Mining policy uncertainty hurts investment in Tanzania - report

10Oct 2018
By Financial Times Reporter
DAR ES SALAAM
Financial Times
Mining policy uncertainty hurts investment in Tanzania - report

NEGATIVE high profile shifts in the investment-risk profile for two of Africa’s most prominent mining countries, including Tanzania, has cast a dark shadow over the continent, which has, on balance, made modest improvements in its overall investment risk profile, a new report has warned.

According to the Investment Risk Index in the World Risk Report released this week, investment security in Africa has improved by 4%, with the average score for constituent jurisdictions from Africa gaining two index points from last year's average of 50.

Of the nine global jurisdictions registering a change in score of at least 10% year-on-year, six were from Africa. Of those six, four registered gains - Burkina Faso (14%), Guinea (11%), Mali (10%) and Mozambique (10%) - while the remaining two (DRC and Tanzania) registered losses. Despite these figures, the industry's view on investment security in Africa is souring.

The Investment Risk Index is made up of both ‘hard risk' based on tangible changes in the investment environment, and ‘perceived risk' based on an industry survey. At the same time as tangible changes to jurisdictions in Africa pushed the average hard-risk score up by three points, a fouling of attitudes as indicted by survey numbers pushed the perceived-risk score down two points.

The aforementioned 4% improvement overall is the result of an 80:20 weighting of ‘hard' versus ‘perceived' scores in the Investment Risk Index.

"It looks to us as though high-profile changes to investment security in the DRC and Tanzania have cast a shadow over a region that has, as a collective, made a modest but significant improvement in its risk profile," Mining Journal Intelligence head Chris Cann said.

Tanzania is off 16% year-on-year having introduced obligations around concentrate processing in a bid to promote downstream industry and has also aggressively pursued the country's largest miner, Acacia Mining (a Barrick Gold subsidiary), for unpaid taxes it reckons amount to close to $200 billion.

The DRC is down 26% year-on-year having made sweeping changes to its mining code that significantly increase the fiscal obligation and have removed a stabilisation agreement in place to protect miners already operating.

Analysis of the Investment Risk Index - comprised of aggregated scores for Legal, Governance, Social, Fiscal and Infrastructure risk - suggests negative, punitive changes such as these not only radiate through the region, but they also have a disproportionately negative effect on the jurisdiction implementing the changes.

Taking Tanzania as a case study, the key change in risk profile was the fresh requirements for mineral processing written into its mining code.

The result of this change was a 25.6% fall in its ‘hard risk' score for the Legal category, which is based on legal analysis of the mining code by research firm, MineHutte. The industry's reaction to the change as measured by the survey showed a disproportionately severe 35.7% drop in Tanzania's ‘perceived' Legal score.

More alarming, however, was the drop in ‘perceived' scores across risk categories that have not seen any significant, tangible change.

A massive 23.3% fall in the ‘perceived' Governance score was at odds with a negligible deterioration ( < 2%) in the ‘hard' Governance score. A flat score based on the ‘hard' metrics for the Social category jarred against a 15.5% fall in the ‘perceived' score. The Fiscal scores were similarly out of kilter. Only the Infrastructure category resisted the trend.

Perhaps most startling was the change in survey results designed to gauge the geological prospectivity, which one would obviously expect to be flat year-on-year. Here, the industry decided Tanzania's geological potential was more than 40% lower than before it made the change to its code.

"While the industry should respect the right of host governments to regulate their extractive industries as they see fit, governments in turn should be aware of how the industry is likely to react to dramatic change that eats into the profitability of miners," Cann said.

"The numbers out of Tanzania suggest the industry is savage on governments that move the goalposts, particularly if change is poorly communicated and consultation with miners is limited.

"This should be considered before change is implemented, alongside the likely impact change will therefore have on future revenues born from further foreign direct investment into the mining sector."