$430bn gas economy: Dar faces grave risks

Gas Pipelines 

By George Njogopa

Posted  Wednesday, October 2  2013 at  00:00

In Summary

• The discovery of natural gas deposits, which many hope will lead to an economic windfall within the next decade, has put the country on the spot, and may lead to an increase in the loss of tax revenue, experts attending a two-day Financial Transparency Conference warned of the risk of the country ending up eating crumbs from the fist.

Dar es Salaam. As Tanzania eyes the exploration and production of natural gas reserves estimated to be 43 trillion cubic feet(TCF) valued at $430 billion, experts yesterday warned that the country risks falling into the trap of illicit financial outflow that cost developing country $1 trillion yearly.

Tanzania drew international attention this year by almost trebling its appraisal of its natural gas reserves, with multinational firms now eyeing investing in the lucrative natural gas sector.

According to the U.S. Geological Survey, East Africa’s coastal waters are expected to hold up to 441 trillion cubic feet of natural gas, with Tanzania and Mozambique taking the lead in terms of provable reserves.

For instance following the major discovery, UK based British Gas announced early this year that it would invest about $15 billion in Tanzania within the next ten years, more than half the country’s current annual Gross Domestic Product(GDP).

But, amid the country’s excitement especially within the ruling elite, experts are warning that Tanzania risks becoming a major hub of illicit financial outflows in terms of tax evasion and corruption unless sound tax and financial laws are enacted and transparency in oil and gas exploration and production is improved.

The discovery of natural gas deposits, which many hope will lead to an economic windfall within the next decade, has put the country on the spot, and may lead to an increase in the loss of tax revenue, experts attending a two-day Financial Transparency Conference warned of the risk of the country ending up eating crumbs from the fist.

“Tanzanians have the potential to use natural gas income to end poverty, if the resources are managed transparently…But illicit financial flows have the power to thwart this progress,” Policy Forum coordinator Semkae Kilonzo said.‬

Roughly about $1 trillion have been illegally repatriated from developing countries each year, with about half of it $500 billion, coming from Africa.

These proceeds of crime, corruption, and tax evasion represent an unacceptable drain on developing economies that is equivalent to eight times the size of global foreign aid, Mr Bubelwa Kaiza, from the Fordia Organisation said.

“Tanzania has already been losing revenue in form of tax evasion from multinationals and individuals engaging in mining, illicit wildlife trade and logging. The amount has not been duly documented, but it is set to increase with the oil and gas exploration and production unless steps are taken immediately, Mr Kaiza noted.

Transparency is necessary, added Steve Kayiza, an expert from the African Development Bank. Clear mechanisms have to be put in place mechanisms that facilitate monitoring of companies’ revenue and tax payment to avoid corruption and tax evasion, he added.

The government is preparing what it calls ‘gas economy’ strategy that will ensure it gains the most from extracting of huge gas deposits, estimated to be about 43 trillion cubic feet.

The strategy include putting up a natural gas policy, enacting revenue laws that will be specific in guiding taxation issues on gas as well as building capacity of tax officials at the Tanzania Revenue Authority so as to reduce instances of tax evasion.

But some multilateral institutions, including the AfDB have offered to help build the government’s capacity to manage the gas economy.

African countries, including Tanzania, have been finding themselves in the trap of illicit outflows because of competition to attract foreign investors.

Tanzania entered the same mistake when it granted mining investors wanton tax-breaks through the Mining Act 1998 and a tax regime that is protected against amendments despite changes in the prices of minerals.

The new Mining Act, 2010 reduced most of the tax breaks. The country also joined the Extractive Industries Transparency Initiative, which helps increase transparency in mining, oil and gas activities.

“Africans get less for our natural resources and manpower, and our governments have less tax revenue to put toward roads, health clinics, and schools,” Mr Kilonzo added.

“It is simply not acceptable that a continent with such an abundance of natural resources should continue to see such a low quality of life for most of its inhabitants,” Mr Kilonzo added.

What should be done to avert illicit financial outflows from Tanzania

The AfDB said in a recent report that in order to benefit more from the newly found natural gas resources revenue from the sector should be used to develop other job-intensive sectors and avoid risks associated with jobless growth.

“But this is only possible through extensively upgrading the country’s legal and institutional framework and preparing sectoral investment plans,” said the Africa Economic Outlook, report.

Another AfDB report offered lessons to Tanzania and other resource rich African countries on how to prevent illicit outflows.

“African countries should go beyond the Extractive Industries Transparency Initiative to ensure transparency along the entire resource value chain, as well as establish well-functioning Sovereign Wealth Funds,” a report entitled Africa a Net Creditor to the Rest of the World, released in May this year noted.

Measures recommended by AfDB, to boost net resource transfers into Africa and curtail illicit financial flows from the continent include, requiring banks and tax havens to regularly report to the Bank for International Settlements (BIS) detailed deposit data by sector, maturity, and country of residence of deposit holders; addressing the problems posed by anonymous shell companies, foundations, and trusts by requiring confirmation of beneficial ownership in all banking and securities accounts, and demanding that information on the true, human owners of all corporations, trusts, and foundations be disclosed upon formation and be available in public registries; ensuring that the anti-money laundering regulations already on the books are strongly enforced; requiring the country-by-country reporting of sales, profits, employee levels, and taxes paid by all multinational corporations;

Other measures are pursuing the automatic cross-border exchange of tax information on personal and business accounts—ideally on a multilateral basis as a number of European nations have announced they will begin doing; addressing capacity issues and corruption domestically within African tax authorities; reforming customs departments to better detect and deter trade misinvoicing; encouraging resource-rich countries to establish well-functioning Sovereign Wealth Funds (SWFs), while joining the Open Budget Initiative, the Collaborative Africa Budget Reform Initiative (CABRI), and the Extractive Industries Transparency Initiative (EITI);

Another is empowering national authorities for the regulation and management of public procurement.

SOURCE: THE CITIZEN