TANZANIA: An Introduction to General Business Law
The Current State of the Market
The legal system of Tanzania is largely based on common law. Tanzania is a union of two historical regions, Tanganyika and Zanzibar, which were united in 1964. Tanzania has progressed into a competitive and industrial economy and is prioritising a number of significant projects.
Based on a recent report published by Absa Africa Financial Markets Index 2023, which analyses countries based on six elements – market depth; access to foreign exchange; market transparency, tax and regulatory environment; involvement of local investors; macroeconomic opportunities; and the legality and enforceability of standard financial markets master agreements – Tanzania has done exceptionally well in five out of six, thus providing a stable and conducive environment for local and international investors to engage in sustainable investments.
Major Ongoing Projects
The Liquefied Natural Gas Project (LNG Project)
The LNG Project, located in the Lindi region in the Southern part of Tanzania, is valued at USD32.7 billion. The project aims to produce and sell LNG and domestic gas between 2030 and 2059.
The project is anticipated to trigger domestic investment, and Tanzania’s strategic location and the Asia-Pacific region’s move towards environmentally friendly energy resources give the country an opportunity to become a major natural gas supplier to India, wider South-East Asia, and China. The project, which is estimated to be worth USD5–7 billion per year, is expected to boost the country’s GDP by 6.5–7.5%.
The project will be developed by a newly incorporated project company. The licensors/shareholders include Norway’s Equinor in partnership with ExxonMobil, which will hold a 44% stake and operate block 2, and Shell in partnership with Pavilion Energy which will hold a 44% stake and operate blocks 1 and 4. The Tanzanian government through the Tanzania Petroleum Development Corporation (TPDC) has a 12% interest in the project.
Shell and Equinor signed a memorandum of understanding confirming the joint development of the project in 2021 and ratified a framework agreement with the government of Tanzania (GoT) in June 2022. The Host Government Agreement is yet to be finalised between the parties; however, optimism remains high as the GoT is working with the foreign investors to finalise negotiations for the project.
The project will set a foundation for Sub-Saharan Africa to develop greener energy resources, which reflect the pledges made by countries during the 2021 United Nations Climate Change Conference.
Moreover, according to a macroeconomy report on the LNG project published by Stanbic Bank Tanzania in 2022, an estimated 277,356 to 647,048 jobs will be created. The creation of new employment allows the economy to maintain a healthy rate of growth.
The project is also aligned with the objectives set by Vision 2025 and the third and final Five-Year National Development Plan (FYDP), which aims to create a competitive and industrial economy for human development which will increase efficiency and productivity in manufacturing by using the resources available in the country. Furthermore, the LNG will be a catalyst for the rise of foreign direct investment (FDI) in Tanzania.
The East African Crude Oil Pipeline Project (EACOP)
The EACOP will be the world’s longest heated oil pipeline and will run from Hoima in Western Uganda to the port of Tanga in Tanzania once it is completed. The shareholders include TotalEnergies with 62%, Uganda and Tanzania with 15% each held by their countries’ national oil companies and China National Offshore Oil Corporation (CNOOC) with 8%. 80% of the pipeline is in Tanzania.
So far, the GoT and Uganda have signed an agreement on the pipeline’s construction and the Host Government Agreement was ratified in April 2021. Another significant step was reached in February 2022 when TotalEnergies, the CNOOC, the Uganda National Oil Corporation and the TPDC finalised the investment decision.
A construction licence was obtained on 24 January 2023 and was granted by the Ministry of Energy and Ministry of Mineral Development (MEMD).
This project has the potential to transform Tanga into an economic centre through an increase in business activities in the area.
Moreover, FDI is expected to rise significantly during the construction phase. The anticipated impact of FDI growth is economic stimulation, increase in employment, development of human capital, and access to management expertise, skills, and technology which will allow companies, investors and also the local community and economy to develop.
The impact of the EACOP will further assist Tanzania in reaching its objective of becoming a competitive and industrial economy for human development as well as transforming the state into a middle-income country by 2025.
Legislative Highlights
Mining regulations
In September 2022, the GoT issued the Mining (State Participation) Regulations of 2022 (the “SPR 2022”) which directly impact every mining company or person holding a mining licence or special mining licence in Tanzania. The SPR 2022 revoke the previous Regulations of 2020 (the “SPR 2020”). Below are some of the key highlights of the SPR 2022.
In negotiating the percentage of free carried interest shares to be issued by the government over and above 16%, the following must be taken into consideration:
In October 2022, the GoT issued the Environmental Management (Control and Management of Carbon Trading) Regulations of 2022 (the “Carbon Trading Regulations”). The Carbon Trading Regulations apply to all carbon trading projects in mainland Tanzania and are the first piece of legislation on carbon trading in the country. While the Regulations are new and the first of their kind to be passed by the Tanzanian Parliament they must, however, operate together with ratified international treaties and other written laws applicable on carbon trading. It should be noted that the Carbon Trading Regulations are silent on whether carbon credits must be created in Tanzania; however, they do allow for the credits to be traded outside Tanzania.
According to Regulation 34 of the Carbon Trading Regulations, there are various stakeholders that may incur various costs and are hence entitled to benefits from the project. These include the project proponent, the owner of the property involved in the carbon trading project (the “Managing Authority”), the regulatory authority and local communities. Cost and benefit-sharing schemes shall consider capital invested as well as the roles and responsibilities of the project stakeholders.
For land-based projects the following holds true: the managing authority shall be entitled to 61% of the gross revenue accrued from the sale of certified emission reductions (CER); of the 61% issued to the managing authority:
If the managing authority is not operating under the NEMC, 10% of the 61% issued to it shall be used for community activities at the village level:
Of the remaining 39%, the proponent shall be required to pay 9% to the designated national authority (DNA), out of which the DNA shall pay 2% to the National Environmental Trust Fund and 1% to the agency responsible for energy.
Therefore, a proponent of land-based projects shall be entitled to 30% of the gross revenue accrued from the sale of CER and the government shall be entitled to 70%.
In respect of other projects with high initial capital investment requirements, costs and benefits sharing shall be determined and negotiated between the managing authority and the proponent. It should be noted that the DNA shall provide guidance in order to facilitate fair and equitable cost and benefit-sharing arrangements for carbon trading projects in Tanzania.
What Lies Ahead
The hope is that the ongoing projects discussed above will successfully launch as expected and that Tanzania will continue to put in place a supportive regulatory framework to encourage the implementation of more projects. In terms of reforms to attract FDI, certain sectors including mining and energy are being prioritised.