Tanzania: The Local Content Regulations In Tanzania And Its Compatibility And Compliance With The World Trade Organisation Laws

Last Updated: 2 October 2018

Article by Amne Suedi

Shikana Law Group

http://www.mondaq.com/x/741366/Mining/The+Local+Content+Regulations+In+Tanzania+And+Its+Compatibility+And+Compliance+With+The+World+Trade+Organisation+Laws

Mineral extraction and revenues in Tanzania have made very little positive impact on the lives of most Tanzanians. The government of the United Republic of Tanzania has taken the honourable and bold initiative through the enactment of the Local Content Regulations GN 3 of 2018. It reflects a strong will to foster diversification and linkages to the local economy, create jobs through the use of Tanzanian expertise, goods and services, businesses and financing in the mining value chain. It maximises on value addition. Not only does it force licensees and contractors to use indigenous Tanzanian companies for the procurement of goods and services, but also requires a physical presence in Tanzania. Tanzania is embarking a new direction in the mining sector with a big chance to transform the economy if the regulations are well implemented and quick to adapt to a changing market. 

Tanzania's local content regulation with regards to the mining sector has the following objectives:

1. To develop local employment and the domestic labour market
2. To transfer skills, technology and know-how 
3. To create local value, increase local linkages and develop domestic industry
4. To diversify economically
5. To promote innovation, technology, research and development, enhancement of technology transfer and creation/increase of local technological capabilities
6. To ensure local ownership of the mining industry
7. To increase revenue streams from minerals
8. To develop local community projects

I will summarise the key points here that will serve as a purpose to discuss whether or not these are compliant with Tanzania's commitments under the World Trade Organisation (WTO).

Local Content Regulations applicable to the mining sector in Tanzania

Salient feature of these regulations in relation to their compliance with the WTO rules are as follows:

1. An indigenous Tanzanian company should be given first preference in the grant of a mining license. Tanzanian company is defined as majority + 1 percent equity participation by citizens and local content requirements are introduced in terms of composition of board of directors and management.
2. Where a foreign company qualifies for a mining license, it must have at least 5% equity participation of an indigenous Tanzanian Company. The Minister of Minerals has the power to waive this requirement on condition.
3. Regarding trade in goods and services in Tanzania, a foreign investor must enter in venture with a Tanzanian Company through equity participation amounting to minimum 20 %. 
4. A Licensee/ Contractor must incorporate a project office in the district they intend to carry the project before any activities commence.
5. Contractor must submit a local content plan for approval by the Mining Commission prior to commencing the mining project. For the purposes of this article, the local content plan must ensure that: first consideration is given to services provided within the country and goods manufactured in the country and guarantee to use locally manufactured goods. It is also stated that a local content plan must also contain 5 sub plans on (a) employment and training, (b) research and development, (c) technology transfer, (d) legal services and (e) financial services.
6. With regards to employment, priority is given to qualified Tanzanian nationals and on-the job training must be given by employers. Junior and Management Level employment is reserved for Tanzanians. 
7. On procurement, it is mandatory for the Contractor/Licensee to establish and implement a bidding process for the acquisition of goods works and services. The Mining Commission must set up the bidding rules. In terms of awarding contracts, the principle of lowest bidder will apply, Tanzanians companies will be prioritised and awarded the contracts..
8. All insurable risks relating to mining activity in Tanzania must be insured through an indigenous brokerage firm or an indigenous a reinsurance broker.  Offshore insurance service relating to Mining activities in Tanzania may be obtained only upon written approval of the Commissioner of Insurance.
9. All entities engaged in mining activities that require legal services in the country are now required to only retain the services of a Tanzanian legal practitioner or a firm of Tanzanian legal practitioners whose principal office is located in Tanzania.
10. Similarly, the Contractor must only retain the services of a Tanzanian financial institution or organization. Where the Contractor wishes to engage the services of a foreign financial institution, it must seek approval from the Mining Commission. A Contractor is required to maintain a bank account with an indigenous Tanzanian bank and transact business through banks in the country. An indigenous Tanzanian bank means a bank that has one hundred percent Tanzanian or a majority Tanzanian shareholding.
11. Foreign as well as domestic investors must source a certain percentage of intermediate goods or inputs from local producers. The Regulation foresees a gradual increase of the percentage of inputs that needs to be sourced locally.
12. The Local Content Regulation in Tanzania, through its requirements aims to develop and support local manufacturing and service provision through backward, forward and sideways linkages along the value chain.

So now that we have contextualised the discussion, let us look at whether or not the Local Content Regulations are compliant with various World Trade Organisation plurilateral and multilateral agreements.

Is the Local Content Regulation in Tanzania compliant with the WTO Rules?

Despite Tanzania's history and strong affiliation to socialist like policies in the past, it has been a WTO member since 1 January 1995 and a member of GATT since 9 December 1961.

The General Agreement on Tariffs and Trade (GATT)

One of the very core principles of the GATT is that of "national treatment" whereby imported products may not be discriminated against in relation to their domestic counterparts (Article III). Local content measures most often violate at least one of the paragraphs of Article III since typically these measures condition a benefit on the use of goods of national origin therefore discriminating against goods according to their territorial origin.

The salient features of Article III are:

• Article III:1 of the GATT provides that domestic laws, regulations and restrictions affecting the sale and use of products should not afford protection over domestic production.
• Article III:4 of the GATT refers to the national treatment principle and requires that imported products are treated equally to domestic products with respect to laws and regulations affecting their sale or use.
• Article III:5 of the GATT prohibits support schemes that "requires, directly or indirectly, that any specified amount or proportion of a product which is the subject of the regulation must be supplied from domestic sources".

Article III:4 and Article III:4 and III:5 may only restrict support schemes with local content policies if Article III:8a of the GATT does not specifically exclude them. This paragraph excludes government procurement from the national treatment obligation, with the exception of any procurement scheduled under the Government Procurement Agreement (GPA).

Article XX of the GATT sets exceptions for policymakers to implement local content policies if the WTO member state, in this case Tanzania, can prove that its measures protect or aim to protect "human, animal or plant life or health" and if so, that it is necessary to achieve that objective (paragraph b), or that the measure is linked to the "conservation of exhaustible natural resources" (paragraph g). However, the tests for these exceptions are very difficult to meet as a number of WTO Appellate body decisions have shown us and the likelihood that local content measures are categorised as discriminatory and arbitrary is high.

Agreement on Trade- Related Investment Measures (TRIMS)

TRIMS apply to all investments in goods production. It does not apply to investments in services. These measures include regulatory measures for foreign direct investment, local content requirements and foreign exchange/trade balancing measures.

TRIMS explicitly prohibits local content policies, which are qualified as measures requiring the purchase or use by an enterprise of domestic products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

General Agreement on Trade in Services (GATS)

Local content policies that may impact on foreign investment and employment of local and foreign staff are regulated by the GATS.

The GATS recognises the right of WTO members to regulate the supply of services in accordance with their own policy objectives, members must nevertheless ensure that it be done in a 'reasonable, objective and impartial manner'.

In contrast to the GATT, where all the provisions apply directly and automatically to all WTO members, the GATS has a binary approach:

1. general obligations, which include Most- favoured- nation (MFN) treatment, transparency, exceptions for regional integration and have a universal coverage; and
2. schedule of commitments made by a country in relation to obligations concerning market access and national treatment. This is contained in individual countries' schedules of commitments.

Countries that have scheduled commitments in services related to the extractive sector for example, unless they have expressly stated exceptions, are restricted in their ability to use local content regulations to:

1. Protect domestic suppliers: Article XVI.2 (a) – (c) of GATS
2. Limit employment of expatriates in lieu of local workforce: Article VI.2 (d) of GATS. This is relevant for specific job categories, obligations to use local workforce by sub-contractors and those indirectly involved in supplying services to the mineral sector.
3. Impose ownership requirements: Article XVI. 2(e – f) of GATS restrict local content regulations and laws in the form of joint ventures, equity participation, maximum foreign ownership and obligation of state participation.

The government of the United Republic of Tanzania has not made extensive commitments when it comes to the supply of services (only in tourism sector) and therefore when it comes to the regulations related to joint venture, local shareholding requirements, insurance, legal and financial services as it stands, Tanzania is free to implement policies that are in line with its national goals.

Plurilateral Agreement on Government Procurement

Tanzania is not a signatory to this Agreement.

Conclusion

Tanzania may be at risk of violating its obligations under GATT and TRIMS where it implements local content policy around the supply of goods and the priority given to Tanzanians against foreign suppliers. However, the local content regulation provisions which relate to trade in services in mining and procurement in mining, do not fall in the realm of the GATS nor the Agreement on Government Procurement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.