Only enabling economy can transform Tanzania

Dar es Salaam. Africa is a very noisy and busy place these days and it should come as a no surprise given the breath-taking pace of energy resource discoveries on the continent in recent years.

Some reports put the number of African countries with commercially viable reserves of natural gas and oil at no less than 44! The size of the finds is staggering in some cases and has the potential to radically transform the economies and lives of the citizens of these countries beyond their wildest dreams in a generation. Natural gas discovered in Tanzania is valued at between $350 billion and $500 billion at current prices, more than 10 times the country’s GDP! The problem facing all these countries, however, is how to transform the resource wealth that is still underground today into tangible and meaningful wealth for all African citizens within a realistic time frame. Public expectations are extremely high, outstripping government capacity to deliver and this is the source of most of the noise I referred to earlier.

In Tanzania, a debate over how to enable citizens to benefit from the discovered natural gas has been raging for months in various platforms and one may rightly argue that it has taken an ugly turn lately. First, there were violent protests in Mtwara by people opposed to the piping of gas from Mtwara to Dar es Salaam and most recently we have heard leaders both in the public and private sectors accusing each-other of lacking sincerity and goodwill in dealing with the challenge arising from this discovery and the expectations they have created in the minds of Tanzanians.

On the policy front, we have, on the one hand, politicians and government technocrats trying their best to reassure citizens, urging them to be patient, asking them to cooperate with the government and accommodate foreign investors as this new emerging energy sector takes shape, promising benefits in the form of new jobs, tax revenues and royalties that will in turn be invested in vital infrastructures such as electricity, roads, ports, hospitals, schools and so on to create sustainable growth for all.

On the other hand, ordinary citizens and particularly members of the private sector who after many years of systematic marginalisation and two decades of government-led economic reforms that have fallen short of putting the economy under the control of indigenous Tanzanians, are rightfully sceptical about their government’s ability or even willingness to deliver on any of its promises because they have seen this movie before, in some cases more than once.

Apart from natural gas, Tanzania has rich reserves of precious metals (like gold, diamonds and tanzanite) that were discovered many years ago and have been under exploitation for generations.

The mining sector was supposed to make the people of Tanzania fantastically rich not least according to promises made by the government in the mid-1900s, when the new mining policy was launched. However, despite the impressive growth of the mining sector in Tanzania and many boom periods, including the most recent one that saw gold prices surge to an incredible hike of $1,800/oz, the majority of Tanzanians have remained desperately poor.

Of even greater concern is that more than a century after gold and diamond reserves were discovered in the country, Tanzanians are only playing a marginal role in the mining industry, as artisanal miners, low and mid-level employees of or suppliers of minor goods and services to international mining companies .

There is very little evidence that the mining boom has benefited the local economy in any meaningful way and many years after discovery, these minerals continue to be shipped out in raw form, without any value addition. The sector has miserably failed to create high value jobs in the country, exporting them instead to foreign countries such as South Africa, Japan, China and India.

This pattern of marginalisation of indigenous entrepreneurs to be precise, is prevalent in other key sectors of the economy such as banking, manufacturing, construction, telecommunications, retail, real estate, commercial farming, commercial fishing, tourism, health care, education, logistics and supply chain management, shipping, aviation and so on.

It is not surprising, therefore, that there is so much disquiet about recent statements coming from the government claiming that citizens cannot play a significant role in the ongoing allocation of natural gas and oil assets because they lack skills and capital. While it is an undeniable fact that exploration and extraction of minerals, be it gold, natural gas or oil requires rare skills and a vast amount of capital, it does not necessarily follow that citizens must be condemned to forever play a subsidiary role in their own economy because they presently lack vital capabilities.

To take such a position as accepted wisdom is in my view both lazy and irresponsible.

It is lazy because if the ability of local people to participate meaningfully in their economy has not changed significantly after 50 years of independence and many billions of dollars invested in education and socioeconomic reforms all aimed at improving the economic status of Tanzanians, we need to ask ourselves what went wrong and start taking deliberate steps to correct the situation instead of accepting and perpetuating the status quo.

It is irresponsible because with 79 per cent of the population under the age of 35 and still getting younger amid diminishing prospects of a life without poverty, our country faces real risk of social turmoil in the not so distant future as a result of growing impatience with the pace of change and a growing sense of socioeconomic marginalisation among young people in particular.

We must recognise that Tanzania is not the first poor country to discover mineral wealth in its territory. Malaysia, Chile, Brazil, South Africa, Botswana, Ethiopia and China discovered minerals at times when their nationals lacked both the capital and skills necessary to develop the industry, but they took a different route and managed to ensure that effective control of these strategic resource industries remained ultimately in the hands of local people. They did not succumb to the relentless pressure of foreign interests that sought total control nor did they say “let the highest bidder win” because they knew that taking such a position prematurely, efficient as it seemed, would forever condemn local companies to failure.

It is high time we took a fresh look at the economic landscape currently in place in our country and made decisions that will ensure we embark on a more stable and sustainable growth path. We must build an economy that is substantially Tanzanian, not only in name, but also in its constituent parts. Some call this indigenisation of the economy, some call it resource nationalism, others call it empowerment of the private sector and some even refer to it as crony capitalism.

I, however, call it common sense economics. An economy that is significantly locally owned and controlled is a more dependable source of jobs and government revenue, is more resilient to economic shocks and contributes to political stability. On the other hand, an economy that keeps the people on the margins of existence will do none of that and the final outcome is too terrible to contemplate.

So, what can we do to change the course of events that seems so inevitable?

I think we need to start by answering the questions that have been at the core of the government’s inability to address this long-standing problem of marginalisation of the private sector. Public officials for their part are raising some important and difficult questions such as:

1. How do we make sure the private sector will be able to deliver given that its weaknesses in the areas of specialised skills and raising investment capital are well known?

2. How do we choose who to empower economically through deliberate government action and who not?

3. How can we make sure that empowerment initiatives are not mired in corruption, rent-seeking, nepotism and cronyism?

4. Where will empowerment resources come from given the fact that the government is always struggling to balance its budget and foreign donors are not supportive of these forms of economic empowerment initiatives?

The answer to the first question is that there is no guarantee that every empowerment project will result in success. There must be a number of failures in such an endeavour because the number of moving parts is by necessity very high, but this in itself should not be a reason for procrastination and policy paralysis.

When Malaysia made a strategic decision in 1972 to use agriculture as its engine of economic transformation and became the world’s biggest producer of palm oil within two decades, the government of that country made sure the attainment of the economic goal would go hand in hand with the economic empowerment of its hitherto marginalised social groups.

In 1972, the Malaysian government settled 112,000 families on oil palm plantations with each family being allocated a four-hectare (10 acres) oil palm farm plot. The plots were already planted by the government, had a small wooden low cost house good enough to accommodate an average size Bumiputra (indigenous Malay) family in addition to other infrastructures such as farm implements, electricity, water, roads, schools, health clinics, agriculture extension services and so on.

Each settler family was handed a title certificate to the farm with a 99 years lease, all at no cost at all!

What the government wanted from these people was for them to become great oil palm farmers who would in turn drive Malaysia’s green revolution, which they did with dramatic results.

It is important to note, however, that not every settler involved in this project turned into a great oil palm farmer. There were numerous failures along the way, but that did not stop the project. If anything, such failures were taken as lessons that would contribute to the improvement of the success rates of subsequent empowerment programmes. The second question is about fairness in implementing government-led empowerment programmes and can best be addressed by targeting broad project outcomes rather than targeting individuals or groups.

The Malaysian Palm Oil Revolution, for instance, had a very clear goal namely to make Malaysia a global leader in the production of palm oil and related products. This is an objective that the entire nation of Malaysia could own and focus on delivery. The empowerment aspect of this programme was only a means by which the government

set about to achieve the main result. This made it easier for Malaysia to decide who could be targeted by such an initiative.

The government needed farming manpower to attain its goal, but instead of the easy route that was hiring millions of poor Malays as lowly paid farm hands on government owned farm estates, it made a bold and deliberate decision to turn only half a million of its population into agriculture entrepreneurs and provided them with the support they needed to get started.

The project was an unqualified success. Malaysia became the dominant producer of palm oil in the world in less than 20 years, income levels of all its people grew to reach middle income country status by 2000 and today, the former settlers and their descendants have become some of the wealthiest people in the country, having graduated from farming to such ventures as real estate, manufacturing, IT, banking, commerce, transport, hospitality and so on.

The third question of how to implement empowerment projects without getting caught up in corruption, rent-seeking and cronyism is a legitimate one, but we need to be clear that economic empowerment projects are not the cause, but rather can be the victims of corruption, where the latter is allowed to flourish.

Understanding the difference between cause and effect will help us separate them and focus on the real problem. Now that we know there is corruption in our midst and that it poses a serious threat to the successful implementation of our economic initiatives, including those associated with the economic empowerment of indigenous communities, let us seriously fight corruption by severely punishing its purveyors at all levels and in all sectors of our society.

The issue of resources is often cited as a cause for failing to implement empowerment projects even when the will to do so is present. There is a simple solution to this problem.

In his recent article in the online journal Project Syndicate entitled “Silicon Valley or Demand Mountain?”, Mr Edward Jung, former chief architect at Microsoft and currently chief technology officer at Intellectual Ventures warns emerging economy policy makers against wasting scarce resources by dishing out such incentives as tax breaks and free land in the hope of attracting innovators to settle and prosper there because as he says, most of these well-meaning schemes are missing an essential ingredient: demand.

He cites an example of Silicon Valley “... that was built on the back of demand by the US Department of Defence that put up tens of billions of dollars in contracts for microelectronics, a commitment that both paid down innovators’ risk and created infrastructure that would support the growth of start-ups”. That was economic empowerment US-style and it is something we can emulate if we want.

Today, for example, the government is issuing small grants to young innovators in ICT in what is a well-intentioned initiative to help these young people build their own businesses and create jobs.

Reading from Mr Jung’s advice, however, the success of this project is bound to be short-lived because as we have seen already, the failure rate is too high and the main cause of failure is that these young people are churning out impressive technological innovations that only few people can use or afford to buy, meaning they can never scale up and go to market in a successful way.

All this would change if the government created a demand mountain of tech solutions it needs to implement its work instead of giving out many small grants that end up being wasted. By doing so, young innovators would be certain of being well paid if they delivered the right products and very soon there would be enough private sector capital to support best innovators and in the process creating a vibrant innovation hub in the country.

It is a well-established fact that by sponsoring long-term, targeted initiatives, governments can stimulate more predictable demand.

“The Apollo Programme gave innovators clearly defined goals and a roadmap for getting there: first put animals in orbit, then put people there, then send probes to the moon, then send people there,” says Jung in the same article.

“Unlike market-driven demand, which too often results in a winner-takes-all dynamic, state-sponsored demand creates an environment in which multiple solutions to technical problems can proliferate and coexist. The pioneers of microelectronics tried many strategies to supplant vacuum tubes, and they delivered a host of semiconductors and chip designs: germanium, silicon, aluminium, gallium arsenide, PNP, NPN, CMOS, and so on. Some of these research efforts were never implemented, but many found their way into specialised devices.

The diversity of options allowed widespread adoption, paving the way for the digital revolution.”

There are opportunities in the emerging natural gas and oil industry in Tanzania for our government to play a key role in empowering the local business community by creating its own demand mountain.

Let me be clear, empowerment does not and will not come by allocating exploration blocks to Tanzanian citizens who have neither capital nor skills to develop them. This is definitely not the way to go.

The government can, however, define major and long-term economic initiatives centred in the natural gas and oil sector and build a demand mountain that will provide opportunities for service delivery and other forms of economic opportunities by and for Tanzanians.

These initiatives should be big in size and long-term in nature to accommodate as many participants as possible in a sustainable way.

I will conclude by citing another example of empowerment strategies undertaken by the Malaysian government after discovery of oil in that country 40 years ago.

Empowerment at macro level

When oil was found in Malaysia in 1974, the government created a state-owned company to regulate and secure the national interest in the sector. This company was called Petronas. An act was passed by Parliament stipulating that all petroleum assets found in the Malaysian territory would henceforth by default belong to Petronas 100 per cent. This gave Petronas significant leverage in negotiation with international industry players.

Recognising that the country would for the foreseeable future depend on outside support because it had neither capital nor skills to develop the oil sector, the Malaysian government devised smart strategies that enabled it to attract all the big brand oil majors such as ExxonMobil, BP, Shell and so on to Malaysia under a framework that allowed Petronas to retain strategic control of all major assets.

About 40 years later, Petronas is a well- established industry player of International repute, owning and operating petroleum businesses in many parts of the world.

We need to ask ourselves today whether or not we have a vision of our own for Tanzania Petroleum Development Corporation (TPDC) to become a major industry player like Petronas 20-30 years from now.

Empowerment at micro level

The Malaysian government recognised very early that any attempt to empower its people with material assets would fail if the people were not properly educated. The government launched a massive investment initiative in education emphasising science and engineering.

Malaysian universities today graduate more than 200,000 degree holders every year, of which 70,000 are science and engineering students. These graduates go on to find well-paid jobs in the nation’s oil-fuelled economy or even better, go on to build businesses of their own.

Tanzanian universities, on the other hand, are producing less than 2,000 science and engineering graduates every year.

What the nation needs now is an announcement of a plan to drastically change these statistics and prepare our country to reap the benefits of its natural wealth.

Empowerment at firm level

Recognising that the most lucrative part of the oil business is in the provision of services to major oil companies, the Malaysian government created the Malaysian Petroleum Resource Corporation (MPRC), whose mandate was to spearhead the emergence of a competent local (Malaysian) service industry for the petroleum sector.

Under the MPRC Act, any foreign petroleum service company wishing to operate in Malaysia must be registered in the country.

However, before obtaining registration, the company must show that it has a local partner holding a significant stake in the business. The company must also show how it plans to gradually transfer skills and knowledge to local people so that the company is managed by Malaysians after a reasonable period of time. Today, MPRC oversees more than 3,500 private companies (both local and joint ventures with foreign partners) all providing technical and other services to the oil sector in Malaysia.

We can make it if we try

Let us, therefore, put aside our petty differences and come together to agree on a common vision for our country in the face of unprecedented opportunities and risks.

If we agree that the private sector is the engine of economic growth, then let us also remember that for growth to be sustainable in the long-term, and take control of the nation’s strategic economic resources we should also recognise that the fact that the local private sector is small and weak at the present time is in itself not a reason to abandon it altogether and hand the control of the economy to foreign interests, but rather, we should take it as a challenge and opportunity to build a strong and stable economy for our country. Thank you.

The author is chairman, Infotech Investment Group Ltd