some few bureaucrats within the government and finally financed by the new global economic power house, China, through a 33 year loan offered at 2 percent interest rates.

The Mtwara gas saga may have ended for now, but its legacy is still fresh in the memory of the rulers, investors and above all Tanzanians. It divided the nation; those who sympathized with the Mtwara people and those who saw them as greedy and a threat to the national security.

But above all, the Mtwara riots raised twenty key questions, which if not addressed effectively could in future create another deadly chaos especially in natural resource rich regions; how much do the people know about gas production? What’s the revenues mode adopted by the government in gas sector?

At what stage are we as a nation in terms of gas production? What will the government take at the end of the day after all possible deductions like operational cost and investment cost? What amount of gas would be available for the export market?

Apart from what goes to the national’s coffer is there any percentage that would be returned back to the gas-rich regions for development? If Zanzibar strike gas or oil reserves, will it be a national matter or an exclusive affair for the people of Zanzibar? Is it time for the government to introduce a pay-back-scheme to specifically develop resource-rich regions? Will the discovery of gas reduce the price of gas for domestic users in Tanzania? (Considering the fact that the imported gas currently cost about Sh70,000 per 30kg cylinder in Dar es Salaam).

As 95 percent of urban dwellers in Tanzania consume charcoal and woods as their main source of affordable cooking energy, the choice that comes with a heavy price producing 9 million tonnes of Carbon monoxide(poisonous gas) emitted into the atmosphere. This consumption leaves behind a devastating legacy of 109,500 hectres of deforestation annually.

According to the latest audited figures by the end of last year, two billion tonnes of CO2 enters the atmosphere every year from deforestation causing sufferings to millions of people especially in poor countries like Tanzania. Scientists say one days' deforestation is equivalent to the carbon footprint of eight million people flying to New York.

In a country where gas is still viewed as something special for the rich and Kerosene being out of reaches for many especially in the rural areas, charcoal has long been the main fuel for cooking in households and the cheapest option for the urban poor.

At the end of the year Tanzania produces about 100 million tonnes of charcoal valued at $700million according to a study by the World Bank conducted early this year.

Put this in your mind; Nigeria is ranked 9th in oil production, but pump prices in that country are at per with Tanzania, a non-oil production country? To ease the prices, the government of Nigeria introduced oil-subsidy, which also ended into the pocket of some ruling elites, forcing the current regime to suspend it?

This means that affordable and reliable gas would save Tanzania from the current environmental degradation caused by the use of charcoal as the source of energy.

Is there anywhere in Africa where the Mtwara’s demands have been implemented and proved to be workable solution? Will electricity users in Tanzania pay less for a single kilowatt once the country abandon the use of heavy furnace oil(HFO) and use gas to produce electricity? It’s believed that the use of gas in Dar es Salaam would enable Tanesco to produce a total of 907 megawatts, which currently cost the nation about $1 billion as the cost of imported heavy furnace oil.

Tanzanians have been convinced that electricity produced by gas is cheaper and affordable, but no one has promised that once gas replace heavy furnace fuel, power tariffs would also be reduced.

As a country, do we have any concrete plans on how to use the gas revenues once production start? Preliminary report claims that Tanzania would earn about $3.5 billion (Sh5.6 trillion) annually as revenues and profits from the gas production. President Kikwete last hinted on having sovereignty fund to manage billions of dollars flowing from gas sector.

In Africa, the richest tribe, which is the Royal Bafokeng based in South Africa has established the most successful sovereign funds using revenues and profits from platinum production. To what extent do Tanzanian leaders are willing to learn from this tiny tribe dubbed by Havard Scholars the “Singapore of Africa” is a debatable subject set for another day.

Does the government know how to communicate with its people in terms about various natural resources and proposed multinational investments? What do the media know about out gas, oil and the politics behind it? What do our legislators know about gas, oil and minerals?

If What President Kikwete told the nation in his monthly address was communicated to the nation especially the people of Mtwara and Lindi earlier, perhaps we wouldn’t have gone through the rough path of violence that rocked the gas-rich regions.

As a nation do we have a capacity to mine natural gas, oil and minerals without inviting foreign investors? Are Mtwara and Lindi regions fully prepared to accommodate the multibillion dollars gas and oil investments? As a country, at what stage are we before starting gas production? (Remember there four stages involved before starting production; these stages are exploration, appraisal, development and production?)

The bitter truth is that Tanzania has no technical and financial capacity needed to exploit gas. So the choice belong to us whether we should continue to have unexploited gas reserves amid the massive poverty waiting the right time when we have capacity or we should follow what Qatar and others have done.

Will living costs in Mtwara and Lindi regions surge dramatically following the influx of people attracted by the multibillion gas industry?

Any debate, demonstration, speech or private motion that doesn’t consider these key questions will just be telling half-story of the gas business or sometime could mislead the general public as well as the ruling elite.

According to a survey conducted by The Guardian on Sunday, so far neither the demonstrators nor the legislators have an understanding on how gas revenues would be divided between the two sides: the government and the international investors. So how can a nation be trapped into a trap of chaos and cheap politics, if first of all it’s not made public what will the government earn as well as how the net income would be divided?

There are three major types’ modes of sharing, which are known globally that can be used in gas and oil business; Production sharing agreements (PSA), concession agreements and service contract agreements.

For instance, in the deal between Pan African Energy and the government, both parties agreed to go for Production Sharing Agreement (PSA), while in the recent discovered gas, the government has opted for concession agreements, according to documents seen by the Guardian on Sunday.

In concession agreement the licence is granted to the international or local investor under the following conditions: License issued to investors; Have exclusive right to explore and produce at its own risk. The investor owns production, pays royalty and rental. The investor also pays taxes apart from owning the equipment used to exploit gas or oil.

In this mode, whatever is produced minus production cost, taxes, royalties and capital, is finally divided between the government and the investor as per agreed ratio. Under this agreement, the Tanzania government will be earning an average of 72 percent, leaving the investor with 28 percent.

Under the Production Sharing Agreement, government’s revenues come from Surface rental, royalty, profits share from free carried share, participating interest, income tax, tendering and bonuses.

In Oil and Gas, average “government take” globally is 64 per cent, whereby some “government takes” are between 40 per cent and 85 per cent, according to reliable details gathered by the Guardian on Sunday.

Now if the government’s earning from gas will be at an average of 72 percent, estimated to be $3.5 billion annually, the question the people of Mtwara and Lindi should ask is how much of this would be returned back to the gas-rich regions for communities’ development?

So far Tanzania has no any clear policy of returning back portion of the revenues collected by the government to communities living around the minerals, oil and gas regions.

The key question raised by the native from Southern region was how the discovery of massive gas in their area would help them economically and socially. They may have erred on how to present their question, but their message is not new in natural resources rich countries.

This question has been raised in minerals-rich regions in Tanzania many times, but those who raised it paid a hefty price during the past decade. When small-scale miners in a mining town of Kahama, about 1200 km from Dar es Salaam city, resisted the entry of a Canadian mining giant, in 1996, it is alleged that over 50 small scale miners who refused to vacate the area were buried alive in an operation supervised by security forces.

In Lake Victoria gold belt, locals who tried to resist the introduction of large scale mining by multinational were silenced by teargas canisters and bullets, thanks to about $4 billion Foreign Direct Investments that went to the mining sector between 1998 and 2010.Till today, the communities that surround the lucrative mining areas in Lake Victoria gold belt are still gunning for a chunk of the glittering stone and there’s no hope that their cry would be answered soon.

According to reliable statistics from the Central Bank of Tanzania, between 1998 and 2011, Tanzania exported gold worth $11.3 billion, but in return, the government earned only $450 million or 4 percent as taxes and royalties.

The 4 percent earnings went directly to the central government’s coffer, and little of it was returned to the communities were these mines are located. Though minerals are national property regardless of where they are mined in Tanzania, the negative impacts like environmental degradation resulting from mining activities affected directly those communities living near the mining areas.

Though the Presidential Mining Review Committee formed in 2007, among other things, recommended that at least 20 percent of the taxes and royalties collected from minerals exports should be returned to the communities in the mining areas to fund development, the 2010 Mining Act didn’t consider this recommendation.

Today, the millions of people in the mining areas are struggling with massive poverty because the government’s policies failed to address how the communities in these areas should benefit from lucrative minerals.

China loan: who wins?

Many analysts agree that Tanzania needed a modern gas pipe to accommodate the growing demand in Dar es Salaam, though they do differ in the cost as well as the financing arrangement.

One foreign investor with interest in the gas sector who spoke under the conditions of anonymity told the Guardian on Sunday, “The pipeline was a must for Tanzania because the Songas owned was overwhelmed by the demand…the plan to build this pipeline was there about five years ago, but couldn’t be implemented because of lack of finance.”

There has been also the question of Chinese financing to the gas pipeline, which, was earlier seen as one of the best deals Dar es Salaam has ever sealed in the past two decades. But, following the recent violence, concerns were raised on how the loan was arranged as well as the conditions attached to that loan.

In September, 2011, the Tanzanian government got a whopping $1.2 billion loan from China’s Exim Bank to finance the construction of the 524-gas pipeline project in what Dar es Salaam termed a landmark deal. But in return there were tough conditions, which among other things wanted Tanzania to award a tender to a Chinese based contractor.

Not only that but also the construction tender would be awarded to the Chinese firm, while all the construction materials would be imported from China.

One of the biggest conditions is that a Chinese company and not the opposite should win a construction tender. Name any big project financed by China through its financing arm The State owned Exim Bank through loan or aid in Africa, the winners are always Chinese because it’s their companies that win tenders. Not only that but also, all the materials required can’t be purchased in Africa, and are mainly imported from China.

Though this situation has been hailed as a win-win situation as the Chinese call it, the reality is that there’s only one winner China. Its bank makes a profit for loaning an African country, and all the loan is repaid back without delay, while the Chinese firm also reaps all the natural resources and leave behind a troubling legacy.

Above all the quality of work especially in roads construction leaves more questions in terms of quality, but since he who pays the singer, dictate the tune, Africans are left with nothing, but just an expensive shoddy work.

If China was financing these kinds of projects in Africa but allows local companies to undertake the jobs including buying the materials from host countries, this would have been a win-win situation because apart from helping the country it also supports economy through the multiplier effects. In real transaction, the amount of money that comes to a recipient country is just a small percentage, which is not more than 10 per cent because the rest remains in China, in the bank accounts of the contractors. This is just China’s tricky to beefs up its companies through a controversial arrangement, which many see as a win-win situation.

If China was for instance transferring 50 per cent of the so-called loan or aid to local banking system of the recipient country, the impacts would have been felt financially as well as economically even before the real project takes off.

But, this is not the case. In a proper and globalised business transaction, the cost of borrowing is always the interest rates. But in the Chinese standard applicable in Africa, the hidden cost is always the natural resources plus unfair competition in any project financed by China.

“The government’s argument is that the interest rate of the loan is very low at 2%...however any student of Chinese loan business would know that most of the costs in these loans are hidden.” One analyst who declined to be named says adding, “First of all, Tanzanian authorities have no control of the project.”

What happened is that the Government through Tanzania Petroleum Development Corporation (TPDC) and Ministry of Finance applied for a loan from Exim Bank, which was finally granted in 2011.

There was no tender announced by the government of Tanzania as required by the Public Procurement Act. In this deal, Exim Bank of China picked a contractor to implement the project and disburses funds to that company directly.

As one analyst put it, “Therefore the cost of the pipeline is determined by the Chinese, construction by Chinese, sub-contractors Chinese and even labour from China.”

To put things into perspective, this arrangement is only applicable if the $1.2 billion was aid from the Chinese government. But since this is a loan that would be paid back one day by the people of Tanzania, this arrangement leaves more doubts.

Tanzania is not alone. In late 2008, Africa and the world was stunned by the deal sealed between China and the Democratic Republic of Congo(DRC) in which the two countries would swap 10 million tonnes of copper ore for US$9 billion loan to construct infrastructure project in the war-torn Central African nation.

The deal signed in Beijing gaves DR Congo $6bn of desperately needed infrastructure about 2,400 miles of road, 2,000 miles of railway, 32 hospitals, 145 health centres and two universities. In return, China gets a slice of DR Congo's precious natural resources to feed its booming industries 10m tonnes of copper and 400,000 tonnes of cobalt.

At the current world prices for copper and cobalt, the Chinese side, will earn a whopping overall profit of about $42bn after all the investment's been paid including the $9 billion infrastructure loan. The Financier of the loan is no more than China’s Exim Bank, but the way the deal is designed, it looks like a barter trade something that’s not true.

In the DRC case, if Chinese firm would have paid 30 per cent corporation tax, the government would have made $13.5 billion—more than the loan or the much-celebrated barter deal signed by the two countries in 2008. But, this is not the case, because at the end of the day, the Chinese are given an unlimited tax relief simply because they were able to loan the DRC regime $9 billion to finance its dilapidated infrastructure.

It’s true to the Western countries may have been appalled by the Chinese’ loan to construct the $1.2 billion gas pipeline, but the truth is that the deal is also clouded with more questions than answers provided by our ministers.

With all these on the Tanzanian plate, the question is how much do we know about gas and oil business? If this and other 20 other questions are not answered properly to enable the public and politicians to understand the story behind the booming gas business, avoid what has happened elsewhere.

SOURCE: GUARDIAN ON SUNDAY