Abstract
Local content is a famous agenda that sweeps across Africa. In Tanzania it is one of the new agenda that needs attention. This paper answer the question which asks, what are the challenges of local content in local procurement especially in major mining entities in Tanzania? The paper has deployed Institutional theory in addressing the research question. The paper has tried to explain what has transpired in Tanzania over local content agenda and the recommendations on how to deal with the challenges.
Keywords: Local content, Institutional theory, Local procurement practice, Institutional theory.
Received: 1 August 2016 / Revised: 8 December 2016 / Accepted:27 December 2016/ Published:9 January 2017
Contribution/ Originality
This study is one of very few studies which have investigated on the local content agenda based on the challenges of procurement practices in the mining sector in Africa particularly in Tanzania. It has pinpointed the challenges that the local nationals are facing in the mining sector value chain and institutional and organizational capacities that can be deployed to mitigate the challenges.
1. INTRODUCTION
More than fifteen years have gone since Tanzania started experiencing booming of large scale mining investment (Tanzania Minerals Audit Agency (TMAA), 2013). Mining sector recorded substantial investment growth in the second half of 1990s pursuant to reforms in mineral policy and mining taxation regime endorsed in 1997. By 2009, eight gold mines and two gemstone mines of large-scale have been operational in Tanzania (TMAA, 2013).
There are number of mines in Tanzania with years of opening and closure including Golden Pride Mine (1998-2014); Buhemba Gold Mine (1999- 2003); Geita Gold Mine (1999 - 1926); Bulyanhulu Gold Mine (2000-2035); and North Mara Gold Mine (2003-2021).Others are Tulawaka Gold Mine (2005-2013); Buzwagi Gold Mine (2009-2019); New Luika Gold Mine ( 2012- 2018); Mererani C Tanzanite Mine (2000-2028); and Mwadui Diamond Mine (1940-2028)(Tanzania Investment Centre, 2012).
Additionally, official statistics for mining include quarries and exploration projects, large scale operational mines accounts for more than 95% of the value. From 1997 to 2012, FDI to mining sector had amassed about USD 7.3 billion (Figure 1). Since 1997, mining investments gives more than 50% of FDI and in some years more than 80% (TIC, 2012).
The increased investment in mining sector has caused enormous increase production within a decade, for example aggregate gold output has risen from below 1 ton in 1997 to above 40 tons each year (TMAA, 2013). Increased monitoring of the mineral sector has born positive results; particularly increased export earnings and Government take in terms of taxes and royalties. Currently, mining is the highest contributor of non-traditional exports value (about 51%) making about 33% of total value of Tanzanian exports in 2012 (National Bureau of Statistics, 2013).
Linking mining with other sectors of economy is very crucial. Linking mining to other sectors of the economy provide both backward and forward linkages in mineral value chain (Sigam and Garcia, 2012). Mining needs inputs tangible and intangible supplies, such goods include equipment, production reagents, grinding media, fuel and foodstuff. Intangible supplies include technical services, financial services, cleaning and catering services. On the other end, forward linkages include mineral based manufacturing, refinery, lapidary, jewelry, financial and marketing services (Vorster, 2001).Figure-1. Total GDP vs. Mining Growth (%) (2001-2013)
Source: NBS (2013)
1.1. Value Chain and Local Content
1.1.1. Tanzania Policy Adjustments of 2009: Instilled Local Content Basics
Considering public outcry and shortcomings experienced during the first decade of large scale mining from 1998 to 2008, the Government engaged stakeholders to adjust and come-up with the Mineral Policy, 2009. One key objective sought by the policy was to foster linkage of the sector with mainstream economy increasing integration with other sectors and contribution of the sector to the GDP.
The policy aimed at motivating and enabling the private sector to increase participation of nationals in more influential roles of exploration, mining, mineral beneficiation and marketing. The policy addressed issues of employment and training for Tanzanians in all trade occupations, management and technical fields in mining. The other aspect was supply value chain from of goods and services to mining industry which where local procurement was envisaged to secure preferential treatment.
The policy clearly puts a commitment for Government to develop essential infrastructure to supports mines development and supply to the mines.The Government is also committing to empowering Government business vehicles such as STAMICO (State Mining Company) and NDC (National Development Cooperation) to strategically take interest in viable mining projects. The policy has also clearly put a responsibility for Government to collaborate with private sector to promote and support establishment of training institutions for the mining skills and trades.
Linking mining with other sectors of economy was meant to provide both backward and forward linkages in mineral value chain. This entails a range of tangible and intangible supplies. Goods such as equipment, production reagents, grinding media, fuel and foodstuff. Intangible supplies include technical services, financial services, cleaning and catering services. Backward linkages considers manufacturing of mining equipment, parts of plans, production materials and consumables Forward linkages envisaged include refinery, lapidary, jewelry, financial and marketing services.
Though, the spirit of local content under Tanzania Mining Policy, 2009 was carried through to the Mining Act, 2010 with clear statements, particularly Section 41, 47, 49 and 52 the local content provisions in terms of obligations, reporting and measurements have not been fully instrumented.
Thus the main aim of this paper is to know the local content challenges in procurement in major mining entities in African countries while taking Tanzania as a case study.
1.1.2. Yet, Contribution to GDP and Multiplier Impact is Far from Target
Figure-4. Actual & Target of Mining Contribution to GDP (2001-2013)
Source: NBS (2013), United Republic of Tanzania (2009)
Inspite of substantial growth in mining investment and revenues, yet the contribution to of mineral sector to mainstream economy remained dismal (Figure 5). Still large scale mining projects substantially procure capital, technology, labor and supplies from abroad which means the value generated is being externalized from exploration, development, production to closure phase of projects.
Figure-5. Mining Contribution to GDP (TZS) (2001-2013)
Source: (Tanzania NBS (2013))
Considering global competition for investments, there is limitation in maximizing local benefits through Government’s take from mining projects. Government take can hardly go beyond 20% of mine’s life gross turnover. Before mining project’s profit cash is available for sharing between investors and Government, there numerous expenditure to be incurred. For that matter, Tanzania cannot solely depend on Government take to maximize mining contribution to the national economy. In the other way round, more of value created out of spending by mines which consumes more than 80% of their sales turnover in form of capital expenditure, operating and administration expenses, interest charges and return profit to corporate investors may be externalized if no supplies are sourced locally. The split of mining revenue between national economy and foreign economies is analogous to eating of chicken's egg where the biggest motivation is place on an egg-yolk. However, just like for an egg, egg-yolk, it is just a little portion, placed in the middle, of the whole lot, the mining profit share to Government bound to be localized is little fraction of total revenue and comes after recovery of investment. One to maximize benefit of eating the egg needs to start eating the egg-white. Maximization of local content from in spending from exploration to closure of mines will have a great impact benefit national economy, from exploration to closure has to be internalized.
1.2. Challenges of Mining Sector and Local Content
Tanzania's mining industry has been providing less than expected contribution in terms of its multiplier effect to domestic economy. Mining contributes about 3.5% of Country's GDP, a little higher from renaissance of mining in 2000 where it was about 1.6% (NBS, 2013). Still there is a wide gap to meet the target of 10% contribution to GDP as envisaged in the Mining Policy, 2009 and Vision 2025. Inspite of growth in mining investments and revenues between 2000 to 2013, less proportionate growth in procurement by mines from local sources has have been recorded (TMAA, 2013).
Weak link between mining and other sectors of economy denies Tanzania economic opportunities accruing from existence of mines of all operating scales. One of school of thought is that operators are inclined to procure abroad where the capital and decisions makers originate while others attributes the problem to the factual vacuum of supplies for mining. Beside the issues of buyers' propensities, issues of technology and quality suiting efficient mining operations is an apparent challenge to majority of Tanzanian suppliers and service providers.
1.3. Theoretical Underpinnings and Definitions of Key Terms
Institutional theory is theory that is in use in this paper. Institutional theory is a theory that predicts processes by which social and political structures including schemes, rules, norms and routines become established as an authoritative guideline for behaviour that governs interactions in the society (Scott, 1995). This theory asserts that authoritative guidelines for behaviour are created, diffused, adopted, adapted over time (Scott, 1995). This implies that for organization to survive and thrive, they must conform to the rules and belief systems prevailing in the environment (Scott, 1995). Furthermore, Kraft and Furlong (2007) contend that institutional theory is a policy making mechanism that emphasize that formal and legal aspects of Government directives to be followed.
This theory is ideal for this paper as most of what is happening in the mining sector in any country of the world is regulated, surviving and thriving under the rules, norms and values of a given country (Kraft and Furlong, 2007).
1.4. Definition of Local Content
Level of nationals or entities of a hosting country participating in industry value chain is popularly referred as 'local content’. Globally there a lot of misnomer and misconceptions on the terminology 'local content’ is considering diversity in definition of a related term 'local community' in its scope and range of application. At project's micro level, the local community is normally connected with the contiguous communities where the project is located. For large scale mining projects, the neighboring communities are identified through Environmental and Social Impact Assessment Studies which are subject to official approvals. Concept of Corporate Social Responsibility (CSR) is strongly founded on the basis of positive impact that the project bring to the immediate hosting community, the villages and local government. It is therefore a common feature for people to squarely define local content in CSR perspective. On the other hand, at macro policy level, local content is normally defined as level of participation of nationals and entities controlled by indigenous people in industry's value chain.
Ghanaian Petroleum Commission Act, 2011(Act 821) defines local content as the use of Ghanaian human and material resources, services and businesses for systematic development of national capacity and capabilities for enhancement of Ghanaian economy. The definition purely focuses on national macro policy perspective without indulging in local content initiatives through Corporate Social Responsibility engagements.
The Nigerian Oil and Gas Industry Content Development Act of 2010 have totally avoided the term 'Local Content' instead used term 'Nigerian Content'. That piece of legislation defines Nigerian Content as the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian Oil and Gas Industry. It further defines 'Nigerian content indicator' as a percentage rating of a company based on specific criteria defined on the basis of values ascribed to each criterion.
The Tanzania Extractive Industries (Transparency and Accountability) Act, 2015 defines “local content” as ‘an added value brought and or developed in Tanzania through participation of the national labour, technology, goods, services, capital and research capabilities in the Extractive industry activities’. The definition provided by TEITA is comprehensive in terms of scope but inadequate to resolve critical issues in judgment of practical cases. The definition lacks thresholds and numerical criteria measurements of how much contribution from Tanzanian sources would qualify good, service or labour as local content.
In a bid to resolve intricate issues around the definition which is the basis for decisions and reporting, key sector player held a workshop focus group discussion on the subject of local content in March, 2015 at Mwanza, in the Lake Zone, Tanzania. From the attempt to concretize the concept, aide memoir of the workshop defined Local Content by its economic attributes rather than confining it to a legal phrasing. It underscored key economic attributes in defining local content in mining as follows; Entity involved in mineral value chain is registered and resident in Tanzania; Ultimate Ownership and Control of the Entity with qualifying majority (75%) of voting shares stays are being held by Indigenous Tanzanians; More than 50% of revenues is spent and/ or invested in country and more than 50% of surplus is distributed within Tanzania. Other economic attributes include; Value Adding of Products is substantially being done in Tanzania; Key management positions are held by Indigenous Tanzanians; Strategic decisions are being executed by indigenous Level of multiplier effect to Tanzanian economy is highest than any other country it operates.
The operational definition for this study is taking macro policy perspective where Local Content is defined as the level that indigenous nationals and entities participates in Ownership, Labor Employment and Supply throughout Mining Value Chain. Focus of the study is involvement of Tanzanian business entities in supply of goods, services and technical works to mining projects throughout the value chain. Mining value chain is wide enough to include exploration, geo-scientific studies, evaluation of reverses, mines construction, supply and installation of mining equipment, survey and blasting works, hauling of materials and mineral processing. Other processes in mining value chain include security services, cleaning and laundry services, food and catering services, repair and maintenance of plant and equipment, transport and logistics services, health services, environment and safety services, finance and administration services (Vorster, 2001).
A well developed Local content policy fosters a business case to mining projects considering that supplies can mostly be procured cheaply from nearby sources. Competition experience amongst local suppliers reduces cost and sustainably enhances quality in favor of mining industry as strategic line of business (Vorster, 2001).
1.5. Study Design and Approach
This is an applied descriptive study which involved a survey of seven major mines operating in Tanzania to demonstrate the existing situation and project potential future for local content in supply chain of mining industry in Tanzania.
1.6. Data Collection Methods and Procedures
The study involved both primary and secondary data collection. Primary data collection involved administration of standard questionnaires and round-table discussions with representatives of selected mines. Beside some questions which demanded actual statistical information, questionnaires used more of closed ended questions with continuum of multiple choice responses, Yes or No for question 3 to 8 and Always to Never for question 9 and 10. This had implication on research efficiency and measurement of respondents' tone to the subject.
1.7. Data Analysis and Presentation
Primary data were analyzed to display existing situation with horizontal trend and vertical composition of procurement by selected mines from 2001 to 2013. Aggregate and disaggregate data of local procurement have been tabulated and graphed to ease interpretation of statistics. MS Excel program was utilized to analyze and set graphical presentation of data.
1.8. Research Findings
Tanzania has remained with stunted local content of less than 55% over 10 years. Additionally, the study observed that if elements of locally procured but foreign sourced goods service were to be re-categorized, then goods and services locally produced and supplied to mines would stand at around 22% which is meager (Figure 7).
Survey statistics shows that for a period from 2001 to 2013, total value of goods and services procured worth USD 9.3 billion, out of which 46% is foreign and 54 is local. The analysis also noted that the said local procurement includes all high valued supplies of goods and services which are originally imported through locally registered firms, braches of service providers, mining contractors and suppliers with long-term contracts.
Moreover, massive supplies of energy such as electricity supply by Tanesco and fuel imports through contracted supplier are also classified as local purchase. Supplies such as stationery and personal protective gears sourced abroad but imported by firms registered in Tanzania are counted as local procurements. If those factors are knocked-off the count of real local content remains to be less than 25% rather than the inflated 54%.Figure-7. Local Vs. Foreign Procurement Declared by Miners (USD mil.)
Source: Survey Statistics, Primary Data
The study also noted a number of omissions and misclassifications of goods and services in declaration of local content in mining procurements. Though Capital expenditure is fundamental in determining the impact of major mining projects to domestic economy, it is not well captured in statistics and classifications of foreign versus local procurements. For instance initial investment expenditure for two major gold mines, New Luika which was more than USD 100 Million between 2011 and 2012 and Buzwagi gold which was more than USD 400 Million during 2007 to 2009 were not considered in the statistics. The initial capital outlay involves huge amounts of procurements mainly directed abroad in form of works, equipment and technical services. Had all those amounts been reflected in the statistics provided, total procurement amounts would be higher and tilting towards foreign content which takes lion's share. Under those circumstances, statistics of local content in mining procurement may not give realistic picture (Figure 8).
It was further observed that some large mines could not classify in detail the procurement spending between services and goods. Some of technical services are embedded in installation of plants and equipments which are classified as goods even though value of labour is substantial. In other jurisdiction like South Africa, the definition of local goods and services is subject to National Standards for measurement of local (Republic of South Africa)
Figure-8. Procurement Statistics (2001-2013)
Source: A survey of 7 large mines in Tanzania
It was noted that the existing situation that majority of supplies are foreign sourced even when locally procured is a syndrome of deficiency in domestic manufacturing sector. Tanzania is having a vacuum in manufacturing and industrial production in majority of items demanded by mines not only equipment and technical supplies.
Limited manufacturing of stationery, kitchen utensils, vehicle parts and tires, furniture finishing, electrical cables, plumbing materials, iron and steel products is major handicap for local sourcing. Given consumption scales of mining industry, greater impact in domestic manufacturing of intermediate supplies would have been realized from mining procurement.
The survey also noted that there have been no commitments towards local sourcing beyond corporate social responsibility. Measurements of commitment towards local sourcing noted serious gaps including absence of budget along with procurement plan for local sourcing; lack of step-by-step procedures in giving preference local suppliers or service providers in tendering process; only limited items (particularly catering/foods) reserved for local suppliers and service providers; Tender notices and information about supply opportunities are not broadly advertised to National Suppliers through popular channels ; Inadequate initiatives to facilitate local suppliers with samples and advance payments (Figure 9).
It was further noted that even local caterers who secures tenders in mines do importation of supplies which could abundantly be sourced from Tanzania. Site contractors especially those who work during construction phase operate with foreign sourcing mindset like whole-sale suppliers from abroad.
Figure-9. Practice in Local Procurement Declared
Source: A survey of 7 large mines in Tanzania
2. DISCUSSION OF THE FINDINGS
A survey noted a number of shortcomings which makes local suppliers and service providers less competitive for opportunities in mines. These include Late delivery; temporary absence in the market; inadequate supply; failure to meet specifications; supply of substandard or faulty products; expensive than imports and poor packaging or presentation. The most troubling issues are late delivery and uncompetitive prices compared to imports.
Most of domestic suppliers do price quotations based on competition force invoked by the buyer rather than self-imposed discipline. Given that normally mines normally calls for quotations from un-updated pre-qualified list of suppliers rather competitive tenders they tend to get high prices.
It was also noted that domestic suppliers for imported goods becomes expensive than goods directly imported by mines differential treatment for import duties, volumes and operating margins. Mines are eligible to relief rates of import duty to a level of 5% on importation of specified intermediate mining supplies which cannot be enjoyed by importer outside specified mining operation.Shortcomings Experienced from Local Suppliers & Contractors
Source: A survey of 7 large mines in Tanzania
2.1. Challenges Facing Local Enterprises and its Solution So as to Compete in Supplying to Mines in Tanzania
From the survey, focus group discussions and literature, the study observed a number of challenges impeding local enterprises to grab opportunities of supplying to mining industry. Most of challenges are attributable to financial system gap, skills gap, policy gaps, administrative gaps, infrastructure gaps and (Table 6). Concerted efforts from Government, mining Industry and business community are needed to address the long-awaited solutions to foster integration of local enterprises in mining value chain.
Table6. Challenges facing Local Firms and Approach to overcome them
| Sn | Challenges | Solutions and (Institutions to Intervene) |
| 1 | Capital and finance for manufacturers of mining supplies | Investment & Fiscal Incentives to;-
|
| 2 | Lack of information on mining tenders | Publication of Procurement Notices, submission of Procurement plans, Sensitizing local firms on tenders by mines (Ministry Responsible for Minerals and Local Authorities) |
| 3 | Limited Commercial skills and experience to trade with Mines |
|
| 4 | Limited Technical and Technology Capacities | Industrial Incubation programs (Business and Economic Empowerment Council) Manufacturing Technologies (Ministry of Industry and Trade) Mining Supplies Hubs (Tanzania Chamber of Commerce Industries and Agriculture)A & TPSF) |
| 5 | Unfavorable tax measures towards local manufacturing of equipment and supplies to mines | Review Indirect taxes to make local supplies cheaper than imports (Ministry of Finance and Tax Authority) |
| 6 | Lack of transparency on Supply Opportunities | Use of local channels to advertise supply opportunities and set mechanism for feedback to local bidders (Ministry of Energy and Minerals (MEM) & Mining Entities) |
| 7 | Mines to favor limited number of pre-selected suppliers and importation | (Mining Entities & Chamber of Mines)
|
| 8 | Questionable integrity of local suppliers |
|
| 9 | Lack of Local Content instruments | (Ministry Responsible for Mineral Sector)
|
| 10 | Unreliable and expensive Electricity power which hikes cost of production | (Ministry Responsible for Mineral Sector)
|
| 11 | Limited physical infrastructure to the mines | (Ministry of Infrastructure & Ministry of Transport)
|
| 12 | Red-tape in registration and licensing businesses | (Ministry Responsible for Industry, Trade and Investments)
|
| 13 | Delays of materials due to long clearing procedures | (Port and Revenue Authorities)
|
Source: Researchers` findings, (2016)
3. POLICY IMPLICATIONS AND CONCLUSION
Some of the recommendations that should be given to Tanzania Government includes the provision of relief on import duties which will somehow subsidize local factories/companies or suppliers to improve their scale of production.
Additionally, there should be simple clearing procedures of imported goods at border or ports which sometimes cause local factories/supplier fail to deliver goods or service in time
Further, there should be Government platform that will encourage local investment on machineries factories innovations and expertise
Moreover, there should be sustainable government forums for supporting local producers or vendors. Sometimes local producers are afraid to invest heavily on their productivity because our government doesn’t have stable forums to protect the interest of local producers or suppliers
Conclusively, Tanzania Government must make sure that local businesses are becoming internationally competitive through the empowerment of local suppliers through transfer of appropriate technology to enable Tanzanians and Tanzanian entities to manage and operate the mineral industry.
Moreover, local nationals should be enabled through training institutions and this can be done by runningrequisite curriculum relevant to mineral industry. Furthermore, there must be optimal participation of skilled and unskilled Tanzanians in the mineral sector activities.
Funding: This study received no specific financial support. |
Competing Interests: The authors declare that they have no competing interests. |
Contributors/Acknowledgement: All authors contributed equally to the conception and design of the study. |
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