MCHUCHUMA-LIGANGA PROJECT, A MILESTONE

A new generation of mining regime has been set in Tanzania following the signing of Subscription and Shareholders Agreement between State owned National Development Corporation (NDC) and Sichuan Hongda Group from Sichuan Province in China for the development of the much talked about Mchuchuma and Liganga projects. The agreement that forms a joint venture company in the name of Tanzania China International Mineral Resources Limited aims at developing massive coal reserves at Mchuchuma colliery and iron reserves at Liganga Hills, both in Ludewa district in the newly created region of Njombe, southwestern Tanzania.

In my capacity as Chairman of the Parliamentary Public Investments Accounts Committee (POAC) of the Parliament of Tanzania both my committee and I have been keenly and actively involved in this project. In March of this year I led my committee to fact finding visits to these projects to see for ourselves on what progress had been done and in search of a lasting solution to our perennial electricity power shortages facing our country. Having participated in an oversight capacity in the process towards this deal, I feel I should share my views about the deal and its implications to Tanzania and the Tanzanian economy, in brief.

Why is this NDC-SHC (Sichuan Hongda Corporation Limited) a new generation of mining regime in Tanzania? It is simple; the current Tanzania’s mining regime is that of offering mineral rights to private companies and let them prospect/explore for minerals, develop mines, produce, process and sell the minerals abroad. Once a private company is offered a mineral right, then it belongs to it, it can be traded and even being used as security to financial institutions for raising capital. The government only waits for the company to pay royalty, taxes and other related fees. Government participation, as itself or through a state enterprise, is nil. This is the regime existing now.

All six major gold mines in Tanzania now are operating in this regime and that is the reason why Tanzania as a state does not have a stake in these mines. There are few exceptions though – Mwadui Diamond Deposits and now Buckreef Gold Resource whereby the state has a stake. But this is not due to a clear policy orientation but stalled privatization process.

For the Mchuchuma-Liganga projects the mineral right is owned by the state through NDC. The Corporation invites investors and agree on the shareholding for developing the resource hence ensuring from the beginning the shareholding by Tanzanians. NDC started this approach in the Ngaka Coal project with an Australian Company to form TanCoal Energy in which NDC owns 30% of shares. When my parliamentary committee visited Ngaka after Mchuchuma and Liganga, it directed NDC to renegotiate such that the minority shareholding is at the beginning and apply a principle of payback period to determine shareholding such that the stake increases to 50-50 once an investor has returned his investment based on the business plan submitted.

This is what has been done on the Mchuchuma-Liganga Project. That NDC will have a stake of 20% to increase to 49% after Sichuan Hongda Corporation has recouped its investments in between the period of five to ten years. This is the regime recommended for future mining deals in Tanzania. But this will also mean that the current system of offering mineral rights must change for carefully selected mineral resources whereby the rights should be conferred to state corporations only.

Through a method of open tender, the state corporations invite investors and negotiate terms and enter into a joint venture to develop respective mineral resource. The joint venture company will apply for mining licence and may sign a Mineral Development Agreement (MDA) before mining starts. In MDAs issues of royalties, taxes and fees are laid down and binding. This means, for example apart from NDC benefitting from dividend but the state will receive taxes as par fiscal regime governing the mining sector according to Mining Act, Income tax Act and other laws including local government taxes.

Gold, Copper, Nickel, Cobalt, Uranium, Iron ore, Coal, Silver, Bauxite and all these kinds of mineral resources should be developed in this new model. It will give the country maximum benefits, ensure state participation from the initial stages, strengthen state owned enterprises (which shall then go on to be listed in the stock market i.e. DSE for with at least 25% of its shares to ensure wider ownership to the people and transparency), reduce or completely end speculative behavior of some people who holds mineral rights for purposes of selling them and end corruption related to mineral rights applications etc.

This “second generation” of mining regime should be transitional from my point of view. In the case of Mchuchuma and Liganga the structure is as follows; Sichuan Hongda Corporation (SHC) Limited is the majority shareholder in Tanzania China International Mineral Resources Limited (TCIMR) and they will use the Coal and Iron ore reserves as security to borrow money from Banks in China. Of the USD $3 billion investment that will be coming in, Sichuan Hongda Corporation will be contributing equity of USD $600m. NDC contribution on the other hand would be the mineral resources. The remaining USD $2.4bn will be loans from financial institutions secured against the mineral reserves belonging to Tanzanians and guaranteed by SHC Limited. This securitisation tells us that in future our Corporations should be able to access financing by building credibility in the financial markets. The “third generation” of mining regime should see Tanzanian companies (owned and managed) be able to develop resources themselves or with majority stake.

In concluding this blog post, which was solely to reply to a number of inquiries that I received with regard to the shareholding structure, I would like to bring to attention how huge the Mchuchuma-Liganga project is to our economy. It will have a great multiplier effect for our economy if well managed, utilized and executed guided by a focused strategy. The Mchuchuma-Liganga project will have a turnover of USD $1.2bn per year which is equal to 7.5% of the current GDP, it will create 8,000 direct jobs (NB: at present the total jobs created in the whole mining sector is 13,000), 600MW of electricity, supporting industries, new infrastructures i.e. roads, railway, airports and the backward and forward linkages make this project a key pillar for economic development of Tanzania.

To ensure maximum benefits, we must as a matter of urgency, prepare Tanzanians with the required skills. Construction of VETA in Ludewa District should start now, the development of Coal Road Map to guide the country for the whole Coal sub-sector in Tanzania is very crucial and the construction of the Ludewa-Mtwara Railway line with Mtwara Port development should start as soon as possible.

Tanzania requires to draw-up a Coal Road Map to guide its investments in Coal industry, a Natural Gas Master Plan as a strategy to maximize benefits of this resource to the country through various uses like for power generation, domestic use, industrial use and for exports, and ensure backward and forward linkages to the economy must be contemplated.