This article was written by Robert Edel.
The Tanzanian Parliament has passed three new Acts reforming the natural resources sector and amended several existing pieces of legislation. The changes were introduced on 29 June and fast tracked through parliament, passing on July 3 and 4, despite opposition from the mining sector. At the time of publication of this article the Acts and amendments to existing legislation have been passed by the Tanzanian Parliament but not yet proclaimed.
Summary of Notable Amendments
Changes to the Mining Act
- The introduction of a requirement that the Government shall have a minimum 16% non‑dilutable free carried interest in the capital of mining company which has mining operations under a mining licence or special mining licence. Prior to this change the Mining Act provided thelevel of free carried interest and State participation in operations under a special mining license was to be negotiated between the Government and a mineral rights holder. Companies will now be required to grant a 16% non-dilutable free carried interest.
- Under the new rules, the Government is also entitled to acquire a further 50% of the mining company commensurate with the total tax expenditures incurred by the Government in favour of the mining company. The formula for calculation of the compensation payable for the 50% interest is very vague and unclear.
- An increase in royalties from 4% to 6% on gold, copper, silver and platinum exports, and from 4% to 5% on uranium exports.
- The Government will have a lien over all mineral concentrates produced in the country. This means that the Government will have a security interest over all mineral products produced in Tanzania. Further, raw minerals are not allowed to be stored at the mine site for more than five days before they must be moved to a Government controlled mineral warehouse to await disposal for refining or, where permitted, for export.
- A prohibition on stabilization agreements that fix or "freeze" a particular tax regime applicable to a project. This provision appears to be aimed at preventing the Government and resources companies agreeing to fix a particular tax regime for the duration of the project or agreeing that the terms and conditions of agreements governing the development and operation of projects will not be changed.
- Further, if a stabilisation arrangement that involves the Government foregoing tax revenue is agreed, the parties are required to agree the value of the foregone tax revenue and how the mining company will recompense the Government for foregone revenues. In addition, the Government will have an option to convert the quantified value into equity holdings in the mining company.
- Further oversight and regulation of the industry with the establishment of the Mining Commission. The new Mining Commission has a broad range of powers and authority to oversee the implementation of the new amendments.
Summary of New Laws
Unconscionable Terms Act
- The Tanzanian National Assembly now has the power to direct the Government to re-negotiate contracts relating to the development of natural resources (including minerals and oil and gas) that contain unconscionable terms, including those entered into before the amendments come into force.
- Terms shall be deemed to be unconscionable if they contain a provision or requirement that:
- aims to restrict the right of the State to exercise full or permanent sovereignty over its wealth, natural resources or economic activity. Natural resources includes minerals as well as hydrocarbons;
- restricts the right of the State to exercise authority over foreign investment within the country and in accordance with the laws of Tanzania;
- are inequitable and onerous to the State;
- restricts periodic review of the arrangement or agreement which purports to last for life time the mining;
- secures preferential treatment designed to create a separate legal regime to be applied for the benefit of a particular investor;
- restricts the right of the State to regulate the activities of transnational corporations within the country;
- deprives the people of Tanzania of economic benefits derived from subjecting natural wealth and resources to beneficiation in the country;
- are by nature empowering transnational corporations to intervene in the internal affairs of Tanzania;
- subject the State to the jurisdiction of foreign laws and forum;
- expressly or implicitly undermine the effectiveness of State measures to protect the environment or the use of environmentally friendly technology; or
- aim at doing any other act the effect of which undermines or is injurious to welfare of the People or economic prosperity of the Nation.
- Any unconscionable terms will be automatically deleted if the other party fails to agree to re‑negotiate or no agreement is reached.
- Provisions in agreements with the State that allow for international arbitration or dispute resolution in foreign jurisdictions are also deemed to be unconscionable and therefore subject to being "expunged" from an agreement.
This power will undermine the security of contracts and gives the Tanzanian Government a very broad power to alter the terms of contracts with resources companies.
Permanent Sovereignty Act
- The people of Tanzania are given permanent sovereignty over all natural wealth and resources. All natural wealth and resources in Tanzania vest in the President on trust for the people.
- Raw resources must be beneficiated inside Tanzania. The terms of the provisions introducing this requirement are very broad and, again, vague in scope. It is not clear what level of beneficiation is required. Gold producers may not be significantly affected by this amendment if the production of ore is seen as a type of beneficiation (as seems likely). However, it is unclear what level of beneficiation or treatment will be required to other types of mineral such as rare earths, mineral sands, base metals and others.
Earnings from the disposal or sale of minerals must be retained in banks and financial institutions established in Tanzania. It will be unlawful to maintain such earnings in banks or financial institutions outside Tanzania except where profits from the local operations are "repatriated in accordance with the laws of Tanzania".
Lastly, the amendments purport to prohibit adjudication of disputes relating to natural resources by independent international arbitral bodies and foreign courts, and provide that all disputes are to be determined in accordance with the laws of Tanzania. It is not clear if these amendments also purport to prevent referral of an investment dispute to ICSID arbitration.
Assuming they come into force, these amendments will clearly have an enormous impact on the mining and energy industries in Tanzania and represent some of the most radical amendments to the legal regime governing investment in the resources industry seen in Africa to date.
Many resources companies will be significantly adversely impacted by the amendments. In Australia, we have already seen the ASX suspend trading in the shares in securities of companies listed on the exchange that have significant operations in Tanzania.
If these amendments are actually carried into operation it is unlikely that Tanzania will be able to attract any significant investment in mining or the oil and gas industries in the foreseeable future. In our opinion, it is likely that many existing investors in the resources industry is will have little alternative but to seek to withdraw their investments.
It remains to be seen whether there will be any watering down of the new regime.
Bilateral Investment Treaty Protection
One question that arises as a result of the new legislation is whether the amendments amount to an expropriation of assets of foreign investor contrary to the provisions of a relevant Bilateral Investment Treaty (BIT) or individual agreements between foreign investors and Tanzania.
Tanzania has Bilateral Investment Treaties with a number of countries, including the UK, Germany, Sweden, the Netherlands, China and Mauritius. These Treaties all contain a provision to the effect that the investments of nationals of the Contracting Parties shall not be nationalised, expropriated or subjected to measures having an effect equivalent to nationalisation or expropriation unless there is adequate and effective compensation. Normally, BITs provide that this compensation is measured by reference to the genuine value of the investment immediately before the expropriation event.
The provisions of the new legislation requiring a grant of a 16% free carried interest in the share capital of resources companies without any compensation are likely to constitute a breach of such provisions.
Additionally, the new provisions that grant the State a right to acquire a 50% interest in resources companies may also constitute a breach of the anti-expropriation provisions of a Bilateral Investment Treaty or specific investor/State agreements if the compensation payable is less than fair value. As noted above, the formula for payment of the additional 50% interest is very vague and seems to relate to forgone tax revenue. The unilateral expungement of so-called "unconscionable terms" of investor/State agreements may also constitute a breach of the anti‑expropriation provisions to the extent they abrogate valuable rights of the investor.
Many resources companies choose to structure their investments in African jurisdictions, including Tanzania, in a way that enables them to take advantage of a Bilateral Investment Treaty and the relevant provisions preventing expropriation without appropriate compensation.
For those companies that have had the foresight to do so, it may be possible for them to recover:
- the value of the 16% free carried interest they are forced to grant to the State; and/or
- any difference in value between the fair value of any 50% interest transferred to the State and the amount paid by the State for that interest,
by bringing proceedings under the relevant Bilateral Investment Treaty provisions.
Under the Bilateral Investment Treaties that Tanzania has entered into, these proceedings must be submitted to the International Centre for the Settlement of Investment Disputes (ICSID) pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965. Specific investor/State agreements may also provide that investment disputes are to be submitted to ICSID for determination.
This Convention provides for independent international arbitration in a neutral venue outside Tanzania.
As noted above, there is a real question as to whether the amendments introduced by the Tanzanian Government purport to prevent referral of an investment dispute to ICSID arbitration. Critically, consent to ICSID arbitration (including, for example a clause in an agreement with the State of Tanzania agreeing to refer certain disputes to ICSID arbitration) cannot be unilaterally withdrawn.
If a Claimant is successful in obtaining an award against the State of Tanzania the award can potentially be enforced against the assets of the State of Tanzania held in other countries that are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, for example bank accounts, real property assets and other assets.
We suggest that this is a potential remedy that should be considered by companies affected by these changes in Tanzania, as well as their financiers and investors.