TANZANIA’S NEW INVESTMENT CODE

In the June session of Parliament a Bill was enacted under the title: National Investment (Promotion and Protection) Act 1990. The purpose was to stimulate local and foreign investment by setting up an Investment Promotion Centre and establishing the rules governing investment in Tanzanian enterprises, particularly of foreign capital. The Act applies throughout industry, except petroleum and minerals, to which existing legislation applies. While it replaces the Foreign Investments (Protection) Act 1963 it incorporates, with necessary amendments, a number of other statutes, including the Companies (Regulation of Dividends and Surpluses and Miscellaneous Provisions) Act 1972. (Footnote – A useful account of the state regulation of foreign investment between 1961 and 1985 is given in an article by S. Rugumamu in Africa Development, VOL XIII, No 4, 1988. The new Act aims at avoiding the gross economic errors and mismanagement that have blemished so many parastatal enterprises financed from abroad by means of a monitoring mechanism with statutory powers of control. The Act is based on a coherent policy with regard to overseas investment, the 8srlier absence of which forms a central theme in Mr. Rugumamu’s article.)

The underlying purpose of the legislation is twofold. First, it establishes machinery for the stimulation of investment in Tanzanian industry and offers tax incentives for investment in new enterprises and the expansion or rehabilitation of existing enterprises. Secondly, it lays down rules to ensure that new investment, particularly from overseas, does not lead to abuses and is directed towards enterprises of greatest importance to the Tanzanian economy without creating new burdens only capable of satisfaction in foreign exchange.

The first of these objectives arises from a recognition that an attempt must be made to attract foreign capital if the pace of economic development is to be maintained. Despite attempts to stimulate domestic saving by a new government bond issue and maintaining interest rates at levels comparable with the rate of inflation, local resources alone will be inadequate to sustain economic development at more than a very slow pace. The appointment of Mr George Kahama as Director General of the new Investment Promotion Centre is intended to make use of his earlier experience as General Manager of the National Development Corporation, a holding company for the financing of Tanzania’s growing industrial base in the sixties and seventies, The establishment of the Centre will attract the approval of the World Bank and bilateral aid donors.

Tanzania has, however, learned the hard way how counter productive foreign investment can be. First, there is the danger of transnational corporations, having invested in Tanzania, exporting products at artificially low prices in order to gain a cost benefit elsewhere, a practice that would have the effect of forcing Tanzania to subsidise a foreign firm. Secondly, externally funded projects may be so designed as to rely heavily on imported raw materials and equipment, resulting in a net outflow of scarce foreign exchange. Thirdly, the technology chosen may be quite inappropriate to Tanzanian conditions and both expensive and difficult to maintain. There are examples of all these shortcomings in the earlier history of industrialisation in Tanzania. It was therefore essential to impose on the Director General a duty to satisfy himself that a proposal will a) maximise foreign exchange earnings and savings, b) enhance import substitution, c) expand food production, d) increase employment opportunities and enhance human resource development , e) conduce to the efficient use of productive capacity of existing enterprises and f) improve linkages between different sections of the economy. The Director General will also have to consider other matters such as the source of raw materials, employment conditions, siting, the financing plan and ‘the need to generate constructive competition among enterprises’.

These enquiries may seem onerous and could lead to bureaucratic delays. To minimise this risk the Act requires Ministries, to which aspects of a proposal are referred, to reply within 14 days and enjoins on the Centre to give its final decision within 60 days. It remains to be seen whether such time limits will be reasonable in practice or will lead to slipshod decisions. A great deal depends on the willingness of the promoters to provide reliable information without delay which they are bound under the Act to submit. If an affirmative conclusion is reached a Certificate of Approval is issued. The Certificate may be amended or transferred with the approval of the Centre. Where its terms are not adhered to, or in the event of fraud, a Certificate may be cancelled in which case the Centre may withdraw any rights and benefits and, if necessary, require the promoter to sell the enterprise.

INCENTIVES
As an incentive to investors The Act provides for a tax holiday of five years with respect to the taxation of profits and the witholding tax on dividends. Thereafter the normal rates of tax will apply to profits, namely, 50% for non-resident investors, 45% for residents and 22.5% for investors in cooperative societies; witholding tax on dividends – 10% for non- residents and 5% for residents.

Import duties and soles taxes on equipment, machinery, spare parts and materials to be used solely for the purposes of the enterprise are remitted. An enterprise may be allowed to retain in a foreign exchange account a proportion of its earnings abroad and up to 50% of such holdings may be used for the servicing of debts, the payment of dividends and the satisfaction of other external obligations. The apparent effect of this provision is to limit the proportion of foreign exchange earnings available for payments abroad to less than 50%, though the actual proportion is not defined.

RESTRICTIONS
The Act empowers the enterprise to pay dividends and profits to foreign investors in the approved foreign currency at the prevailing rate of exchange; to transfer abroad an approved proportion of the proceeds of sale of the enterprise; and to provide for the servicing or repayment of any foreign loan specified in the Certificate of Approval. Whether these provisions override the 50% limit referred to in the final sentence of the last paragraph could be a matter for legal debate. The payment of dividends is, however, limited by the terms of the Companies (Regulation of Dividends and Surpluses and Miscellaneous Provisions) Act 1972 to the average of profits made in the last three years, or 80~ of the profits arising in the previous year, or such sum as will reduce the net worth of the enterprise as disclosed in the balance sheet to not less than 125% of the par value of the paid-up capital. The Minister has the power, subject to prior approval by the National Assembly, to authorise an enterprise to pay dividends at a higher rate, but this provision is unlikely to be used except in exceptional circumstances.

The trouble with these provisions is the extent to which they rely on permissive powers to be exercised by the Bank of Tanzania, or presumably by the Centre. In order to remove the anxieties of investors it may be necessary to spell out in regulations made under the Act the precise meaning to be attached to such phrases as ‘A portion of their foreign exchange earnings’ or ‘an approved proportion of the net proceeds of sale’. The word ‘approved’ also requires definition. As it stands the Act appears to favour projects involving only a limited foreign exchange commitment for operational purposes and to operate against entirely foreign-owned enterprises, which would be unable to recover in foreign currency more than a proportion of the proceeds of sale in the event of withdrawal. These may be justifiable acts of policy, but it may be necessary to delineate the borderline more clearly if foreign capital is to be attracted.

An approved enterprise cannot be compulsorily acquired except in the national interest and after due process of law, in which case, full, fair and prompt compensation must be paid in transferable currency.

The Act lists in a schedule three types of enterprise. Part A refers to areas of priority for private investment. Part B enumerates the areas reserved for public sector enterprises, except where the Minister grants a special license. In Part C appear those enterprises reserved for investment exclusively by Tanzanian nationals and those that are closed to foreigners investing less than $250.000. By far the most comprehensive list appears in Part A.

This legislation is essentially experimental. Many developing countries, not forgetting Eastern Europe, are competing for investment capital and it is not known whether investors will be attracted by the prospects offered by Tanzania. Decisions about investment also take into account circumstances other than those covered by legislation, such as the country’s political stability, the climate, the availability of staff housing and the personal taxation of expatriate staff. So, only the future will show whether these investment provisions will have the intended results.
J Roger Carter

RSS feed for comments on this post · TrackBack URL

Leave a Comment

You must be logged in to post a comment.