Tanzania – Birth of a gas giant?

Tanzania has lots of energy. While a stable government, substantial mineral resources, tourism and agriculture have all played a part in making Tanzania one of Africa’s fastest-growing economies, with current annual GDP growth in the region of 7%, it is the energy sector that is expected to grab the headlines.

Newly discovered natural gas reserves off the southern coast of Tanzania (with further reserves in the west) are set to make the country a major natural gas producer. With exploration still in its early stages, confirmed gas reserves already stand at upwards of 20 trillion ft³. Plans are afoot to develop facilities for the liquefaction and export of liquefied natural gas, and financing has been agreed for a 532km gas pipeline. Natural gas is therefore acting as a stimulus to Tanzania’s construction and engineering industry even before the revenues from exports, and the expected benefits of improved power supplies, start to make themselves felt.

None of this has been lost on international investors, with many major international energy and engineering companies already active in Tanzania. What, therefore, are the key considerations for those looking to do business in East Africa’s most populous country?

Investment legislation

The United Republic of Tanzania includes both the Tanzanian mainland and the semi-autonomous Zanzibar archipelago. Investment on the mainland is governed by the Tanzanian Investment Act No. 26 of 1997. For foreign investors making a capital investment of US$300,000 or more, the Tanzania Investment Centre can assist with obtaining the permits, authorisations and documentation required to set up and operate in Tanzania.

Investment in Zanzibar is governed by the Investment Promotion Act of 1986, with the Zanzibar Investment Promotion Agency undertaking a similar role to the Tanzania Investment Centre.

Permits, licences and tax

To conduct business in Tanzania, a foreign company must first register with the Business Registration and Licensing Agency. The Contractor’s Registration Act 1997 sets out further requirements as to the registration (with the Contractor’s Registration Board) of contractors and construction projects. The registration process can be bureaucratic and potentially lengthy.

All companies must register with the Commissioner of Domestic Revenue and receive a taxpayer identification number, to be used in all tax and business activities. The tax regime features incentives aimed at promoting national economic development, such as relief from VAT and import duties in respect of plant and machinery for certain infrastructure and utilities projects.

Doing business

Business in Tanzania tends to be built around strong personal relationships and trust, making one-to-one meetings between senior decision-makers a key priority.

As with many emerging markets, corruption can be an issue, as highlighted in May 2012 when corruption allegations triggered a reshuffle in which a number of senior government ministers lost their jobs. Tanzania ranked 100th out of 182 in the 2011 Corruption Perceptions Index by Transparency International.

All public procurement is by tender, governed by the Public Procurement Act 2004 and the 2005 procurement regulations. Those contracting with government departments and state-owned enterprises must pay careful attention to the terms and conditions for tendering because even minor non-compliance may invalidate the tender.

A new procurement act, the Public Procurement Act 2011, has been approved by parliament and is expected to come into force shortly. Building on the provisions of the 2004 Act, the new act includes measures to enhance transparency further and is expected to provide, for the first time, for e-procurement, with the aim of simplifying and speeding up the tendering process.

Contract enforcement

Tanzania’s legal system has at times been viewed as slow-moving and difficult to predict. However, recent strategies, spearheaded by the judiciary, have seen the Commercial Court streamlined, yielding a substantial reduction in the average time taken for business disputes to be heard.

Arbitration in Tanzania is governed by the Arbitration Act (Chapter 15), which was introduced in 1971 and so pre-dates the UNCITRAL Model Law. The National Construction Council publishes a set of arbitration rules (last revised in 2001) which are commonly used in relation to domestic construction contracts. Tanzania has been party to the New York Convention since 1965 and acceded to the ICSID Convention in 1992.

Opportunities

Tanzania therefore holds many promising opportunities for investors in the construction and engineering sector with an appreciation of what is involved in doing business there. If, as expected, natural gas fires the Tanzanian economy to even greater rates of growth, the opportunities will only increase in the coming years.

Kwadwo Sarkodie is a partner in the Construction & Engineering Group at Mayer Brown International LLP
Pendo Marsha Shamte is an associate at CRB Africa Legal, Tanzania