Can FDI benefit Developing African economies?

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Since 2012 a string of discoveries of oil and natural gas reserves have been found in Mtwara, a small town on the south east of the Tanzania. They have come as a result of extensive exploration along the area by foreign investors such as Statoil that can very well be regarded as big players of the industry. A selected issues report on Tanzania published in May 2014 suggests that should the reserve be found commercially viable, Tanzania has a chance to transform its economy. The reserves are currently valued at $20 billion and, for many, this presents the country with another chance to become a middle income economy.

Tanzania was in an almost identical situation about two decades ago when its mineral sector took the spotlight. Today, it is hard to see how Tanzanian gold impacted the economy and the standard of living of the local population. The Human Development Index is still one of the lowest in the world, and according to an article by Global Financial Integrity, as the mining exports grew to $1.5 billion, the government’s revenue from the sector was a mere $100 million—roughly 7% of the $1.5 billion. If nothing is to change with oil and gas, how will the country move into middle income status by the reported target of 2025? The government is finding itself in the position it was in 20 years ago; it has to make decisions and formulate policies that could shape the future of the country.

A point to note, according to the same selected issue paper on Tanzania by the IMF, the country’s petroleum fiscal regime—a system that shows how risk and reward are shared by the government and the investor—is a mixture of production sharing and income royalties. The Tanzanian Petroleum Development Corporation (TPDC), the national oil company, has all the licenses, and it is responsible for making the Production Sharing Agreements (PSAs) with the private sector. The government has never disclosed these agreements and hence knowledge of how the revenue is split is not accessible to the public. A model PSA produced by TPDC suggests that the government will pocket between 50-80% of the revenue depending on how much gas will be extracted per day, although in the middle of July this year, a leaked PSA between TPDC and Statoil, an investor from Norway, projected that the government may earn just a mere 30-50%. In fact Statoil, a company in which the majority shareholder is the Norwegian government, has full license to take all of its profits and invest it out of the country.

It is questionable whether 30% of the revenue will be enough for the government to usher its economy into middle income status, especially when the rest of the revenue leaves the country and is not reinvested back into the economy. Time and time again, resources that have attracted FDI to African countries have not been able to uplift the respective economies out of poverty. For instance, Nigeria discovered oil for the first time in 1948, yet up to today around half the country lives on under $2 a day, according to the 2012 article by The Economist on the desperate need for reform in Nigeria’s oil Industry. Granted, it is a thin line between staying well positioned in the investor’s approval list while making policies that help improve the economy. But for the African producer and African consumer to start benefiting from these resources, and the investment they attract, there is a strong need for reevaluations on economic decisions about the oil industry, including investment incentives.

One way in which FDI can begin to have a positive impact on African economies is if the local participation is increased, accountability is fostered and a significant percentage of the profits are re-invested back into the economy. If profits are reinvested back into more schools, health centers and roads, the public will experience it with more jobs, better infrastructure and better healthcare—things that past and current investment in different sectors in the industry has failed to provide.

2500 miles from Tanzania something different is happening. The Federal Government of Nigeria created the Nigerian Content Development and Monitoring Board to improve local participation in its oil and gas industry. A similar model can work for Tanzania as well. At the moment, most contracts and most jobs are given to non-locals, understandably because in most cases they are better trained and hold a greater capacity of operation. The government should create a minimum level of local participation in the Industry and work to bring it up to a satisfactory level as they work to improve the local supply. This will have a more apparent trickle-down effect as more profits will be retained and local unemployment will reduce

Moreover, it is important that governments work with investors with credibility. So much revenue from FDI in Africa is lost through trade mis-invoicing—at least $60.8 billion from 2002-2011 alone, according to a report by Global Financial Integrity titled Hiding in Plain Sight. Companies are misreporting prices of imports they bring, such as machinery, to avoid tax and value of sales they do to reduce the amount they have to pay to the governments. In Tanzania alone, around $3.5 billion was lost to trade mis-invoicing in 2011 according to Global Financial Integrity. Reliable investors, increased transparency and improved governance would go a long way to retain such vast amount of money.

Until some of these changes begin to take shape, Tanzanians, and in general Africans, will hardly benefit from resources such as minerals or oil. With what happened with the mineral sector in hindsight, a different approach has to be taken if the country wants middle income status by 2025. African politicians need to stop making decisions on behalf of themselves and take a unified stand in representing the public’s interest and interests of the country in the long run. It is clear that investors have been winning, at the cost of the African public. The rules of the game ought to change for both parties to win.

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