EXAMINATION OF THE EFFECTIVENESS OF REGULATION OF

EXAMINATION OF THE EFFECTIVENESS OF REGULATION OF
EXAMINATION OF THE EFFECTIVENESS OF REGULATION OF
FOREIGN DIRECT INVESTMENT IN TANZANIA
THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTER’S OF LAW IN
INTERNATIONAL TRADE AND INVESTMENT LAW IN AFRICA
INTERNATIONAL DEVELOPMENT LAW UNIT, CENTRE FOR HUMAN
RIGHTS, FACULTY OF LAW, UNIVERSITY OF PRETORIA
SUBMITTED BY LILIAN MELKIZEDEKI KIMARO, STUDENT NO.
12207706
i
© University of Pretoria
DECLARATION
I declare that this Mini-Dissertation which is hereby submitted for the award of Master’s of Law
degree (LLM) in International Trade and Investment Law in Africa at International Development
Law Unit, Centre for Human Rights, Faculty of Law, University of Pretoria, is my original work
and it has not been previously submitted for the award of a degree at this or any other tertiary
institution. Other works cited or referred to are accordingly acknowledged.
Lilian Melkizedeki Kimaro
i
DEDICATION
This piece of work is for my family, especially my loving husband, Dr. Melkizedeki Stephen
Kimaro who always encourages and supports me tirelessly. To my precious children, Gilbert and
Eileen thank you for understanding and encouraging me throughout my master’s programme.
ii
ACKNOWLEDGMENT
I owe special gratitude to my family for providing me with the support and the encouragement
throughout my studies. A deep appreciation to the Australian Aid for the sponsorship.
I would like to thank the following people who in whatever measures, provided me valuable
assistance in the production of this work;
Prof. Daniel Bradlow, Director of the LLM (International Trade and Investment Law) who
ensured that we had international renowned resource persons to conduct the program. Mr.
Olufemi Soyeju for his close supervision and guidance in the writing of this thesis; my sincere
thanks are also due to Ms. Susan Karungi for her tutorial and technical guidance which build the
base for this thesis. My sincere thanks is extended to Mrs. Emily Laubscher for her
wholeheartedly support. She was a friend and a mother to me.
Prof. Chris Maina Peter, Lecturer at School of Law, University of Dar es Salaam and a member
of the International Law Commission, for his encouragement and being gracious with time so as
to provide helpful insights and relevant materials. I acknowledge Prof. Kenneth Mwenda’s
advice in this area of research.
I wish to extend my heartfelt gratitude and thanks to the Centre for Human Rights, University of
Pretoria for giving me an opportunity to pursue this master’s programme. I am grateful to all the
members of the teaching staff for impacting us with knowledge, insightful and practical
experience. A series of targeted modules offered by them enabled us to acquire significant
knowledge from the course. I would like to give my sincere thanks to my employer, Ministry of
Foreign Affairs and International Cooperation of Tanzania for allowing me to attend this
programme.
I would also like to thank Ms. Mercy Kitonga of the Ministry of Foreign Affairs and
International Cooperation of Tanzania, who assisted me in editing this work. Lastly, I appreciate
iii
the support from Ms. Glory Bildard and Mr. Patrick Chove of Tanzania Investment Centre for
providing me with valuable materials.
Thank you and May God bless you all.
iv
ACRONYMS & ABBREVIATIONS
ACU
After Care Unity
AJIL
American Journal of International Law
AU
African Union
BGT
Biwater Gauff (Tanzania)
BITs
Bilateral Investment Treaties
BRELA
Business Registration and Licensing Agency
CGI
Corporate Guide International Ltd.
CRDB
Cooperatives Rural and Development Bank
CSR
Corporate Social Responsibility
DAHACO
Dar es Salaam Airports Handling Company Ltd.
DRC
Democratic Republic of Congo
DTTs
Double Taxation Treaties
DTAs
Avoidance of Double Taxation Treaties
EAC
East African Community
EEZ
Exclusive Economic Zone
EIA
Environmental Impact Assessment
EPZs
Export Processing Zones
ETW
Entrepreneurship Training Workshop
EU
European Union
FDI
Foreign Direct Investment
FREZA
Free Economic Zones Authority
FTAs
Free Trade Agreements
GATT
General Agreement on Tariffs and Trade
v
GDP
Gross Domestic Product
GFCF
Gross Fixed Capital Formation
ICC
International Chamber of Commerce
ICSID
International Centre for the Settlement of Investment Disputes
IEDC
International Economic Development Council
IIAs
International Investment Agreements
ILO
International Labour Organisation
IMF
International Monetary Fund
IPC
Investment Promotion Centre
ITO
International Trade Organisation
JTI
Japan Tobacco International
MAI
Multilateral Agreement on Investment
MAP
Millennium Partnership for the African Recovery Programme
MFN
Most Favoured Nation Treatment
MNEs
Multilateral Enterprises
NAFTA
North American Free Trade Agreement
NBC
National Bank of Commerce
NEMC
National Environmental Management Council
NEPAD
New Partnership for Africa’s Development
NGOs
Non-Governmental Organisations
OAU
Organisation of African Unity
OECD
Organisation for Economic Cooperation and Development
OSHA
Office of Safety and Health Administration
PESA
Private Enterprise Support Activities
vi
PVV
Physical Verification Visits
R&D
Research and Development
RTAs
Regional Trade Agreements
Republic
United Republic of Tanzania
SA
States of America
SMEs
Small and Medium Enterprises
TANESCO
Tanzania Electric Supply Company Ltd.
TANROADS
Tanzania National Roads Agency
TANU
Tanganyika African National Union
TAZARA
Tanzania Zambia Railway Authority
TBL
Tanzania Breweries Limited
TCC
Tanzania Cigarette Company
THA
Tanzania Harbours Authority
TIC
Tanzania Investment Centre
TIN
Tax Identification Number
TNCs
Transnational Corporations
TRA
Tanzania Revenue Authority
Tsh.
Tanzanian shilling
UN
United Nations
UNCITRAL
United Nations Commission on International Trade Law
UNCTAD
United Nations Conference on Trade and Development
UNCTC
United Nations Commission on Transnational Corporations
UNGA
United Nations General Assembly
UNIDO
United Nations Industrial Development Organisation
vii
USA
United State of America
USAID
United States Agency for International Development
VAT
Value Added Tax
VQF
Vocational Qualifications Framework
WTO
World Trade Organisation
WWF
World Wide Fund for Nature
ZIPA
Zanzibar Investment Promotion Authority
viii
DIRECTORY OF CASES
Biwater Gauff (Tanzania) Ltd v. United Republic of Tanzania
Dowans Holdings SA (Costa Rica) and Dowans Tanzania Limited v. Tanzania Electric Supply
Company Limited (Tanzania)
Edward Mlaki and Another v. The Regional Police Commander Kilimanjaro Region and Another
Genin v Estonia
John Mwombeki Byombalirwa v. The Regional Commissioner, Kagera and Another
Khimji Gangji Sisodya v. Republic
Noble Ventures v Romania
Salini Costruttori SpA and Italstrade SpA v. Kingdom of Morocco
USA (LF Neer) v United Mexican States
ix
LIST OF TREATIES & INSTRUMENTS
African Charter on Human and Peoples’ Rights, 1982
Agreement between the Government of the United Republic of Tanzania and the Government of
the Kingdom of Denmark Concerning the Promotion and Reciprocal Protection of Investments
Agreement between the Government of the United Republic of Tanzania and the Government of
the United Kingdom of Great Britain and Northern Ireland for the Promotion and Protection of
Investments, 1994
Agreement between the Government of the United Republic of Tanzania and the Government of
the Republic of Finland on the Promotion and Protection of Investments
Agreement between the Government of the United Republic of Tanzania and the Government of
the Italian Republic on the Promotion and Protection of Investments
Agreement between the Government of the United Republic of Tanzania and the Government of
the Kingdom of Sweden on the Promotion and Reciprocal Protection of Investments
Agreement on Encouragement and Reciprocal Protection of Investments between the United
Republic of Tanzania and the Kingdom of the Netherlands
Constitution of the United Republic of Tanzania, 1977
Convention Establishing the Multilateral Investment Guarantee Agency of 1985, entered into
force on 12 April 1988
Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, which
entered into force on 7th June 1959
Convention on the Settlement of Investment Disputes between States and Nationals of other
States of 1965, entered into force on 14 October 1966
Industrial Shares (Acquisition) Act, 1967
Insurance (Vesting Interests and Regulation) Act, 1967
National Bank of Commerce (Establishment and Vesting of Assets and Liabilities) Act 1 of 1967
National Agricultural Products Board (Vesting of Interests) Act, 1967
Paris Convention for the Protection of Industrial Property of 1883 (Revised at Brussels in 1900,
Washington in 1911, The Hague in 1925, London in 1934, Lisbon in 1958 and Stockholm in
1967, and as amended in 1979), signed in 1994
x
State Trading Corporation (Establishment and Vesting of Interests) Act, 1967
Treaty between the United Republic of Tanzania and the Federal Republic of Germany
concerning the Encouragement and Reciprocal Protection of Investments, 1967
Tanzania Export Processing Zones Act, 2002
Tanganyika Foreign Investment (Protection) Act, 1963
Tanzania Investment Act, 1997
Tanzania Investment Regulations, 2002
Tanzania Land Act, 1999
Tanzania National Investment (Promotion and Protection) Act, 1990
Tanzania Village Land Act, 1999
Zanzibar Investment Promotion and Protection Act, 2004
xi
TABLE OF CONTENTS
DECLARATION ............................................................................................................................. i
DEDICATION................................................................................................................................ ii
ACKNOWLEDGMENT................................................................................................................ iii
ACRONYMS & ABBREVIATIONS............................................................................................. v
DIRECTORY OF CASES ............................................................................................................. ix
LIST OF TREATIES & INSTRUMENTS ..................................................................................... x
TABLE OF CONTENTS.............................................................................................................. xii
CHAPTER ONE ............................................................................................................................. 1
INTRODUCTION .......................................................................................................................... 1
1.1 Background to the research ................................................................................................... 1
1.2 Problem Statement ................................................................................................................ 5
1.3 Research Questions ............................................................................................................... 6
1.4 Objective and Significance of the Study ............................................................................... 6
1.5 Definition of concepts ........................................................................................................... 7
1.6 Literature Review.................................................................................................................. 8
1.7 Research Methodology........................................................................................................ 11
1.8 Outline of Chapters ............................................................................................................. 11
1.9 Scope and delineation.......................................................................................................... 12
CHAPTER TWO .......................................................................................................................... 14
CONCEPTUAL AND THEORETICAL FRAMEWORK FOR REGULATION OF FOREIGN
DIRECT INVESTMENT.............................................................................................................. 14
2.1 Introduction ......................................................................................................................... 14
2.2 Foreign Direct Investment and Economic Development .................................................... 15
xii
2.3 Principles Underlying Foreign Direct Investment .............................................................. 16
2.3.1 Fair and equitable treatment principle .......................................................................... 16
2.3.2 Full protection and security principle........................................................................... 17
2.3.3 Most-Favoured-Nation principle .................................................................................. 17
2.3.4 National Treatment principle........................................................................................ 18
2.3.5 Protection against expropriation principle.................................................................... 18
2.4 Economic Theories of Foreign Direct Investment .............................................................. 23
2.4.1 The classical theory ...................................................................................................... 23
2.4.2 The dependency theory................................................................................................. 24
2.4.3 Tanzania and economic theories of foreign direct investment ..................................... 24
2.5 Regulation of Foreign Direct Investment............................................................................ 25
2.5.1 International Initiatives in Regulating Foreign Direct Investment............................... 26
2.5.2 Challenges in Establishing Multilateral Accord over the Regulation of Foreign Direct
Investment ............................................................................................................................. 28
2.5.3 Foreign Direct Investment at Regional Level...................................................................... 29
2.6 Conclusion........................................................................................................................... 31
CHAPTER THREE ...................................................................................................................... 33
AN OVERVIEW OF LEGAL, REGULATORY AND INSTITUTIONAL FRAMEWORK FOR
FOREIGN DIRECT INVESTMENT IN TANZANIA ................................................................ 33
3.1 Introduction ......................................................................................................................... 33
3.2 Tanzania Legal Characteristics ........................................................................................... 33
3.3 Tanzania Investment Promotion Policy .............................................................................. 34
3.4 Foreign direct investment inflow in Tanzania..................................................................... 35
3.5 Substantive laws and regulatory frameworks related to foreign direct investment in
Tanzania .................................................................................................................................... 36
xiii
3.5.1 Major laws and regulation affecting foreign investment.............................................. 36
3.5.2 Legal framework of investment at independence......................................................... 37
3.5.3 Some Changes and Tanzania Investment (Promotion and Protection) Act, 1990........ 38
3.5.4 The current law related to foreign investment in Tanzania .......................................... 39
3.6 Incentives and Tax Policy and its Effect to Foreign Direct Investment.............................. 41
3.6.1 Incentives and Guarantees Offered by Tanzania Investment Centre ........................... 41
3.6.2 Tax Policy..................................................................................................................... 42
3.6.3 Avoidance of double taxation treaties .......................................................................... 45
3.7 Institutional framework for foreign investment in Tanzania .............................................. 45
3.7.1 Tanzania Investment Centre ......................................................................................... 46
3.7.2 Practicality of Tanzania Investment Centre as a ‘One Stop Centre’ ............................ 46
3.7.3 Performance of the Centre............................................................................................ 48
3.7.4 Limited Institutional Capacity in Monitoring Investments or After Care Services ..... 49
3.7.5 Administration of tax incentives................................................................................... 50
3.8 The Impact of Chinese Investments in Tanzania ................................................................ 51
3.8.1 Chinese Presence in Tanzania ...................................................................................... 51
3.8.2 Chinese investments in Tanzania ................................................................................. 52
3.8.3 The Impact of the Chinese............................................................................................ 52
3.9 Conclusion........................................................................................................................... 54
CHAPTER FOUR......................................................................................................................... 55
REGULATORY AND INSTITUTIONAL REFORM FOR FOREIGN INVESTMENT AND ITS
IMPACT TO TANZANIA ECONOMY ...................................................................................... 55
4.1 Introduction ......................................................................................................................... 55
4.2 The challenges of investment treaties in regulating foreign investment to foster economic
development .............................................................................................................................. 55
xiv
4.2.1 Tanzania Investment Act .............................................................................................. 55
4.2.2 Bilateral Investment Treaties and developmental goals ............................................... 56
4.3 Institutional weaknesses...................................................................................................... 57
4.3.1 Tanzania Investment Centre Structure ......................................................................... 57
4.4 Tax Incentives ..................................................................................................................... 58
4.4.1 Corporate Tax Reduction.............................................................................................. 59
4.5 Introduction of E-platform to Registration and Licensing Agencies .................................. 60
4.6 Foreign Direct Investment and its Impact to Economic Development in Tanzania ......... 60
4.6.1 Examples of Foreign Direct Investments’ Impact on Tanzania ................................... 61
4.6.2 Analysis of Foreign Direct Investment in Various Sectors in Tanzania ...................... 65
4.6.3 Other Challenges and Way forward ............................................................................. 71
4.7 Conclusion........................................................................................................................... 74
CHAPTER FIVE .......................................................................................................................... 75
FINAL CONCLUSION ................................................................................................................ 75
5.1 Summary of findings........................................................................................................... 75
5.2 Conclusion........................................................................................................................... 76
5.3 Recommendations ............................................................................................................... 76
Bibliography ................................................................................................................................. 79
xv
CHAPTER ONE
INTRODUCTION
1.1 Background to the research
International foreign investment law has witnessed a rapid growth in the past few decades. The
number of bilateral and regional investment treaties concluded between states has grown. True to
history, this growth has never been smooth, admittedly, ‘such controversy resulted from the law
on the subject being the focus of conflict between several forces released at the conclusion of the
Second World War’.1
International law relating to foreign investment covers two types of investments, foreign direct
investment (FDI) and portfolio investment. FDI is distinguished from portfolio investment
because portfolio investment does not entail control by government. Moreover, in portfolio
investment the investor takes upon himself the risks involved in investments.2 FDI investors who
take both ownership and control positions in the domestic firms, are in effect the managers of the
firms under their control; whereas foreign portfolio investment investors, who gain ownership
without control of domestic firms, must delegate decisions to managers, but limit their freedom
to make decisions because the manager’s agenda may not always a direct fit, in-line with and
consistent with that of the owners. With this, manager vs. owners’ dynamic, portfolio investment
projects are considered to be managed less efficiently than direct investment projects. Direct
investors are more informed than portfolio investors regarding changes in the prospects of their
projects. This, enables them to manage their projects more efficiently generating an advantage,
with an added value in the capital markets, to direct investments relative to portfolio
investments.3
In the early 1960s, Africa witnessed emergency of new independent states. New phenomenon
was seen in the context of managing economies in a bid to strengthen the countries’ economy,
states started to compete for foreign investment. Creating enabling environment to attract FDI,
1
Sornarajah, M (2004) The International Law on Foreign Investment
Sornarajah (n 1 above) 7
3
Itay, G & Razin, ‘Foreign Direct Investment vs. Foreign Portfolio Investment’ National Bureau of Economic
Research Working Paper 11047, http://www.nber.org/papers/w11047.pdf (accessed 17 November 2011)
2
1
the process involved creation and review of respective laws. This is in line with the thinking that
foreign investment could be beneficial to the host economy if the foreign investment is harnessed
to the economic development of the host economy.4 Then, developing countries began to enact in
legislation that was designed to screen foreign investment having regard to the effect it would
have on the domestic economy. This is thought to be in continuous process; hence the interest of
this study is to examine the effectiveness of the legal and regulation of FDI in Tanzania and its
reflection to economic development.
Due to time constraint this thesis will focus on foreign direct investment in Africa. The definition
of FDI has raised lot controversy for more than a decade. Different authors have tried to define
it. Sornarajah5 defines foreign investment as the transfer of tangible or intangible assets from
one country into another for use in the recipient country to generate wealth under the total or
partial control of the owner of the assets. He further clarifies that this transfer can include
movement of physical property such as equipment or the physical property that is brought or
constructed such as plantations or manufacturing plants as constituting foreign direct
investment.6
Sebastian Manciaux, in his article the Notion of Investment: New Controversies7discusses how
different awards and decisions have been reached at International Centre for Settlement of
Investment Dispute (ICSID) on the matter. He discusses the criteria set in Salini case8 when
investment was defined to include substantial commitment, duration of performance, regularity
of profit and return, assumption of risks, and significance for the host state’s development.
Another definition, most widely used is by the International Monetary Fund (IMF) and United
Nations Conference on Trade and Development (UNCTAD). The IMF defines the concept as the
category of international investment that reflects the objective of a resident entity in one
economy obtaining a lasting interest in an enterprise resident in another economy. The lasting
interest implies the existence of a long term relationship between the direct investor and the
4
United Nations Committee on Transnational Corporations 1970s
Sornarajah (2004) 7
6
As above
7
Manciaux, S ‘The Notion of Investment: New Controversies’ (2008) 9 The Journal of World Investment & Trade
6
8
Salini Costruttori SpA & Italstrade SpA v. Kingdom of Morocco, ICSID Case ARB/00/4
5
2
enterprise and a significant degree of influence and the presence of the investor on the
management of the enterprise. Direct investment comprises of the initial transactions and all
subsequent transactions between investors and among affiliated enterprises, both incorporated
and unincorporated.9
The OECD, in its guidelines10 also adheres to this definition with a slightly different twist;
defining FDI as a lasting interest by a resident entity in one economy in an entity located in a
host economy, presuming the existence of a long-term relationship between the direct investor
and the local entity and a significant degree of influence on the management of the local entity.
The entity in the home country can be referred to as the direct investor and the one in the host
country as the direct investment recipient. OECD highlights that absolute control by the foreign
direct investor is not required and that it should be considered enough that the investor’s
transaction enables him to participate in or influence, the management of the direct investment
entity, and sets the prerequisite for control to be ownership of at least 10 percent.11
This thesis will adapt the definition of FDI influenced by the Salini case
which explored FDI from a legal, political and economic point of view, in effect
encompassing the core controversies of defining FDIs.
Tanzania with its strategic geographical location, political stability, enormous natural resources,
and world renowned tourist attractions to include Ngorongoro Crater, Mount Kilimanjaro,
Serengeti, Lake Manyara and the spice island of Zanzibar is a FDI heaven. The country is an
emerging economy with almost limitless growth potential. Investment opportunities existing in
Tanzania are categorised in terms of lead and priority sectors, where a number of them remain
untapped. These include agriculture, mining, tourism, manufacturing, banking and insurance
services, education and health, and natural resources.12 According to the 2011 World Bank
report13 Tanzania is classified as a low income economy with $ 500 Gross National Income per
9
International Monetary Fund, Balance of Payment Manual, Fifth edition, Washington D.C. (1993) 86
Organisation for Economic Cooperation and Development, Detailed Benchmark Definition of Foreign Direct
Investment, Third edition, Paris (1996) 7
11
Organisation for Economic Cooperation and Development, Directorate for Financial and Enterprise Affairs.
Glossary of Foreign Direct Investment terms and definitions http://www.oecd.org/dataoecd/56/1/2487495.pdf
12
http://www.tic.co.tz (accessed 10/8/2011)
13
World Bank Report on World Development Indicators, April 2011, Washington D.C. http://data.worldbank.org
(accessed 26 November 2011)
10
3
capita. The country has a population size of 44 million and its Gross Domestic Product (GDP)
growth was recorded to be 6.0 percent in 2009 and 7.0 percent in 2010.
Peter and Mwakaje14 have documented the history of FDI in Tanzania since its independence.
Noting that the growth of FDI in Tanzania has been characterised by upheavals, Peter and
Mwakaje further note that the country started well with the enactment of the Foreign Investment
(Protection) Act in 1963 which aimed at attracting investors.15 The Act was fortified by bilateral
investment treaties between the newly independent State and some developed countries such as
the United States of America, Switzerland, Federal and the Republic of Germany. The adoption
of the Arusha Declaration that marked a localisation of all major means of production, placing
them exclusively under the custodianship of the government effectively nullified any pre existing
FDI aspirations and bilateral treaties that were in existence hitherto.16 The drastic change in the
policy that was the proclamation of the Arusha Declaration was further supported by Legislation
that was enacted to that effect and culminated in the mass nationalisations of various investments
in the country.17 Which are banks, retail and wholesale trades, agricultural products marketing,
insurance business and industrial shares in various private companies.
The trend however did not last. In the present global economy, Tanzania has re embraced
liberalisation of its economy manifested in the removal of all obstacles that previously hampered
the inflow of free private investment. Free market economy has re-emerged and expanded, acting
as a, stimulus for the reflow FDI back into the country. This change went hand in hand with
measures that boosted investor attraction – back into the country both at policy level18 as well as
by the enactment of a legal basis for investment promotion and protection through the National
Investment (Promotion and Protection) Act of 1990.19 The measures that were taken marked a
new era in Tanzania one that was smarter with regards to investment. Currently, the country has
no single legal framework for the regulation of foreign investment; rather Tanzania Investment
Act20 is used as the law to govern investments in the country. The new initiative also led to the
14
Peter, CP & Mwakaje, SJ (2004) Investments in Tanzania: Some Comments – Some Issues
Act 40 of 1963, Foreign Investments (Protection) Act http://www.parliament.go.tz/Polis/PAMS/Docs/40-1963.pdf
16
This was passed on 29 January 1967
17
Nationalisation Act, 1967
18
The objective of the policy was to create a conducive environment for attracting and promoting investors
19
The Act was to create a friendly environment for investors as a move towards opening up the economy
20
Act 26 of 1997
15
4
establishment of Investment Promotion Centre (IPC), which later changed to Tanzania
Investment Centre (TIC).
The Tanzania Investment Centre established as ‘one stop’ centre for attracting and managing
investments has since its inception played a key role in boosting investment in the country.
According to TIC report to date, China alone has registered more than 280 projects in
Tanzania.21 The monetary value of these projects had by the end of 2010 exceeded US$ 200
million.22 However, all is not roses, several challenges remain, mostly relating to the regulation
of investments including whether the current legal framework governing investment in Tanzania
contributes positively towards attracting investments that boost the economy or detracts from the
country as a prime investment destination.
1.2 Problem Statement
From Tanzania Investment Centre reports it is fact that Tanzania has received considerable FDI.
The decade long analysis has shown TIC had registered over 4,084 investments between 1997
and 2007, of which 25.04 percent were foreign. Total FDI into Tanzania between 1995 and 2004
totaled US$ 2476.4 million compared to less than US$ 2 million between 1986 and 1991.23
Despite this massive investment, actual translation into actual economic development has been
miniscule, disappointing and almost non-existent. Some international authors like Sornarajah,
Brownlie and Subedi in analysis peg such shortfall to insufficient regulations. In various
international organisations reports this has been the centre of discussion. The World Bank
report24 argued that though legal and regulatory frameworks for FDI are not the primary drivers
of investment decision, they can tip an investment decision in favour of a particular economy.
Strong, stable legal and regulatory frameworks help create transparent environments conducive
for investment. UNCTAD in its expert meeting discussed the right for the host state to regulate
21
‘Tanzania Investment Report 2004 Foreign Private Investment in Tanzania’ http://www.tic.co.tz
Rutaihwa, JL ‘Empirical Analysis of China-Africa Economic and Trade Cooperation for Good or Bad: A Case of
Tanzania’ (2011) 1 International Journal of Academic Research in Business and Social Sciences 3
www.hrmars.com/journals (accessed 12 January 2012)
23
Report on the Study of Growth and Impact of Investment in Tanzania (2008)
24
Investing Across Borders: Indicators of Foreign Direct Investment Regulation in 87 economies 2010 report
http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/IAB-report.pdf
22
5
FDI in order to manage negative externalities caused by the investment.25 In Tanzania Maina,
Rugumamu, Kabelwa, Moshi and others on different occasions have written about the
relationship between foreign direct investments regulations and economic performance.
This study shall therefore seek to explore the correlation between the effectiveness of FDI
regulation and the resulting host country’s economic development, with Tanzania as a case study
for analysis.
1.3 Research Questions
The researcher is of the view that there is a deficit in the regulation of FDI’s in Tanzania which
explains the failure in achieving policy objectives for economic development.
The following questions will guide the researcher in answering this vital issue:
1) What is state of legal and regulatory framework for FDI in Tanzania?
2) Why the critical imperative for review of legal and regulatory framework for FDI in
Tanzania?
1.4 Objective and Significance of the Study
The objective of this dissertation is to examine the efficacy of legal, regulatory and institutional
frameworks in host/recipients country’s in regulating FDI for envisaged economic development.
The study is relevant to academics and researchers as they will build on what has being written
and provide new insights and knowledge. It is also important to policy makers as it will
contribute to the current knowledge base on the correlation between investment regulatory
frameworks and actual realisation of objectives as well as offer tools for improving the
competitiveness of investment regulation in Tanzania and other countries with like conditions,
for purposes of fostering economic development.
25
‘The Development Dimension of FDI: Policy and Rule-Making Perspectives’ proceedings of the Expert meeting
held in Geneva from 6 to 8 November 2002 New York: United Nations (2003)
http://unctad.org/en/docs/iteiia20034_en.pdf
6
The study will also contribute to ongoing debate that, investments by developed and emerging
economies to Africa are driven by hunger for raw materials and not for altruistic intentions of
boosting the continent’s economic development. And that foreign investment may adversely
affect the country’s economy by crowding out domestic investment and lowering domestic
savings in effect adversely affecting the host country’s development trajectory.
1.5 Definition of concepts
As propounded by various authors like Thomas, Seers, Sasha Lennon, and international bodies
like UNDP, IMF and WB, there are many differences in terms of what constitutes development.
Thomas argues development as a concept is inherently highly complex, ambiguous and contested
both theoretically and politically.26 Sasha Lennon, SGS notes that broadly economic
development is typically measured not just in terms of jobs and income but also improvements in
human development, education, health and environmental sustainability.
According to Seers the purpose of development is to reduce poverty, inequality and
unemployment. For him if all these have become less severe, then beyond doubt this has been a
period of development for the country concerned.27 Scott Templeton proposes that there is no
single, widely accepted definition of economic development, but there is considerable agreement
that the main goal of economic development is improving the economic wellbeing of a
community.
Recent United Nations documents emphasise ‘human development,’ measured by life
expectancy, adult literacy, access to all three levels of education, as well as people’s average
income, which is a necessary condition of their freedom of choice, in effect, broadening the
notion of development to incorporate individuals’ well-being, from their health status to their
economic and political freedom. The Human Development Report 1996, put it best when it
propounds that ‘human development is the end—economic growth a means.’28
26
Thomas, A (2004) ‘The Study of Development’ Paper prepared for DSA Annual Conference, 6 November
Seers, D ‘The Meaning of Development, with a Postscript’ 1979
28
http://www.worldbank.org/depweb/english/beyond/beyondco/beg_01.pdf (accessed 19 November 2011)
27
7
The International Economic Development Council (IEDC)29, proposes that economic
development can be described in terms of objectives such as the creation of jobs and wealth, and
the improvement of quality of life. To the IEDC, economic development is a process that
influences growth and restructuring of an economy to enhance the economic wellbeing of a
community, through job creation, job retention, tax base enhancements and quality of life.
As there seems to be no common definition for economic development, no single strategy,
policy, program or formula for achieving successful economic development; and communities
differ in their geographic and political strengths and weaknesses, each community therefore, will
have a unique set of challenges for economic development. For purposes of this study,
development shall be taken to encompass progress in country’s economy, manifested in
improvement in living standards of the people and creation of more employment to the local
people.
1.6 Literature Review
Foreign investment has always been considered a crucial catalyst for economic growth for all
countries around the world. Various authors and publications of international bodies have
discussed the issue whether the flow of capital in the country have any impact to country’s
development. There is ongoing debate whether regulation of FDI should be restrictive or not. For
those who are against the idea of restrictiveness argue that investors are always hesitant to invest
in countries with too much restriction hence low level of capital inflow. On the other hand, those
who support the idea are of the view that if regulation of FDI is not existent, the purpose of
economic growth will be defeated. The researcher seeks to find the answer by drawing from
multiple sources of information. Focus will be on effectiveness of the regulatory regime
governing FDI in Tanzania and protection of domestic interests.
Sornarajah30 argues the issue of the right to regulate FDI will remain a stumbling block. He add
even the Doha Declaration mandates that the investment should reflect in a balanced manner the
interests of home and host countries, and take due account of the development policies and
29
30
http://www.iedconline.org/hotlinks/whtecodev.html
Sornarajah (2004) 313
8
objectives of host governments as well as their right to regulate investment for the public
interest. The researcher seeks to reflect on Sornarajah’s contribution in this study.
Leon Trakman 201031 discusses that in theory, the liberalisation of FDI should benefit both
foreign investors and help domestic economies share in the wealth derived from foreign
investment. He critically discusses that the evolving right of investors to participate in FDI
within a liberalised international regime and the sovereignty of states to protect domestic
interests from the exigencies of FDI is an ongoing concern. In his view, he sees the need for
international investment law to address conflicts arising out of this tension between state
sovereignty and the liberalisation of investment in a manner that is principled, transparent and
evenhanded.
Some of the international publications report that foreign investment plays an important role in
complementing developmental processes at the national level by enhancing export
competitiveness, creating employment opportunities and providing opportunities to local labour
to develop new skills.32 Ranjan, on the other hand,33
argues that foreign investment may
adversely affect the country’s economy by lowering domestic savings and investment by
reducing competition and crowding out domestic investment.
Another contribution as discussed by Irandoust 201034 FDI is one of the major sources that
contribute to economic growth through capital accumulation, technology transfer and knowledge
spillovers. The World Bank report of 2006 shows that FDI accounts for more than 60 percent of
private capital flows to the developing world. This expansion of FDI has encourage
policymakers in developing countries to attract more foreign capital by reducing barriers to FDI
and offering tax incentives and subsidies believing that FDI promote economic growth.
31
Foreign Direct Investment: Hazard or Opportunity?
United Nations Conference on Trade and Development, 1999 www.unctad.org
33
Ranjan, P ‘International Investment Agreements and Regulatory Discretion: Case study of India’ (2008) The
Journal of World Investment & Trade
34
Irandoust, M ‘A Survey of Recent Developments in the Literature of FDI – Led Growth Hypothesis’ (2010) The
Journal of World Investment & Trade
32
9
On the other hand, Lall and Narula 200435 raised an issue that most developing countries have
removed restrictions on FDI inflows, but this has allowed foreign investors to exploit existing
capabilities more freely. Thus this research sees a need to look on regulation of FDI with much
focus to Tanzania. The role of FDI in economic development remains valid hence the interest of
researcher to draw attention on the importance of effectively regulating FDI to achieve this
important long term goal.
There are views from economic studies which suggest that, as developing countries are
concerned, FDI can promote growth; much will depend on the state in issue, the nature of FDI,
the manner of its use and the regulations imposed on it.
Busse and Groizard36 explore the linkage between income growth rates and FDI inflows, and
argue that countries need a sound business environment in the form of good government
regulations to be able to benefit from FDI. The researcher agrees with the authors and wants to
explore further how this can be done.
Schrijver in his book37 discusses how the Havana conference reached an agreement on treatment
of foreign investment. He pointed out that the Agreement provided for certain rights of host
states to regulate foreign investment. In promoting and protecting foreign investment host states
have rights to regulate for the benefit of their societies.
Andrew Guzman, 199838 contribute also to this debate and pointed that the regulatory regime
governing FDI needs to be stable and sensitive to sociocultural and economic change.
The efforts to attract capital inflow do not end at country level. The East African Community
(EAC) has taken economic reforms initiatives to strengthen investors’ confidence to attract
35
Lall, S & Narula, R ‘Foreign Direct Investment and its Role in Economic Development: Do we Need a New
Agenda?’ (2004) The European Journal of Development Research
36
Busse, M & Groizard, JL ‘Foreign Direct
Investment’http://econ.worldbank.org/external/default/main?print=Y&pagePK=64 (accessed 19 November 2011)
37
Schrijver, N (1997) Sovereignty over Natural Resources: Balancing Rights and Duties
38
Guzman, AT ‘Why LDCs sign treaties that hurt them: Explaining the popularity of BITs’ (1998)
http://works.bepress.com/andrew_guzman/15
10
capital inflow; this is recognised as the engine of economic growth - An EAC Model Investment
Code.39
1.7 Research Methodology
This will be explorative research, mostly qualitative which will constitute a desk and library
based research. It will rely on both published and unpublished material. Internet sources will also
be widely referred to. The research will analyse both primary and secondary sources to draw
meaningful conclusions. Primary sources shall contain international and domestic treaties,
conventions and statutes. The collection of secondary data will involve the preexisting
information from books, articles, journals and reports from relevant stakeholders including
Ministry of Foreign Affairs, Tanzania Investment Centre, Ministry of Trade and Industry,
Ministry of Finance & Planning and Prime Ministers’ Office of the United Republic of Tanzania.
1.8 Outline of Chapters
Regarding the organisation, the thesis consists of five chapters arranged in a coherent manner.
An introductory chapter presenting an overview of the thesis topic, a definition of the research
problem, methodology for data collection and analysis, guiding research questions, objective and
significance of the study, literature review and scope of the research.
Chapter two shall focus on the regulation of foreign direct investment, highlighting existing
international initiatives for regulating foreign direct investment and principles underlying FDI
and conduct an examination of challenges in establishing multilateral accord over the regulation
of FDI. The chapter will also focus briefly on the African take on legal frameworks for FDI
before providing an overview of FDI at regional level focusing on the EAC Model Investment
Code and efforts by EAC to create enabling environment for foreign investment to thrive.
Tanzania is a member of the EAC and a case study for the region.
39
2002 Code is not a binding legal instrument but rather a model whose features the Partner States may incorporate
into their national laws
11
Chapter three shall present challenges in regulating FDI. The laws governing investment in Tanzania will
be critically examined in the interest of discerning whether they are addressing issues of
economic growth and development. The institutional framework of the prime Tanzanian
investment agency will be looked at under the chapter in order to see if the structure is realistic
and empowered to monitor foreign investors. Some cases from local and international bodies
such as Biwater Gauff (Tanzania) Ltd v. United Republic of Tanzania, Dowans v. TANESCO,
Edward Mlaki and Another v. The Regional Police Commander Kilimanjaro Region and Another
and others will also be looked at to be able to have a wider view on the treatment of foreign
investment.
Chapter four critically discusses the imperative for reforms of the legal and regulatory
framework for FDI in Tanzania. Under the chapter, other challenges will be discussed in detail
by looking on practical examples to see why the need for legal and regulatory reforms.
Chapter five which covers the conclusion and recommendations will summarise the findings and
draw conclusion that are recommended for implementation.
1.9 Scope and delineation
This thesis will limit the use of the word development. As explained in the definition of
concepts, development is wide and a complex issue, with many different and sometimes
contentious definitions. It has always been ‘open ended’ in that there can be as many dimensions
to it. The study will limit development to improvement on country’s economy and improvement
in living standards of people.
It is worth noting that this dissertation covers Tanzania Mainland only. Due to time constraint
Zanzibar has been left out. The United Republic of Tanzania has a unique legal arrangement
when it comes to implementation of international agreements including trade and investment.
United Republic of Tanzania comprises of two governments, that of Tanzania Mainland and
Zanzibar both enjoying powers on domestic implementation. There are some issues which are
characterised as Union Matters40 and others which are non-union matters. Investments fall under
40
Schedule one to the Constitution of the United Republic of Tanzania of 1977 lists the Union Matters
12
non-union matters where each part of the Union deals with investments separately. In Zanzibar
investment matters are governed by the Zanzibar Investment Promotion and Protection Act,41
and the body entrusted with dealing with investments is the Zanzibar Investment Promotion
Authority (ZIPA).
41
Act 11 of 2004
13
CHAPTER TWO
CONCEPTUAL AND THEORETICAL FRAMEWORK FOR
REGULATION OF FOREIGN DIRECT INVESTMENT
2.1 Introduction
This chapter explains the regulation of foreign direct investment. It seeks to explain the
relationship between FDI, economic development and regulation process. The chapter will
review principles underlying FDI and economic theories of FDI. It shall examine international
efforts level to regulate investment and look at standards of treatment of foreign investment in
customary international law with the aim of assessing the nature and scope of the core principles
of foreign investment law.
Thorough examination of challenges in establishing multilateral accord over the regulation of
FDI will be conducted. An overview of FDI at regional level will be conducted focusing on the
EAC Model Investment Code and efforts by EAC on creation of enabling environment for
foreign investment to thrive.
The world has witnessed remarkable growth in FDI flows, spurred by strategies on investment
by transnational corporations (TNCs) and liberalisation of national FDI policies. Numerous
bilateral investment treaties and number of regional and interregional agreements have been
concluded. It is believed that FDI offers benefits to host economies in terms of capital inflows,
technology transfer, shared managerial skills and knowledge, improved access to export markets
and so on. However, there are no guarantees that the opening up of a host country to foreign
investment result in FDI inflows. Even when the adage proves true, development and other
envisaged results differ considerably, depending on the circumstances. There are suggestions that
governments need to consider what role they want inward FDI to play in their economies
development process and design their FDI policies accordingly.42
42
‘The development dimension of FDI: policies to enhance the role of FDI in the national and international contextpolicy issues to consider’ (2002)
14
Following the rapid inflow of FDI the right to control foreign investment became topical in many
countries. Up until the 1980s most countries made extensive use of restrictions on foreign
investment. Since the 1980s there has been a complete reversal where countries start providing
an open and predictable investment regime in their domestic reform agenda portraying an open
handed welcome to foreign investment.
Under the chapter, a number of books, articles and international instruments will be summarised
in order to bring wider understanding of regulation of FDI.
2.2 Foreign Direct Investment and Economic Development
The development dimension of FDI has been particularly relevant since the 2001 WTO
Ministerial Meeting in Doha in relation to the development implications of, and prospects for,
closer multilateral cooperation on long-term cross-border investment, particularly FDI.
Attraction of FDI is becoming increasingly important especially for developing countries.
However this is often based on the implicit assumption that greater inflows of FDI will bring
certain benefits to the country’s economy.43 Many states, particularly the least developed states,
have liberalised their foreign investment laws and made a large number of investment treaties
without witnessing the expected flows of foreign investment.44 It has been discussed that despite
the assumption that flow of foreign investment lead to economic development, the treaties are
neither specifically designed to foster economic development nor do they contain any
meaningful provisions as to the promotion of such economic development aspirations.
Various authors are of the view that the impact of FDI will largely depend on the conditions of
the host economy, for example the level of domestic investment/savings, the mode of entry and
the sector involved, as well as a country’s ability to regulate foreign investment.45 It is believed,
FDI, where it generates and expands businesses, can help stimulate employment, raise wages and
replace declining market sectors. However the benefits may only be felt by a small portion of the
43
‘Foreign Direct Investment: A Lead Driver for Sustainable Development?’ Towards Earth Summit 2002
Economic Briefing Series No. 1
44
Sornarajah (2004) 262
45
World Investment Report 1999
15
population, for example where employment and training is given to more educated, typically
wealthy elites or there is an urban emphasis, wage differentials between income groups will be
exacerbated.46
2.3 Principles Underlying Foreign Direct Investment
The guiding legal foundation for modern foreign investment law is customary international law,
protection to aliens, including foreign investors, the notion of diplomatic protection, international
human rights law and the international law of state responsibility. The underlying idea is to
ensure there is no discrimination in the conduct of international business. Basically there are five
main principles of foreign investment law namely, Most Favoured Nation (MFN) principle, the
national treatment principle, fair and equitable treatment principle, full protection and security
principle and protection of foreign investment against expropriation.
These principles are employed to secure a certain level of treatment for foreign investors in host
countries with different objectives. Looking on Most Favoured Nation principle, its purpose is to
grant foreign investors from a country the same favourable treatment that is accorded to foreign
investors from third countries operating in the host country. The object of the national treatment
principle is to grant treatment comparable to that accorded to domestic investors operating in the
host country itself. While the fair and equitable treatment brings in the elements of fairness and
equity drawn from international law especially the principle of minimum standards and practice,
as well as domestic law principles concerning the overall treatment of foreign investment in a
host country.
2.3.1 Fair and equitable treatment principle
The concept of fair and equitable treatment is a major and important principle of foreign
investment law. When states began to conclude BITs as the principal vehicle to regulate and
promote foreign investment, this principle was incorporated as a key provision. The principle
provides a basic level of protection to foreign investors and is based on the elements of fairness
46
OECD a. (1999) Foreign Direct Investment and the Environment: An Overview of Literature
16
and equity. Violation of this principle by the host state concerned is the most common allegation
made by foreign investors before international investment tribunals.47
One of the early cases to deal with the notion of ‘denial of justice’ as an example of an unfair
treatment was the Neer case.48 This case was the beginning for governmental treatment of
foreign investors as to amount to an unfair treatment under international law. It was held, in this
case that the treatment of aliens, in order to constitute an international delinquency,
should amount to an outrage, bad faith, willful neglect of duty, or to an insufficiency of governmental
action so far short of international standards, that every reasonable and impartial man would recognise
its insufficiency.
In another case of Genin v Estonia,49 the arbitration tribunal stated that a violation of the fair and
equitable principle could be established by acts showing willful neglect of duty, an insufficiency
of action falling far below international standards, or even subjective bad faith.
2.3.2 Full protection and security principle
The entitlement of foreign investors to full protection and security is another principle found in
many BITs and Free Trade Agreements (FTAs). It was argued, in Noble Ventures v Romania,50
that Romania was required to provide Noble Ventures with ‘full protection and security’, which
required Romania to enforce its own laws and to provide police protection to protect the
investment of foreign investors located in Romania.51
2.3.3 Most-Favoured-Nation principle
MFN treatment is one of the oldest and most important principles of both foreign investment law
and the law of international trade. Although traditionally the MFN principle has been linked to
trade agreements, it has come to play an important role in investment protection. The reason why
foreign investors seek protection under the MFN principle is to avoid any discrimination against
them which would put them at a competitive disadvantage compared to other investors from
47
Subedi, SP (2008) International Investment Law: Reconciling Policy and Principle
USA (LF Neer) v United Mexican States (1927) 21 American Journal of International Law 555- 556
49
Genin v Estonia, ICSID Case No ARB/99/2, Award of 25 June 2001
50
Noble Ventures v Romania, ICSID Case No ARB/01/11 of 12 October 2005, 12
51
Subedi (2008) 67
48
17
third countries. The underlying idea behind this principle is to ensure equality of competitive
opportunities between investors from different foreign countries.52
UNCTAD has discussed this principle and provide the definition. In its report MFN treatment in
the context of foreign investment means that ‘a host country treats investors from one foreign
country no less favourably than investors from any other foreign country’.53
2.3.4 National Treatment principle
As discussed by Subedi the objective of the national treatment principle is to address
discrimination on the basis of nationality of ownership of an investment. In order to ascertain
what discrimination is it is necessary to compare the treatment of the foreign investor to the
treatment accorded to a domestic investor in similar circumstances. The principle of national
treatment under foreign investment law has a slightly different meaning from the meaning
accorded to this principle in international trade law.54 The national treatment, as defined in
UNCTAD report means a host country extends to foreign investors treatment that is at least as
favourable as the treatment that it accords to national investors in like circumstances.
2.3.5 Protection against expropriation principle
Protection of foreign investment against expropriation is a centuries old principle of foreign
investment law. As a rule of thumb, foreign owned property may not be expropriated or
subjected to a measure tantamount to expropriation unless the following four conditions are met.
First an expropriation must be for a public purpose. Second expropriation should be nondiscriminatory. Third it is taken in accordance with applicable laws and due process. Fourth full
compensation is paid.55
What constitute expropriation and discrimination, what is a public purpose and what is meant by
full compensation has been the matter of controversy and most scholars have made their own
52
As above 68
UNCTAD, Most-Favoured-Nation Treatment, UNCTAD Series on Issues in International Investment
Agreements: New York and Geneva, United Nations (1999) 1
54
Subedi (2008) 71
55
As above 74
53
18
contribution to this debate. According to Higgins, the ‘public purpose’ principle signifies ‘a
means of differentiating takings for purely private gain on the part of the ruler from those for
reasons related to the economic preferences of the country concerned’.56
Taking without due process of law would entail a taking in contravention of the principle of
equality before the law, fair hearing and other principles of natural justice generally recognised
by the world’s principal legal systems. Similarly, a discriminatory taking would entail unlawful
discrimination between domestic and foreign investors engaged in like business and in like
circumstances as well as between foreigners of different nationalities.
Based on jurisprudence and the literature on the subject matter there are four types of
expropriation that constitute proper expropriation.
Direct Expropriation
Direct Expropriation constitutes the actual taking of property by the host government by direct
means, including the loss of all, or almost all, useful control of property. This is the most obvious
form of outright expropriation and its definition is less controversial. Tanzania Mainland, the
focus of this study, followed the promulgation of Arusha Declaration in 1967; conducted direct
expropriation where mass nationalisations of various investments in the country occurred. The
government enacted laws through which various enterprises were taken over by the state. A
Nationalisation Act, 1967 that was enacted for that purpose gave the government permission to
expropriate property in the public interest.57 A number of enterprises were affected following the
enactment of other different laws. These include, banks through the National Bank of Commerce
(Establishment and Vesting of Assets and Liabilities) Act,58 retail and wholesale trade through
the State Trading Corporation (Establishment and Vesting of Interests) Act,59 agricultural
products marketing through the National Agricultural Products Board (Vesting of Interests)
Act,60 insurance business where a monopoly was created vide the Insurance (Vesting Interests
56
Higgins, R ‘The Taking of Property by the State’ (1982-III) 176, Recueil des Cours 259, 371
Peter, CM Foreign Investments in Tanzania: the Mainland and Zanzibar (1994)
58
Act 1 of 1967
59
Act 2 of 1967
60
Act 3 of 1967
57
19
and Regulation) Act,61 and industrial shares in various private companies vide Industrial Shares
(Acquisition) Act.62 This expropriation was proper and legal since its aim was for public
purposes and was taken through the above mentioned laws and the most important, the
government paid compensation for the nationalised property.
Indirect Expropriation
Another type of expropriation is indirect expropriation which involves taking governmental,
whether administrative or legislative, measure that does not directly take property but has the
same impact by depriving the owner of the substantial benefits of the property.63 This has also
happened in Tanzania where the matter was taken to the International Centre for Settlement of
Investment Disputes (ICSID) for arbitration.64 Biwater case arose out of a dispute between a
British project company (the Claimant), held jointly by a British and a German company, and the
Republic of Tanzania (Respondent) over a concession to operate the water and sewerage services
of Tanzania's big commercial city, Dar es Salaam. After concluding that Claimant failed to meet
its contractual obligations, which forced Tanzania to cancel the contract and regained possession
of assets previously leased to Claimant. Claimant brought an action before ICSID under the
United Kingdom (UK)-Tanzania BIT, claiming that Tanzania breached its obligation to afford
Claimant fair and equitable treatment, to provide full protection and security, not to take
unreasonable and discriminatory measures, and to guarantee the unrestricted transfer of funds.
The issue before the Tribunal was whether Tanzania’s conduct amounted to indirect
expropriation. According to Biwater the Republic’s conduct amounted to the expropriation of
BGT’s investment in two respects. First, the repudiation of the Lease Contract and more
precisely, the means by which the government sought to implement the termination and second,
the occupation of City Water’s facilities, usurpation of management control and deportation of
City Water’s senior managers.65 The Claimant supported her argument by referring to article 5(1)
61
Act 4 of 1967
Act 5 of 1967
63
Subedi (2008) 76
64
Biwater Gauff (Tanzania) Limited v United Republic of Tanzania ICSID Case No. ARB/05/22
65
As above award 393 408
62
20
of BIT between Tanzania and UK.66 Under the article, it is expressly stated that investments of
nationals or companies of either contracting Party shall not be:
‘nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or
expropriation ... in the territory of the other Contracting Party except for a public purpose related to the
internal needs of that Party on a nondiscriminatory basis and against prompt, adequate and effective
compensation.…’
By inclusion of the words “measures having effect equivalent to ... expropriation”, BGT
observes that article 5 encompasses both direct expropriation, in the sense of formal
governmental takings, and de facto or indirect expropriations, which are the product of measures
short of an actual taking of title, but which nonetheless result in the effective loss of
management, use or control, or a significant depreciation of the value, of the assets of a foreign
investor.67 The Claimant emphasised that the Republic has failed to comply with the
requirements of Article 5 by not acted for a legitimate ‘public purpose related to the internal
needs of the Republic’; and that has failed to act ‘on a non-discriminatory basis’; and it has failed
to pay BGT ‘prompt, adequate and effective compensation’.68 Hence, the Republic is in breach
of Article 5, thus invoking its international responsibility and, in principle, entitling BGT to seek
full restitutio in integrum or its monetary equivalent.69
In response the Republic argued that BGT’s expropriation claim fails for a number of reasons.
First BGT did not have anything that could have been expropriated, even in principle. Second
BGT’s own decisions and actions defeat its expropriation claim and third, BGT has failed to
prove that any alleged expropriatory act caused compensable harm.70 The Republic supported
her argument by saying, expropriation occurs when ‘the owner was deprived of fundamental
rights of ownership and it appears that this deprivation is not merely ephemeral’. She cited
Pope&Talbot case, where a NAFTA tribunal required that ‘measures affecting property interests’
had to be of certain ‘magnitude or severity’ to qualify as indirect expropriation. In the TECMED
case, another authority that was referred to, an ICSID tribunal held that in accordance with
66
Signed on 7 January 1994 and entered into force on 2 August 1996
Biwater award 395
68
Biwater, award 397
69
As above, award 398
70
As above, award 419
67
21
international law, the investment could be considered as having been indirectly expropriated if
the deprivation of the foreign investor’s property was ‘not temporary’.71
After hearing the arguments from both parties, the tribunal found Tanzania had committed an
indirect expropriation of BGT’s investment through a series of actions that transcended the
behaviour expected of a party to the project contracts and entered the realm of exercise of
sovereign authority that violated Tanzania’s treaty obligations. Specifically, instead of following
the contractually prescribed course for termination of the projects contracts, the Tanzanian
government openly repudiated the lease contract with City Water causing public furor, called the
performance bond, cancelled the VAT waiver, and deported City Water’s expatriate staff. In the
Tribunal’s view, the cumulative effect of these acts amounted to an unlawful expropriation of
BGT’s rights in the lease contract and in the project because BGT’s rights, although due to
expire a short time thereafter under the contracts’ Notice of Termination, were still technically
valid.
Creeping Expropriation
Creeping expropriation, which is the third type of expropriation is also a form of indirect
expropriation. It involves the use of a series of governmental measures to reduce the economic
value of the investment. What is involved here is the cumulative impact of the measures rather
than individual measures which on their own may not amount to expropriation.72
Regulatory Expropriation
This form of expropriation has been regarded as another form of indirect expropriation. Under
this type a measure taken by the host government for regulatory purposes has an impact on the
economic value of the asset owned by the foreign investor sufficient to be deemed an
expropriation.73 For a measure to constitute regulatory taking that amount to expropriation
requiring compensation, and the measure should be a discriminatory one.
71
As above, award 438
Subedi (2008) 76
73
Subedi (2008) 77
72
22
2.4 Economic Theories of Foreign Direct Investment
There are two conflicting economic theories on foreign investment. One maintains that foreign
investment is wholly beneficial to the host state while the other maintains that unless a state turns
away from dependence on foreign investment it cannot achieve development.74
2.4.1 The classical theory
The classical economic theory takes the position that foreign investment is wholly beneficial to
the host economy basing this assumption on spillover benefits the most important being that
foreign capital brought into the host state ensures presence of domestic capital for use in other
public benefit activities. Arguably, technology brought by foreign investor leads to the diffusion
of technology within the host economy; foreign investment creates new employment; the labour
that is so employed will acquire new skills associated with the technology introduced;
management skills will also be transferred to local personnel; infrastructure facilities built will be
to the general benefit of the economy and that upgrade facilities and infrastructure such as
transport, health or education for the benefit of foreign investor will also benefit society as a
whole. Following all these benefits of foreign investment flows, foreign investment must be
protected by international law. Such protection will facilitate the flow of foreign investment and
lead to the economic development of less developed countries.
Sornarajah argues that despite the edicts of classical theory, there is no evidence yet that its
tenets are based on accurate evidence. Though initial capital inflows may take place through
foreign investment, there is evidence that outflows by way of repatriation of profits are greater.75
He keeps on arguing that some studies indicate that capital outflows associated with foreign
investment may be twice as much as the initial inflows. He argues further that aspects presumed
to be advantageous such as new technology may be untrue largely because, technology pegged to
investment is not current technology, rather that which outlived its usefulness in the State of
Origin but was inaccessible, and therefore seems new to the developing state.
74
75
As above 51
Subedi (2008) 51
23
He argues further that the claim that management skills are transferred may also be unreal as
higher positions requiring training and confidence are rarely within the reach of local personnel.
The claim that infrastructure facilities are built may also be contested as health and educational
facilities that are created are only accessible to the elite within the host state who could afford
such facilities.76
2.4.2 The dependency theory
The dependency theory as opposed to the classical theory has the view that foreign investment
will not bring about meaningful economic development. The fact that most investment is made
by multinational corporations which have their headquarters in the developed states and operate
through subsidiaries in developing states, have interests of its parent company and its
shareholders in the home country. As a result multinational corporations come to serve the
interests of the developed states in which they have their headquarters. The home states become
the central economies of the world, and the states of the developing world become peripheral
economies serving the interests of the home states. Development becomes impossible in the
peripheral economies unless they can break out of the situation in which they are tied to the
central economies through foreign investment.77 Sornarajah argues that the resources which flow
into the state as a result of foreign investment are seen as benefiting only the elite classes in the
developing state, who readily form alliances with foreign capital.
According to dependency theory, foreign investment is bad as it keeps developing countries in a
state of permanent dependence on the central economies of developed states and does not
promote development. Unless a developing state break out of the dependence situation,
economic development becomes impossible in the state.78
2.4.3 Tanzania and economic theories of foreign direct investment
Looking at both theories, one can postulate that Tanzania’s laws and institutions are oriented
within classical theory. This is visible via the way the role of foreign investment activities in the
76
Sornarajah (2004) 53-54
As above, 57
78
As above, 58
77
24
development process of the country came to prominence and dominance. This is evidenced
through the efforts made by Tanzania to create enabling environment for investment by making
changes in the national and institutional infrastructure.The trend begun with the formulation of a
National Investment Policy in 1990 aimed at creating a positive environment that could attract
foreign investment, that would cut through the bureaucracy of interacting with multiple
government entities for an investor. In the interest of enhancing the legal framework for
arbitration of investment disputes, Tanzania joined the International Centre for Settlement of
Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA), as
another means of ensuring that the environment to investments in the country was conducive and
provided confidence to potential foreign investors.
2.5 Regulation of Foreign Direct Investment
The regulation of FDI is a controversial issue. The bone of contention not challenging the need
to regulate, but rather the entity that should regulate. FDI is a considerable investment. However,
the end result is not guaranteed, the development is not always an end all. Expectations pegged
to FDI and its achievement can have negative connotation for national sovereignty and
interests.79 It is believed that FDI is an important source of capital for growth in developing
countries. The researcher is of the view due to a rapid and massive growth in foreign investment,
and an expansion of economic activities gave rise to the need to regulate foreign investment.
The question remains who should regulate. According to various literature regulation of
international investment can be in different forms, market regulation; national regulation;
international regulation through bilateral investment agreements, multilateral, plurilateral or
contractual regulation; and lastly regulation can be regional regulation in trade agreements.
Some scholars have argued that countries need a sound business environment in the form of
good government regulations to be able to benefit from FDI. Others have suggested that well
designed regulatory systems are the only way to ensure an economy can protect itself from the
consequences of poorly implemented FDI.80 The regulation of the activities of FDI in a host
79
Leal-Arcas, R (2011) International Trade and Investment Law: Multilateral, Regional and Bilateral Governance
Kirkpatrick, C et al ‘Foreign Direct Investment in Infrastructure in Developing Countries: Does Regulation Make
a Difference?’ (2006) 15(1) Transnational Corporations 143
80
25
country is seen at three different levels, the national level where national laws and the
implementation of government investment policy inform the process, the regional level which
considers treaty obligations involving the Member states who are party to it and the practice of
customary international law in the region and the international level which calls for the
application of rules of conventional and customary international law.
2.5.1 International Initiatives in Regulating Foreign Direct Investment
Attempts to regulate foreign investment at international level have been made since the inception
of the United Nations (UN). Efforts were made under the auspices of the UN, the Bretton Woods
Institutions and other economic organisations such as the Organisation of Economic Change and
Development (OECD) to regulate investment.81 Several attempts have been made to come up
with a comprehensive code on foreign investment. Due to the existence of conflicting approaches
to the issue foreign investment protection and the existence of contending systems relating to the
treatment of foreign investment; there is no multilateral agreement on foreign investment.
The first attempt to address the issues of contention with regards to foreign investment was made
under the Havana Charter (1948).82 The Havana Charter which was to launch the International
Trade Organisation (ITO) to replace the temporary GATT arrangement addressed both
international direct investment activities under articles 11 and 12 and competition policies under
chapter V. Had it been ratified, the ITO thus would have had some competence over both
government policies and actions affecting global corporations and the conduct of corporations
themselves. Articles 11 and 12 though were not sufficient to provide for strong governance of
host nation policies and practices. Under chapter V, the ITO would have had some powers to
regulate restrictive business practices of global corporations and have much more authority to
regulate the activities of international firms than to regulate government actions affecting these
firms.83
81
Subedi (2008) 19
Sornarajah (2004) 269
83
‘Postwar Efforts at Rule Making’ http://www.piie.com/publications/chapters_preview/54/5iie1117.pdf (accessed
10 February 2012)
82
26
Another attempt was made in 1959 by major capital exporting countries to adopt an international
instrument on foreign investment known as the Abs-Shawcross Draft Convention on Investment
Abroad to protect the interests of foreign investors. However, this Draft Convention receives
strong opposition from the capital importing countries and was not adopted. Although most of its
provisions found their way once again into the 1967 Draft Convention on the Protection of
Foreign Property proposed by the OECD, this too was not adopted and remained as a draft.84
Another attempt to draft a code of conduct on multinational corporations by now defunct United
Nations Commission on Transnational Corporations (UNCTC) failed due to its non-acceptance
by the developed states. These instruments contained rules that were favouring the interests of
the developing states.85 In essence, a movement was geared at creating a New International
Economic Order giving greater control over foreign investment to developing states. The codes
were resisted by the developed states, which put forward their own version of the code. At the
end these efforts did not succeed.
In 1992 there were other efforts to draft instruments on Guidelines on Foreign Investment. This
was proposed by a study group of the World Bank and the Multilateral Agreement in Investment
(MAI) attempted by OECD. Though these were non-binding it did not succeed due to the fact
that in 1990s, there was movement for the liberalisation of the regime for investments. The
developing countries turned away from the attempt to create New International Economic Order
and were courting foreign investors by granting them high standards of protection through their
domestic laws and investment treaties.86
With the beginning of the 21st century, new attempts were made to regulate foreign investment.
After the failure of the World Bank, IMF, OECD and UNCTC to formulate a balance and
comprehensive set of standards on foreign investment, efforts were made by the European Union
(EU), with the support of the US, at the Doha Ministerial Conference in November 2001 to put
the issue of regulation of foreign investment on the world trade agenda.87
84
Subedi (2008) 21
Sornarajah (2004) 270
86
As above 271
87
Subedi (2008) 46 47
85
27
2.5.2 Challenges in Establishing Multilateral Accord over the Regulation of Foreign
Direct Investment
If states had agreed on the norms that constitute the international law of foreign investment, there
could have been a multilateral agreement on foreign investment with substantive rules which
apply in the area. As mentioned earlier, there is no such multilateral agreement due to the
conflicting approaches to the problem of foreign investment protection and the existence of
contending systems relating to the treatment of foreign investment. Several attempts that were
made failed due to different interests. There is debate on investment instruments on the extent to
grant liberalisation, treatment and protection to foreign investments on the basis of external
standards contained in treaties, and to ensure regulatory control to protect the host state’s
interests at the same time. Clash of interests between developing and developed countries on the
subject matter surfaced during the Doha Round of multilateral trade negotiations.
The main difference between these two groups of states centred around the purpose of an
international treaty on foreign investment. While developed countries wished to achieve through
the treaty the free mobility of capital by minimising the authority of governments with regard to
the imposition of conditions and regulations on foreign investors, developing countries wished to
protect the autonomy of their respective governments over both investment policy and the right
to regulate the activities of foreign investors.88 The Doha Ministerial Meeting stressed for
development issues to be approached in a balanced manner and the right of regulation in the
interests of developing states in achieving their economic objectives to achieve importance.
In the 1980s much of the developing world went through a period of economic difficulty due to
the failures of their generally socialist-economic policies and began to reverse their traditional
attitude towards foreign investment, which was now seen as a solution to their economic
problems. By the mid-1980s the developing countries were competing with each other to attract
foreign investment and offering unprecedented incentives to foreign investment.89 In the face of
such competition for foreign investment, the disintegration of Third World solidarity, the chaos
88
A Report (2002) of the Working Group on the Relationship between Trade and Investment to the General Council
of the WTO, WT/WGTI/6 of 9 December 2002
89
Subedi (2008) 28
28
in the communist world that followed the collapse of Communism in Europe and the fall of the
Berlin Wall, there was no longer the appetite within the UN to push ahead with the adoption of
an international instrument to regulate or control the activities of foreign investors. By the late
1980s the pendulum had begun to swing in the opposite direction, rendering the idea of
regulation of foreign investment in favour of host countries redundant.90 After the collapse of the
Soviet Union, most developing countries came to embrace the idea that foreign investment was a
necessity for economic development, and good incentives, including legal protection, had to be
offered to attract such investment. In 1990s foreign investment law was adjusted or modified to
suit the need of Trans National Corporations.
2.5.3 Foreign Direct Investment at Regional Level
In the absence of a global treaty on foreign investment, both BITs and regional treaties have
sought to fill the vacuum and lead the way. Regional integration agreements are among the most
powerful means to attract FDI. These agreements have dramatically increased since the mid1980s, the most significant being North American Free Trade Agreement (NAFTA), Mercosur,
Association of South East Asian Nations and the European Union, with a single market since
1985. These regional agreements promote FDI as they facilitate more investment among the
member countries but they also promote FDI from outside the region or agreements. Regional
agreements attract MNEs for a number of reasons. They create larger markets; they imply a
greater degree of market deregulation within member states, which attract MNEs from outside.91
The African Union, East African Community and SADC which Tanzania is a member is also one
of those regional groupings.
African context on legal framework for foreign direct investment
African countries have made considerable efforts over the past decade to improve their
investment climate. Many countries have liberalised their investment regulations and offered
incentives to foreign investors. It is believed after these initiatives the economic performance of
the region had substantially improved from the mid-1990s.
90
As above
Bartels, FL ‘FDI Policy Instruments: Advantages and Disadvantages’ UNIDO Working Paper 1/2009
http://www.unido.org/fileadmin/user_media/Publications/RSF_DPR/WP012009_Ebook.pdf (accessed 18 March
2012)
91
29
In its efforts the region has gone as far as adopting a program with the purpose of eliminating
poverty in Africa and develops economies of the continent. The New Partnership for Africa’s
Development (NEPAD) is an instrument with the provision of legal certainty to foreign investors
adopted for this purpose. Among the initiatives taken is to guarantee a sound and conducive
environment for the development of private sector activities and the promotion of foreign
investment and trade.92
Despite offering a number of attractions to foreign investors, other sources declared that FDI has
increased only modestly, as the imagine of Africa among many foreign investors still tends to be
one of a continent associated mainly with political turmoil, economic instability, diseases and
natural disasters. However, although these problems persist in some African countries and
although they are a serious impediment to the development of these countries, little attempt is
often made to differentiate between the individual situations of more than 50 countries of the
continent. As a result, it is believed that many African countries are not even listed for
consideration by transnational corporations when it comes to locational decision for FDI.93
Foreign Direct Investment in East African Community
EAC is the regional intergovernmental organisation of the Republics of Burundi, Kenya,
Rwanda, Uganda and United Republic of Tanzania. FDI as a means of economic growth has
been welcomed by most of these nations. Considerable liberalisation of the prevalent investment
regulations has been undertaken to facilitate the smooth flow of FDI into these economies. East
Africa does not have foreign investment legislation which is binding on the partner states. The
applicable law is just a model that the partner states may adopt.94 The foreign investment laws
that are generally applied in East Africa are those of the partner states. Some partner states have
also ratified international instruments in relation to foreign investment.
East Africa is a region overflowing with potential foreign investments with the aim of harnessing
this potential to cause economic growth and development in the region. The partner states of the
92
Established in 2001 at OAU 37th Session, AHG/Decl. 1 (XXXVII) http://www.africaunion.org/root/AU/Documents/Decisions/hog/11HoGAssembly2001.pdf (accessed 24 January 2012)
93
http://www.unctad.org/en/docs/poiteiitm15.pdf (accessed 23 February 2012)
94
Investment Code, 2006, http://www.eac.int/invest/index. (accessed 22 February 2012)
30
EAC have agreed to cooperate in the areas of investment and industrial development,95 with the
aim of rationalise investments and harmonise incentives with a view to promote the Community
as a single investment area.
2.6 Conclusion
In concluding therefore, one can say there is a relationship between FDI and economic
development. There is a belief that FDI generates positive effects for host countries. From
classical point of view, FDI has shown its ability to contribute significantly to increase capital,
boost human capital and speeds up technological transfer. FDI can also play an important role in
modernising a national economy and promote economic development. Developing countries are
trying to liberalise their economies in order to attract FDI but, attracting FDI is not enough for
economic development, the host country need to have policies in place in order to reap the
benefits of FDI. It needs to put rules and regulations in place that will ensure economic
development for the country. A sound regulatory framework and efficient supporting institutions
to enforce the relevant laws and regulations are imperative for FDI to enter and succeed.
The UN, OECD and other international institutions had played a major role in trying to come up
with standard rules on foreign investment. Despite all these efforts to regulate investment, none
of them have this item on their active agenda, leaving the matter to customary international law
and BITs or Free Trade Agreements. Their contributions though, may not have led to a
successful conclusion of a global comprehensive treaty on this subject, but they have helped in
the development of the main principles of law governing treatment of foreign investment under
international law. Most of the fundamental principles of foreign investment law make foreign
investors to be entitled to the protection of such principles even in the absence of a BIT between
a host and home state.
It is worth noting that these principles of international foreign investment law are worth reading
because the underlying idea behind them is to ensure there is no discrimination in the conduct of
international business.
95
The Treaty for the Establishment of the East African Community, 1999 Chapter 12 arts 79 & 80
31
Lastly, it has been noted that the existence of an international minimum standard for the
treatment of foreign investment has been frequently challenged in the past. This has been the
object of tension between developed and developing countries, with several countries
challenging the existence of a customary international law of minimum standard. The Minimum
Standard of Treatment ensures investments of investors, fair and equitable treatment and full
protection and security in accordance with the principles of customary international law. For that
matter is binding upon a State and provides a minimum guarantee to foreign investors, even
where the State follows a policy that is in principle opposed to foreign investment.
32
CHAPTER THREE
AN OVERVIEW OF LEGAL, REGULATORY AND INSTITUTIONAL
FRAMEWORK FOR FOREIGN DIRECT INVESTMENT IN TANZANIA
3.1 Introduction
Chapter three gives brief introduction to Tanzania, the centre of this study; where the focus is on
legal characteristics. The chapter critically examines the laws governing investment in Tanzania.
The aim is to see if the laws are sufficient to address issues of economic development and point
out the problems. Review of laws related to foreign investment since independence will be
reviewed and some amendments occurred will be looked at as well. Details of challenges in
regulating FDI are presented under the chapter. Regulatory and institutional framework for
regulating foreign investment will be conducted. This is to see whether the agency entrusted with
dealing with investment matters is competent in regulating and monitoring investment activities
to foster development.
Specific research questions have been formulated to answer the vital issues. Following the
research objective two questions are formulated to guide the study in answering the vital factual
legal issues. The first and main question, central to this study is:
What is the state of legal and regulatory framework for FDI in Tanzania?
The aim of this question is to verify whether there is deficit in regulating FDI.
Other question formulated to answer all relevant concepts of this study, and help formulate the
answer to the main question will be discussed under chapter four:
Why the need for review of FDI legal and regulatory framework in Tanzania?
3.2 Tanzania Legal Characteristics
Tanzania is a country in East Africa and lies between one and eleven degrees south of the
Equator. Dodoma is the capital and Dar es Salaam, is the largest and commercial city. Tanzania
covers the surface area of 947,000 square kilometres. It shares borders with eight countries. Its
33
northern border is shared with Kenya and Uganda, the southern one with Zambia, Malawi and
Mozambique. Democratic Republic of Congo (DRC), Rwanda and Burundi are on the west. The
Indian Ocean lies in the eastern part where it embraces the beautiful island of Zanzibar. Another
beautiful island, Mafia, is located down-south the coast line.96
Tanzania had its own legal system based on customs and practice before Second World War.
After World War II, Tanzania the then Tanganyika was declared a Trust Territory of the United
Nations, with Britain’s role to ensure its progress towards self-government and eventual
independence. Having become under British protectorate, Tanzania has adopted a legal system
based primarily on English common law. In terms of the hierarchy of legal, administrative and
regulatory instruments, the first source of law in Tanzania is the Constitution.97 Constitution is
the supreme law of the land and provides for a bill of rights. In Tanzanian Constitution there are
also provisions for ‘claw back’ so the rights under the bill of rights are not absolute, but subject
to legal regulation.
The second tier of the hierarchy is the statutes or acts of Parliament, which are published in the
Government Gazette. The third source is the case law, comprising cases from the High Court and
Court of Appeal, which create precedents that bind lower courts. The fourth source is received
laws, which includes common, doctrine of equity and statutes applicable in England law before
1920. And the fifth source of law is customary and Islamic law. Finally, international treaties and
conventions are a source of domestic law as long as they have been ratified by Parliament.98
3.3 Tanzania Investment Promotion Policy
Following the liberalisation of the economy and efforts to create an enabling environment for
investment, Tanzania established a clear policy of openness to both foreign investment and trade.
Efforts have also been made to improve public private sector dialogue on investment issues, as
part of the efforts to facilitate the role that private investments can play in the development of the
country.
96
http://www.tanzania.go.tz/ (accessed 2 December 2011)
The Constitution of the United Republic of Tanzania, 1977 as amended from time to time
98
http://www.tanzania.go.tz/ (accessed 2 December 2011)
97
34
The national investment promotion policy of 1990 was reviewed in 1996 taking into account the
new policy developments in the country during the 1990-96 periods. The revised policy included
greater emphasis on promoting domestic capacities and encouragement of domestic
entrepreneurship, export development, facilitation of new technology and enhancement of
transparency in the legal framework and deregulation of investment processes. It further made
improvements in providing more competitive incentives with a view to directing investments
towards areas that are most crucial for Tanzania’s economic development.99
3.4 Foreign direct investment inflow in Tanzania
Tanzania is regarded as one of the countries with the highest growth potential in Africa with
enormous potential as an investment destination. It is one of the most promising emerging
markets in the region, offering a unique combination of developed economic infrastructure and a
vibrant emerging market economy.100 Tanzania investment guideline indicates that between 2004
and 2007 Tanzania GDP grew at an average annual rate of 7.3 percent making it one of the
fastest growing economies in Africa.
Tanzania is one of the Africa’s best performing countries in terms of GDP growth and attracting
FDI. When Tanzania Investment Centre, the government primary agency in dealing with
investment started full operation investment inflows have increased abruptly from about 178
projects worth US$ 0.87 billion per year recorded in the year 2000 to 871 project worth US$
6.68 billion per year in 2008.101 This reflects both the available investment opportunities as well
as the positive restructuring of the investment regime that has taken place. Another important
factor is its remarkable set of natural resources, long term stable democracy and strong
macroeconomic performance.
Another important factor worthy noting, when the 1997 Act was enacted shortly after the
launching of the New Investment Policy of Tanzania in 1996, the Act provides the basic
investment framework for Tanzania, with new and modern legislations reflecting the world
99
Tanzania Investment Promotion Policy, 1996 http://www.tzonline.org/pdf/nationalinvestmentpromotionpolicy.pdf
Tanzania Investment Guide 2008 and Beyond, http://www.tic.co.tz/ticwebsite.nsf /FILE/TICGuideline.pdf
(accessed 20 February 2012)
101
http://www.tic.co.tz
100
35
economic conditions in general and Tanzania’s conditions in particular. As a result of these
commendable government efforts FDI inflows in the country rose from US$ 12 million in 1992
to US$ 260.2 million in 2004 after reaching a peak of US$ 516.7 million in 1999.
This inflow supposed to make a great contribution to the overall economic development of
Tanzania. It was expected for the foreign invested enterprises to contribute to tax revenues, bring
in capital, technology import, create employment opportunities, impart skills and other benefits.
But the FDI has so far not give that positive impact as what people were look forward to see.
3.5 Substantive laws and regulatory frameworks related to foreign direct
investment in Tanzania
The laws and regulations in Tanzania have been put in place to provide a legal framework
conducive to the functioning of a market economy. They include laws dealing with capital
markets, mining investments, banking and financial institutions, land ownership, taxation,
foreign exchange, petroleum exploration and development, and export-processing zones. A
number of practical regulations liberalising conduct of business and reducing red tape have been
introduced.
3.5.1 Major laws and regulation affecting foreign investment
In Tanzania major laws and regulation affecting foreign investment is in five groups. These
include investment; trade, taxation, finance and audit; labour, immigration and citizenship;
environment, forestry, construction and land; and trademarks.
Investment
Under investment category there are Tanzania Investment Act, Export Processing Zones Act,
2002, the Capital Markets and Securities Act of 1994, and the Mining Act of 1998 as repealed in
2010.
Trade, taxation, finance and audit
36
Under this group there are Business Licensing Act of 1972, Banking and Financial Institutions
Act of 1991, Customs Tariff (Amendment) Act of 1976, Income Tax Act of 2004, and Value
Added Tax Act of 1997.
Labour, immigration and citizenship
There are two legislations that affect foreign investment in this category namely, Trade Union
Act of 1998 and Immigration Act of 1995.
Environment, forestry, construction and land
Land Act of 1999 and Village Land Act of 1999 provides for the management and administration
of land.
Trademarks
Lastly, there is Trade and Service Marks Act of 1986, Patents Act of 1987 and Copyright and
Neighbouring Rights Act of 1999.
3.5.2 Legal framework of investment at independence
Tanzania Mainland the then Tanganyika attained its independence on 9 December 1961 from
British. Following independence, the state in Tanganyika took an active role in developing the
economy. Armed with a World Bank report on Tanganyika’s development potential, the state
sought out foreign investors willing to establish import substituting industries in the country.
Foreign Investment (Protection) Act was enacted in 1963 to give protection to certain approved
foreign investments in order to attract investors in the country.102 Before independence during
the colonial period, all economic policies were geared to intensify colonial exploitation and to
safeguard colonial interests at the expense of indigenous communities. This went hand in hand
with the enactment of some laws that were obstacles to foreign investors and create environment
favourable to them.
Tanganyika Foreign Investment (Protection) Act, 1963
The enactment of this legislation provided statutory guarantees to foreign investors which would
encourage them to invest in the country. In addition, the government entered into bilateral
102
Act 40 of 1963
37
agreements with foreign governments on encouragement and promotion and protection of
investments. The exercise of enactment of this investment legislation succeeded in attracting
foreign investors in the country where investors from developed countries came and invest in the
country. These include the United State of America, Switzerland, Federal Republic of Germany
and German Democratic Republic. Despite its purpose and achievement things were not smooth.
In the process of liberalisation of the economy it was felt that the Foreign Investment Protection
Act of 1963 has been overtaken by the development that has been taking place both internally
and externally. It was vivid that even after the passage of this Act; Tanganyika could not attract
foreign investors in manufacturing sector.103
Moreover, soon after independence, the TANU government adopted a World Bank development
model which was the result of studies conducted during the last decade of the colonial era. The
model required further integration of rural dwellers into the world capitalist market through the
intensification of export cash crops; cotton, tobacco, sisal, groundnuts, tea, coffee, pyrethrum,
sugar and cashew nuts.
Also in 1966 the country found itself in serious socio-economic and political crisis, which was
fuelled by conflicts with Britain, the Federal Republic of Germany and the USA that upset the
flow of foreign industrial investments and foreign aid to finance agricultural, industrial and other
development projects. Therefore new tactics and new directions were imperative.
Furthermore, the approach used by the TANU government after independence stemmed from the
fact that TANU and its allies wanted to get rid of colonialists contributed to the failure.
Thereafter it was total confusion and disappointment to both leaders and the led alike. It is
against this background that the Arusha Declaration was proclaimed in 1967. As was discussed
in chapter two, the Nyerere’s ideology on socialism through the Arusha Declaration, legislation
was enacted and then mass nationalisations of various investments in the country occurred.
3.5.3 Some Changes and Tanzania Investment (Promotion and Protection) Act, 1990
103
Peter (1994)
38
The purpose of the National Investment (Promotion and Protection) Act of 1990 was to stimulate
local and foreign investment by establishing rules governing investment in Tanzania enterprises,
particularly foreign capital. The Act applies throughout industry except petroleum and minerals.
While the Act replaced the Foreign Investment (Protection) Act of 1963, it incorporated with
necessary amendments, a number of other statutes including the Companies (Regulation of
Dividends and Surpluses and Miscellaneous Provisions) Act, 1972.
It is important to be noted that, another purpose for the 1990 Act was to avoid 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.
This was through establishment of 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. It also lay 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.104
3.5.4 The current law related to foreign investment in Tanzania
Tanzanian government like most other governments has been actively promoting its country as
investment destination. It has increasingly adopted measures to facilitate the entry of FDI.
Examples of such measures include liberalising the laws and regulations for the admission and
establishment of foreign investment projects; providing guarantees for repatriation of investment
and profits; and establishing mechanisms for the settlement of investment disputes. The country
provides the best incentives to investors like tax incentives as part of these promotional efforts.
In improving the overall legal framework for investment activities in the country, Tanzania
amended the National Investment (Promotion and Protection) Act of 1990 and came up with
Tanzania Investment Act of 1997.
Tanzania Investment Act, 1997
104
Tanzania’s New Investment Code http://www.tzaffairs.org/1990/09/tanzania’s-new-investment-code/ (accessed
27 March 2012)
39
The investments in Tanzania are now governed by the Tanzania Investment Act.105 This Act has
to be read together with the Financial Laws (Miscellaneous Amendments) Act.106 The main
purpose of enacting the 1997 investment act is to guide investment activities as well as to
provide for more favourable conditions for investors. This Act does not apply to mining and oil
exploration sectors. These sectors are governed under the Mining Act, 1998 107 and the Petroleum
(Exploration and Production) Act, 1980 respectively.
Unlike the National Investment (Promotion and Protection) Act of 1990, the 1997Act of has no
clear schedule on investment areas. The 1990 Act had a very clear schedule specifically showing
investment areas. Under the schedule Controlled areas were set for large investment which
required for private/public partnership. As pointed out by Maina and Mwakaje, investments
envisaged here were like iron and steel production; machine tools manufacture; chemical
fertilizer and pesticides production; and airlines. Reserved areas were of strategic importance and
were exclusively reserved for public investment. Importantly, there were investment areas
purposely for local investments. Unfortunately, this is not the case with the 1997 Investment Act.
The whole country is up for snatch for both local and foreign investors. There is no reservation
of certain areas of the economy exclusively for nationals.108 These included retail and wholesale
trade; product brokerage; business representation for foreign companies; public relations
business; operation of taxis, barber shops, hairdressing and beauty salons, butcheries just to
mention few.
This loophole led to complain among the local petty traders. The question that need to be
answered can we real classify them as investors who bring in capital for country’s economic
development; or just competitors who came to suffocate and create unfair competition to the
local community who are not able to compete since they do not have enough capital.
105
Act 26 of 1997
Act 27 of 1997
107
Tanzania's Parliament passed the new Mining Act (Act 14 of 2010). The Act was re-enacted with substantial
amendments the provisions that regulate the law relating to prospecting for mining
108
Maina & Mwakaje (2004) 19
106
40
As also pointed out by Maina and Mwakaje, among the weaknesses in the 1997 Act is its silence
on joint venture provision.109 Liberation of the economy was hailed as a policy that will open
avenues through which the local and foreign capital would walk together to prosperity. The real
logic for giving preference to or requiring joint ventures is to try to capture more of the benefits
that foreign investors have to offer. In particular, technology transfer, access to external markets,
and more robust backward linkages to the domestic economy than would take place without
preferences/requirements for joint ventures. On the other hand, local partners can be particularly
valuable in providing location-specific knowledge regarding host-country markets, local tastes,
local business practices, local labour practices, local suppliers, and local business-government
relations.110
3.6 Incentives and Tax Policy and its Effect to Foreign Direct Investment
Host countries do always expect to maximise the long-term economic benefits for foreign
corporate presence. However, there are various costs associated with FDI as well. Among the
costs include those related to countries competing for FDI; market failures in the investment
process and the possible divergences between foreign companies and national interests. For
example, promotion of FDI has been very expensive as developing countries often make major
concessions in terms of special incentives to foreign investors in order to compete for foreign
investment with other countries. These incentives include among others lower income taxes or
income tax holidays, import duty exemptions, and subsidies for investment. In Tanzania,
incentive packages were introduced during the economic liberalisation era.
3.6.1 Incentives and Guarantees Offered by Tanzania Investment Centre
The TIC offers financial incentives and guarantees to those who pass its tests for the Certificate
of Incentives. For example tax reductions in the areas of import duty and VAT; Duty drawbacks
on imported inputs; reduced corporate taxes through capital exemption, favorable asset
depreciations, and lower withholding taxes; automatic ability to hire up to five expatriate
employees without government review (two leading industries, mineral and petroleum, actually
109
As above, 27
‘FDI and Joint-Ventures Requirements’ http://www.piie.com/publications/chapters_preview/53/7iie258x.pdf
(accessed 14 May 2012)
110
41
get more generous incentives and are not restricted to the ceiling of five expatriate employees,
for instance); practically unrestricted repatriation of funds; greater protection by the government
against non-commercial risks; more assistance from government; Fast-track renewals for
licenses, residence and work permits, and so on through TIC assistance; and guarantee against
expropriation and nationalisation, unless government fairly and expeditiously compensates for
nationalisation (Tanzania is a signatory of several international treaties on this matter).
3.6.2 Tax Policy
The Government of Tanzania has implemented tax administration reforms to improve efficiency
as well as rationalise the tax structure. The tax base and rate structure of the Tanzanian tax
system has been rationalised and streamlined with a view to instituting a fair, simple, equitable,
efficient and investor friendly tax regime. A number of taxes have been abolished, the regulatory
framework has been harmonised, an incentive regime has been put in place and the rates have
been gradually reduced.111
Tanzania has offered a tax incentive regime conducive to investment provided for in the various
tax statutes, like the Income Tax Act,112 Value Added Tax Act113 and the East African Customs
Management Act, 2004. Also the Tanzania Investment Act, Mining and Petroleum Acts are also
used to facilitate the granting of tax incentives. The incentives cut across a broad spectrum of
investment goods including non-taxation of imports of capital goods and raw materials,
deferment of VAT on capital goods and capital allowances on investment goods for income tax
purposes. Also in place are exonerations and exemptions of goods and services specifically for
investment purposes.
In offering economy wide tax incentives, special attention is directed to the lead and priority
sectors. For all these sectors, except petroleum and gas sector, acquisition of all capital goods
and parts are zero rated for import duty purposes and VAT thereon deferred. Research expenses
for agriculture are allowable for income tax purposes, while capital acquisitions are 100 percent
111
http://invest-in.tanzania.ru/taxation_in_tanzania.htm (accessed 2 May 2012)
Act 11of 2004
113
Act 24 of 1997
112
42
expensed. To attract productive investment in the petroleum and gas sector petroleum legislation
was enacted. Equipment and materials used in exploration are tax-exempt.
Investors in priority sectors enjoy zero import duty rates for importation of capital goods and
deferment of VAT. There is also a set of exemptions granted on those investing in export
processing through the Free Economic Zones Authority (FREZA) and Export Processing Zones
(EPZ).
Among the tax incentives introduced by Tanzanian government has raised a lot of complaint to
local community like tax holidays. Under a tax holiday, qualifying newly established firms are
exempt from paying corporate income tax for a specified time period for example five years. The
provisions may exempt firms from other tax liabilities as well. There is elimination of tax on net
revenues from investment projects over the holiday period.
Investment experts, particularly from investment promotion agencies, view incentives as an
important policy variable in their strategies to attract FDI for economic development. The
government has offered unreasonably large incentives to entice foreign companies in the
country. But, it has been recognised that investment incentives have only moderate importance in
attracting FDI.114 Furthermore, this has a negative impact on fiscal revenues and creates
significant possibilities for suspicious behaviours from tax administrations and companies.
Unlike advanced economies, which have tended to broaden tax bases and cut tax rates while
maintaining revenues, developing economies like Tanzania have cut rates, introduced special
regimes and lost revenues.115
Although granting investment incentives may promote long term growth, but it goes against
another major goal of the government of Tanzania of raising tax revenue. As incentives often
cause losses of tax revenues (for example, duty exemptions), Tanzanian government through
Tanzania Revenue Authority (TRA), bears the burden of such incentives. TRA and TIC have
114
See UNCTAD-DTCI. Incentives and Foreign Direct Investment, Geneva and New York: United
Nations Publications, E.96.II.A.6, 1996; OECD
115
‘A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies’ IMF
Working Paper WP/12/28 http://www.imf.org/external/pubs/ft/wp/2012/wp1228.pdf (accessed 30 April 2012)
43
been at the centre of this conflict between long term economic growth (advocated by TIC) and
short term tax gains (the driving force at TRA). TRA finds claims regarding future economic
benefits hard to accept if they involve incentives that prevent it from meeting its collection
targets. Even though the 1997 Act amended financial laws enforced by TRA in order to reduce
conflicts between the two institutions, TIC and TRA still face conflicts of interpretation. Draws
from literature reviewed this study finds that Tanzanian government is facing challenge in
implementing its policy of decreasing tax benefits for registered investors as by implication, is
increasingly reluctant to sacrifice tax revenues in the name of long term growth.
These tax incentives like tax holidays to large foreign companies have also brought about public
outcry against the policy. This is partly associated with FDI’s failure to contribute to country’s
economic growth efforts caused by poor management of FDI and weak regulatory mechanisms.
Incentives given to FDIs are generous, wide open ended and the government is deemed not to
have put in place strategic regulatory laws, rules and procedures to control and monitor
operations of FDIs in terms of what they are doing and what they are not allowed to do. As a
result, it entails significantly higher revenue cost for the government and abuse by some foreign
companies. It simply result in the transfer of tax revenues from the host country treasury to the
home country treasury. Companies use this loophole by shifting profits or real activity elsewhere
in such an extreme fashion as to escape paying tax once the grace period is over.
A good example is when majority of the hotels that were listed for rehabilitation or were not
functioning well and were ones situated in the National parks, rather than those that were in
business and conference centers or operating casinos. Beyond the heavy investments, the
government, in a bid to create an enabling environment, has been giving tax exemptions to
investors. Over the years, investors whose investments were approved by the TIC have been
enjoying a tax holiday of five years as part of the incentives. For this matter, many enterprises
have changed hands before the elapse of the five years to allow another investor to enjoy the
same. For example, the Sheraton hotel became the Royal Palm in 2001, just before the five years
had expired; and by 2004, it was sold to another investor, the Swiss based Movenpick; and now
is no longer under the Swiss investor but under Serena hotels.
44
3.6.3 Avoidance of double taxation treaties
To increase inward FDI, policy makers increasingly resort to the ratification of double taxation
treaties (DTTs).116 This can have costs of negotiating and ratifying the contract and giving up
some fiscal sovereignty. There could also be a loss in tax revenues for at least one of the signing
parties. This is particularly important from the point of view of developing countries as most
treaties favour residence-based over source based taxation.
Tanzania so far has signed Double Taxation Treaties (DTAs) with various countries include
Canada, Denmark, Finland, India, Italy, United Kingdom, Norway, Sweden and Zambia.
Tanzania is also in the process of negotiating treaties with several countries including Belgium,
Burundi, Iran, Lebanon, Malaysia, Mauritius, Pakistan and Rwanda.117
This study has
discovered that DTAs offer a gain to the investor with no impact on net additional investment.
Moreover, it may have the unintended effect of encouraging investors to repatriate profits rather
than to reinvest them in the host country where they would further promote economic
development. Another unintended effect of these methods is what is known as ‘treaty shopping’
by investors. They could avoid, seemingly legally, higher taxes in a country where they want to
invest, by funneling their investment through another country with which the targeted country
has a tax treaty with favourable provisions.118
3.7 Institutional framework for foreign investment in Tanzania
Some countries have statutory structure specifically governing the regulation of investment.
India for example has central regulatory authority responsible for the regulation of investment in
the country. In other countries, different regulators become involved to the extent that entities
subject to their jurisdiction end up providing investment advisory services.
116
‘The Impact of Double Taxation Treaties on Foreign Direct Investment: Evidence from Large Dyadic Panel
Data’ http://personal.lse.ac.uk/barthel/docs/DTT_FDI.pdf (accessed 4 May 2012)
117
http://www.tanzania.go.tz/commerce.html (accessed 4 May 2012)
118
‘Tax Incentives and Foreign Direct Investment’ a Global Survey. UNCTAD/ITE/IPC/Misc.3 ASIT Advisory
Studies No. 16, http://unctad.org/en/docs/iteipcmisc3_en.pdf (accessed 29 April 2012) 29
45
The pro investment attitude by government of Tanzania is clearly demonstrated by the
innovative investment legislation, the increasing number of FDI in the country and economic and
structural reforms that have led to substantial progress in establishing a functioning market
economy. In Tanzania, institutional support for priority investment projects is readily available
from the agency entrusted with dealing with investment matters, Tanzania Investment Centre
(TIC) and other government institutions.
3.7.1 Tanzania Investment Centre
The main purpose of establishing TIC is to have an effective and efficient investment agency
responsible to promote, coordinate, encourage and facilitate investment in Tanzania and to
advise the government on investment related matters.119 Section 15 shows the overall missions of
the Centre is to promote and facilitate investment for national economic growth by enhancing an
environment conducive for business and entrepreneurship growth.
TIC is the focal point for all investors and first point of call for potential investors. In order to
strengthen and expedite facilitation services, six different senior officers from government
institutions have been permanently stationed at TIC to serve investors under one roof and the
general direction of the TIC Executive Director. Presently these officers include those from
Ministry of Lands and Human Settlements (access to land);120 Tanzania Revenue Authority
(national government taxation); Immigration Department (Class A and Class B work permits);
Ministry of Labour (Class B work permits), Ministry of Industry and Trade (national business
licenses); and Business Registration & Licensing Agency (registration of companies, business
name registration, ‘industrial’ licenses, trade and service marks, patents and copyrights).
3.7.2 Practicality of Tanzania Investment Centre as a ‘One Stop Centre’
Theoretically ‘one stop centre’ is right and good but practically it is not possible. The crucial and
important question is whether TIC is real a ‘one stop shop’. The above mentioned government
institutions are placed under one roof to enforce core regulations affecting most investors.
119
Section 4 of the Act
Followed the new responsibilities given to TIC by the Land Act of 1999, the Centre now is supposed to help the
Ministry of Land to build a Land Bank, where the occupation of land by investors is tagged
120
46
Although they are under one roof, they have to work with their home institutions in the
background and deliver various authorisations to the investor at the TIC.
The Tanzania Investment Act of 1997 states that government agencies must reply to TIC
requests within 14 days. If not, TIC can assume its request is tacitly answered in the affirmative.
In practice, however, if the request is for a document such as a license or certificate, the investor
simply has to wait for the document, because TIC cannot issue it in lieu of the issuing agency. If
the investor submits all the required evidence, however, then the next step is up to TIC. It then
takes TIC seven days to issue the Certificate of Incentives.121 When the investor lets TIC handle
all facilitation matters, it typically takes one month for TIC to make its final decision.
Immigration requirements alone can take from seven to 14 days.122
Licensing Agencies
Sectoral licenses (‘major licenses’) are normally delivered in specialised ministries; mining and
fishing for example, these ministries have not yet assigned staff to TIC. However, TIC can send
its staff to help settle matters in those ministries on behalf of investors. Where complexities
occur, the investor must accompany TIC facilitators in specific government institutions to
elaborate on information contained in the application. Otherwise, the facilitators can handle
processes in the background without the investor’s presence. Also the investor cannot have all
the services required under TIC, he has to go physically to other government institutions. A good
example is the National Environmental Management Council (NEMC).
Services Offered by the Centre
It is also evident that the Centre’s services are not fully available to all investors. In the process
of investing in Tanzania though not clearly stated anywhere yet, the first step for the cautious
investor should be to contact NEMC. NEMC will assess whether an Environmental Impact
Assessment (EIA) study must be done for the project or no more EIA investigation is necessary.
This would be determined by information provided for by the investor in preliminary assessment
121
See Business Guide, 40
Tanzania Investor Roadmap: Primers on Regulations 3rd Edition, prepared for USAID/Tanzania under Contract
No. PCE-I-817-99-00002-00 by Development Alternatives, Inc. (DAI) Private Enterprise Support Activities (PESA)
Project Dar es Salaam, 23 January 2004
122
47
form. If an EIA is needed, the investor will contact one of many specialised local consulting
firms to do the assessment. There are no explicit rules prohibiting foreign experts to conduct the
EIA, but NEMC encourages the use or participation of a local firm.123 If EIA is not needed, or if
the cost and conclusions of the EIA still warrant investing in Tanzania, the owners would then go
through the core formalities.
First, they will register the company at the Business Registration and Licensing Agency
(BRELA). This process involves a name search to verify that the proposed name is not used by
another business. Then they will obtain a tax identification number (TIN) from the Tanzania
Revenue Authority (TRA). At TRA, the business will also get a VAT registration number,
especially if the start of operations is imminent.
The third step is to obtain a general business license from the Ministry of Trade’s Internal Trade
Section. Otherwise, the general business license will be issued by the local government with
jurisdiction over the location of the business. Tanzania has an Office of Safety and Health
Administration (OSHA), where its mandate was enlarged in 2003 to cover any workplace, a new
mandate that will likely become controversial. Finally, new investors with annual exports above
US$ 100,000 who will export at least 70 percent of their production can apply for Export
Processing Zone (EPZ) operator status. EPZs come with attractive incentives described in a 2002
law that became operational in early 2003.124
For the above challenge it is difficult for TIC to work effectively as a ‘one stop’ centre, this
study has suggested some solution which is provided for under chapter four. Introduction of
electronic system (E-platform) has been suggested and discussed in detailed in the said chapter.
3.7.3 Performance of the Centre
Tanzania Investment Centre record of promoting, attracting and retaining investors in the
country since its inception is undisputed. The question is whether the level of investment attained
is beneficial to the country’s economic development. Despite all the successes the current level
123
124
Tanzania Investor Roadmap: Primers on Regulations 3rd Edition (2004)
Act 11 of 2002 ‘Tanzania Export Processing Zones Act’
48
of investment is not yet adequate for realising Tanzania’s Development Vision 2025 goal of
reducing poverty and promoting sustainable development through GDP growth of over 8
percent.125 This study have find out there are still some weaknesses in regulating and monitoring
foreign investors that need to be addressed for the country to benefit more from foreign
investment. If the country is to achieve its development goals, there are some suggestions for the
recent investment to GDP ratio to be increased to at least 25 percent to achieve a growth rate of
its intended goal of 8 percent. This can be achieved by making further economic and legal
improvement for example in regulation and institutional effectiveness.
3.7.4 Limited Institutional Capacity in Monitoring Investments or After Care Services
Apart from promoting investment, Tanzania Investment Centre is also offering investor friendly
post investment services (After Care Services) and monitoring. This will provide feedback on
fulfilling investment goals and aspirations. Monitoring would provide opportunity for closer
cooperation between TIC and investors in resolving problems and fostering greater impact of
investments. Monitoring can be done by following the post statutory measures as provided for
under part VI of the Investment Regulations,126 where a holder of an investment certificate is
required to inform TIC in writing of the date of commencement of investment. TIC is expected
to verify the commencement of operations. The investor has to notify TIC in writing if a holder
of investment certificate ceases to operate. A holder of investment certificate is also required to
inform TIC when: a person other than the person to whom the certificate was issued has
succeeded to the investment; the name or description of the business or enterprise is changed or
there is an enlargement of or substantial variation in the investment. Tanzania Investment Centre
is expected to verify those information and if satisfied amend the certificate.
Track down investors
Statutorily this is okay, but practically this is not the case. The burden of making FDI work for
the development of Tanzania lies within the realm of the government. The pertinent question
what monitoring and enforcements mechanisms are in place to ensure FDI is regulated well? In
125
Report on the Study of Growth and Impact of Investment in Tanzania http://www.tic.co.tz/TICGrowthImpact.pdf (accessed 3 May 2012)
126
Investment Regulations of 2002
49
Tanzania follow up of businesses like firms’ benefiting from the incentives is neglected. The
capacity to monitor is particularly weak. There are no enough resources to track down investors.
It is a well-known fact that without effective monitoring, governments cannot ascertain the
magnitude of actual investment inflows as this information is vital to governments as it provides
input to enable them to direct and control foreign investment, to formulate investment policies
and strategies, and to target foreign investment projects by industry, characteristic and home
country for promotion. This lack of monitoring capability has also led to a situation in which
foreign investors in a host country because of weak monitoring systems, promise anything
government demand in order to obtain investment licenses and incentives and then configure the
investment project in whatever manner best suits their interests.
Economic development goal
All registered investors are required to submit a ‘progress report’ to TIC within six months of
being registered. Renewal of incentives beyond this point requires a petition that leads to
examination of the project. Tanzania Investment Centre’s challenge of limited staff, does not
give it the capacity to effectively monitor post application to ascertain whether the government’s
vision of fostering long-term economic growth through investment has been attained and the
registered investment has brought in any economic impact to the country. When looking on part
VI of the 2002 regulations there is no mention of tracking achievement of economic
development goals.
3.7.5 Administration of tax incentives
While tax incentives are enunciated in the tax law, their administration is carried out by different
government agencies. For example, tax deductions or allowances on employee training may be
administered by the labour department, duty exemptions by the customs department and income
and profit tax exemptions by the revenue department. Such diversity of agencies dealing with tax
incentives tends to increase the inconvenience of doing business. It is generally recognised that
investors prefer to deal with one government agency and that they like to be able to determine
from the start the total package of incentives available.
50
3.8 The Impact of Chinese Investments in Tanzania
3.8.1 Chinese Presence in Tanzania
This study learnt there are eight different objectives behind China’s presence in Africa including
Tanzania. These include assurance of the supply of raw materials for China, create a market for
Chinese products and services, obtain land for agricultural purposes, channel migration of
Chinese people to Africa, gain diplomatic support from African countries, present an alternative
to the Western development model, provide an alternative to Western development cooperation
and emphasise China’s status as a superpower.127
China is already present and quite active in Tanzania since its independence in 1961. At that time
the Chinese leaders supported movements for independence and anti-colonial activities. In the
post-colonial era Chairman Mao Zedong supported socialist regimes in particular. The
construction of the Tanzania Zambia Railway Authority (TAZARA) railway line took place in
the 1960s. It runs from the Zambian copper mines capital, Kapirimposhi to the Tanzanian
commercial city and main port, Dar es Salaam. It was built by the Chinese because no other
donor was willing to provide support to the socialist government of Tanzania.
The presence of China can also be seen in different ways. The number of Chinese people living
and working in Tanzania has increased. The goods and services rendered, for example from
Tanzania, China imports mainly ores, wooden logs and cotton, while it exports garments,
batteries and other consumer goods to the country. China is an important source of aid, soft loans
and cheap products for Tanzania. There are development assistance help to build the necessary
infrastructure although the quality may be low and operation and maintenance are not always
organised. China has a commitment to invest in Tanzania. A Chinese mission visited Tanzania in
August 2006 made some promises to invest and this was welcomed well by the then Tanzanian
vice president who pledged government support to investors trying to achieve the goals of the
government. The number of Chinese projects registered for investment since then has increased
to 250.
127
Dijk, MP (ed) The New Presence of China in Africa (2009) 11 12
51
3.8.2 Chinese investments in Tanzania
Historically the main source countries of FDI funding to Africa are the United States, the United
Kingdom and France. China has dramatically increased its presence in the continent in the past
decade and became the 5th largest country of origin of foreign investment on the continent in
2009; its growing impact on trade, aid and investment in Africa has attracted increasing
academic, media, and government attention.128 It is within this context that this study examines
the activities of Chinese investors in Tanzania in order to gain a better understanding of the
specific consequences of Chinese FDI for economic development in the country.
China is the third world’s largest economy and one of Tanzania’s top five investors engages in
mining, agriculture, manufacturing, tourism, energy, and, health and education sectors among
others. Tanzania Investment Centre records indicate that in 2007 alone, China invested US$ 3
billion in ten African economies, of which US$ 111 million was invested in Tanzania. However,
there are claims that Chinese investments in Tanzania and in Africa generally are driven by its
hunger for raw materials and energy. This is due to Chinese investors’ conduct after registering
with TIC and obtains the Certificate of Compliance.
3.8.3 The Impact of the Chinese
How will the development of Tanzania be affected by the rapid growth of China’s exports and
investments? China takes over markets in African countries particularly Tanzania more easily
than it manages to break into European or American markets. Will Tanzania be able to compete
with China in sectors like the production of shoes or textile? Different authors have argued that
African industries are usually not ‘competing with’, but in the best cases ‘complementary to’
Chinese industrial exports and investments in the country concerned. Countries like Tanzania
find it difficult to compete in an international or global context, while their markets are flooded
with cheap Chinese products. There are textiles and garments from China exported to Tanzania
competing with the local tailors. Informal local tailors no longer compete with modern textile
and garment industries in Tanzania. They have to produce at lower prices than Chinese textile
128
‘Assessing China’s Role in Foreign Direct Investment in Southern Africa’ March 2011
http://www.ccs.org.za/wp-content/uploads/2011/03/Final-report-CCS-March-2011-CCS.pdf (accessed 29 February
2012)
52
and garment industries and have to come up with more attractive products than the second hand
clothing from Europe, which is available almost everywhere nowadays.129 The researcher agrees
with Dijk for Tanzania to have a plastic recycling plant. Scrap metal has already become
valuable in Tanzania for exports, and the hope is that people will recover plastics in the future for
local processing. Surprisingly, currently most of the plastic bottles are compressed and exported
to China, where the material is reused.
There is a strong perception among the Tanzanian community that Chinese activities in Tanzania
are slanted towards trade rather than investment. Many Chinese economic actors obtain
investment licenses but continue to import Chinese goods into Tanzania rather than making
actual investments. Some believe that this could be a strategy to test the market before
establishing manufacturing operations.130
The researcher is of the view all this is due to deficits in regulating foreign investments in the
country. This is a challenge to the government that needs urgent attention. Another pertinent
question which needs to be looked at is whether Chinese are genuine investors for country’s
economic development. There is record of Chinese investors having colluded with some
unscrupulous local business people to defraud the country of revenues through smuggling of
forestry products worth US$ 58 million annually between 2004 and 2005. Cases of cheap and
fake products manufactured in China, which create unfair competition with locally manufactured
products is also widespread. All these led to the survey conducted by Dar es Salaam regional
authorities which established that most Chinese entrepreneurs were engaged in business other
than what their Tanzania Investment Centre certificates show. A number of Chinese investors
rub shoulders with locals in strategic business places like Kariakoo, Sinza and Manzese, selling
shoes, sandals, and cheap clothes. But most of these goods are said to be produced locally in
backyards.
129
130
Dijk (2009) 14
‘Pattern of Chinese Investments, Aid and Trade in Tanzania’ October 2009
53
3.9 Conclusion
When Tanzania Investment Act of 1997 came in place and establishment of ‘one stop’
investment agency, there was high expectation for change and impact to the country economy.
Neither the Investment Act of 1997 nor the Investment Centre has managed to demonstrate on
empirical evidence the achievements of what were anticipated. Theoretical review of the
Centre’s perfomance has revealed inadequency on attracting foreign investors. On the other hand
the Act’s adequacy has been questioned hence the need for its examinination as it is done in
systematically in this qualitative study and concluded in chapter five.
The study has find some silent features in the investment act. The law is silent on joint venture as
this is expected to open avenue through which local and foreign investors would join their capital
together to prosperity. In the law investors receives rights but they have no duties. There are
certain duties which ought to have been clearly spelt out in the act like training of locals and
gradual localisation of the foreign enterprise.
54
CHAPTER FOUR
REGULATORY AND INSTITUTIONAL REFORM FOR FOREIGN
INVESTMENT AND ITS IMPACT TO TANZANIA ECONOMY
4.1 Introduction
Chapter four discusses the importance of foreign direct investment regulation on economic
development, the case of Tanzania. The discussion will be grounded on the assessment of the
strengths and weaknesses of existing legal framework, with an objective of determining whether
there is a need for imminent regulatory reform.
The following question was formulated to answer the relevant concepts of this study:
Why the need for review of FDI legal and regulatory framework in Tanzania?
4.2 The challenges of investment treaties in regulating foreign investment to
foster economic development
4.2.1 Tanzania Investment Act
As pointed out in literature reviewed in chapter three, there are some challenges in the 1997 Act
that need some amendments. The literature reveals silent features in the Act on Joint Ventures,
poses a challenge in attainment economic goals. The Act lacks clear direction on this
contemporary mode of conducting business, currently favoured by investors. It is the opinion of
the researcher that joint venture clause need to be accommodated in the Act to open avenues for
local and foreign investors to join hands for more success.
The act has given foreign investors various rights but it is silent on duties on the part of
investors. The act fails short of incorporating Corporate Social Responsibility (CSR) clause. This
is an area which needs amendment. This will enable foreign investors to have certain duties and
responsibility to the local community. This need to be made compliance for foreign invested
enterprises in Tanzania. CSR would encourage foreign companies to play a role in engaging with
stakeholders and contribute to the economic, social and environmental development in Tanzania.
55
This researcher agrees with Baker that CSR is the continuing commitment by business to behave
ethically and contribute to economic development. He argues one should look at CSR in terms of
its relevance to economic development.131 Given the importance of the regulation of foreign
investment as well as a link between legislation and CSR, the researcher is of the opinion
incorporation of CSR in the investment legislation is the best approach. This will allow
companies to conduct themselves responsibly and abide to it since they will be legally bound.
On economic point of view, large companies will help to deliver or improve different sectors and
thereby expand economic opportunity. Sectors like extractive industries, financial services,
tourism, food and beverage and many more will benefit from this.132
4.2.2 Bilateral Investment Treaties and developmental goals
Investment is considered to be a vital input for economic development. But it has being observed
that BITs display sensitivity to development policy and are based on outdated and ‘defective
mold’.133 Discussions among scholars in an academic workshop have generate views that these
treaties offer extensive legal protections for foreign investors, but fail to safeguard the rights of
government to act for important policy interests, without fear of breaching the treaty’s vague
commitments. It is worried this limit the ‘policy space’ of developing countries with respect to
regulating the economy. It was also viewed which this study concur with, many developing
countries faced serious capacity problems when it came to negotiating investment agreements,
and to analyse the practical legal and policy consequences of negotiating such agreements. As
pointed out there is need for investment agreements to be balanced, and to factor in a
development dimension.
131
Baker, J ‘Corporate Social Responsibility and Economic Development’
http://www.oecd.org/dataoecd/24/35/2423198.pdf (accessed 16 May 2012)
132
A report on the Role of Private Sector in Expanding Economic Opportunity through Collaborative Action ,
October 2007 http://www.hks.harvard.edu/m-cbg/CSRI/publications/report_29_HarvardEODialogueSummary
20071018.pdf (accessed 16 May 2012)
133
A report on Bilateral Investment Treaties: Implications for Sustainable Development and Options for Regulation
http://www.fes-globalization.org/publications/ConferenceReports/FESCRBerlin_Peterson.pdf (accessed 17 May
2012)
56
From the discussions, this study reviewed BITs between Tanzania and various countries.134 It
discovered developmental goals are missing in those BITs. Drawing from those discussions, rethink of Tanzania’s investment treaty model is warranted.
4.3 Institutional weaknesses
4.3.1 Tanzania Investment Centre Structure
The current structure of Tanzania Investment Centre bears no clear unit or department which is
responsible for regulation of foreign investment with clearly outlined mandate. Looking on the
current structure the study examines possibility of two different respective solutions:
Strengthen the After Care Unit
TIC has After Care Unit (ACU). This is one of the units under the Department of Investment
Facilitation. This unit is expected to do monitoring but it has no power to do so under the current
Act. In performing its duties the Unit is faced with many other challenges like lack of human
resource; lack of funds; poor roads in some regions where projects are located; and government
bureaucracy in different areas.
Attraction of FDI goes hand in hand with the analysis of costs and benefits of these investments,
which requires monitoring and evaluation. The government needs to further strengthen the after
care services. TIC needs to have an effective mechanism for tracking foreign investments and
make regular post approval follow up of investors. An effective mechanism will help in tracking
foreign investment and determine its effect to the community. There is need for legislation to
give the ACU more power for it to be able to conduct proper assessment. The assessment will
help to assess the beneficial impact foreign investors bring to the country. Due to its challenge of
lack of resources, the study sees the need for more staff and more budget allocation to the Unit.
Upgrade the After Care Unit to departmental level
This study is of the opinion there is a need to change the status of After Care unit to a fully
fledge department. The way the current structure is designed the departments function as
134
Denmark, Finland, Germany, Italy, Korea, the Netherlands, South Africa, Sweden, Switzerland and UK
57
independent, coherent administrative structure, while the units are designed to provide a
supportive role to the departments and their functions in the Centre. The ACU has the primary
functions of conducting ordinary project visit to all registered projects for the purpose of
advising on future plans including re-investment, localisation of skills, technology transfers, and
others; conducting physical verification visits (PVV) to verify specific aspects before decisions
are made in relation to granting new certificates or any other approval; and monitoring progress
of registered projects just to mention few. These duties while all are vital do not in fact care the
full extent of requirements of the Centre and allow the ACU to play its rightful role.
With due consideration that countries need effective regulatory mechanism to be able to benefit
from FDI, effective regulation is a foregone conclusion. The After Care unit has to be a fully
fledge department in order to effectively exercise the monitoring role. Currently the ACU is
limited in scope and consequently unable to fulfill the many necessary functions. Paradoxically,
in comparison with the bulk of the activities the Unit is understaffed and unable to adequately
follow-up, monitor and analyse on the many matters that come to their attention. A number of
staff needs to be scaled up take into account on the importance of including different fields like
lawyers, economists, analysts and others.
4.4 Tax Incentives
As discussed in chapter three, there are many types of tax incentives offered to foreign investors
in Tanzania. As a result this has caused problems to the country’s revenue earnings. Among the
problems existing is the way is used to shelter income from taxation through transfer pricing and
the transfer of operations from existing firms to new ones that qualify for the incentives.
Investment allowances pose problems as well as it is difficult to define the eligible expenditures
and to choose the rate of allowance for credit. There is a need for tax law amendments for the
country not to lose revenue as it is of now.
The legal instruments granting tax incentives should be drafted carefully so that they achieve
policy objectives with a minimum leakage of tax revenue. They should be expressed as precisely
as possible so as to avoid the need for frequent corrections or changes. It is believed that frequent
58
changes could contribute to the perception that the tax system is complex and difficult to comply
with.135 In Tanzania this can be evidenced on the investment inflows declined in 2009 by about
41 percent from what was achieved in 2008. The major causes of the decline were mainly due to
some changes which were abruptly introduced in the investment incentive regime in the second
half of 2009.136 So Tanzania needs to look at tax laws and improve them along those lines.
The government of Tanzania can as well refrain from huge tax exemptions for foreign investors.
There is evidence that the government of Botswana refrained from offering tax exemptions to
foreign investors but managed to attract more foreign investment in part because of following
prudent economic management principles that also assured investors that their property rights
would be protected. That is achieving stable legal framework, a strong macroeconomic policy
and favourable investment climate is more fundamental to attracting FDI than just offering tax
exemptions. The following are some suggestions on how this can possibly be done.
4.4.1 Corporate Tax Reduction
The government of Tanzania may improve on tax laws by abolishing tax holidays and reduced
corporate income tax rate. The government may set a lower corporate income tax rate as an
exception to specific sectors or regions. Hong Kong (China), Indonesia, Ireland, the Lao
People’s Democratic Republic, Cambodia and Estonia are a few countries that use this type of
incentive. This may be targeted at the income of foreign investors who meet specified criteria, or
it may be applied for attracting additional FDI. Malaysia for example did this in the mid-1980s
when investment inflows were below expectations.137
This may be targeted at investment in regions that are disadvantaged due to their remoteness
from major urban centres. Operating in a remote area may entail higher costs and place the
location at a competitive disadvantage relative to other possible sites. Moreover, firms may find
135
‘Tax Incentives and Foreign Direct Investment, a Global Survey’ http://unctad.org/en/docs/iteipcmisc3_en.pdf
(accessed 29 April 2012) 3
136
Interview of the Executive Director of Tanzania Investment Centre conducted by Corporate Guides International
Ltd. Tanzania in 2010, http://www.corporate-tanzania.com/assets/pdf/2010/interview/ctz-2010-interview-naiko.pdf
(accessed 2 May 2012)
137
(n 135 above) 19
59
it difficult to encourage skilled labour to relocate and work in remote areas that do not offer the
services and conveniences available in other centres. Workers may demand higher wages to
compensate for this, which again implies higher costs for prospective investors. Tax incentives
may be provided in such cases to compensate investors for these additional business costs.
4.5 Introduction of E-platform to Registration and Licensing Agencies
There are still time delays in giving licenses or registering companies. Existing business
licensing process and registration needs to be further simplified and streamlined in order to
reduce the cost of doing business. So this study is of the view there is need for an introduction of
Electronic System (E-platform) for more efficiency and effectiveness. This can be done by
legislating the deadline for these processes and give the TIC, as ‘one stop centre’ mandate to
make a follow up on the deadline. Once government procedures have been streamlined and
redesigned as part of regulatory reforms, use of computerised databases and registries can lead to
further improvements in regulatory performance.138
4.6 Foreign Direct Investment and its Impact to Economic Development in
Tanzania
In evaluating the impact of FDI on the economy, different criteria have been involved so as to
examine the costs and benefits of investment. Criteria such as employment and tax revenue
generation, emphasis is on the overall objective of promoting investment to improve productivity
and competitiveness of the Tanzania economy.139 Impressive impact has been apparent in certain
areas and weak in others.
Although there is modest employment opportunities, still impact on adding value, technology
transfer and environment on conservation is relatively weak. Despite significant inflow of FDI,
the manufacturing sector is still struggling to improve productivity. FDI in agriculture sector has
managed to bring about significant transformation both in terms of the performance of the
138
139
(n 125 above) 29
As above
60
particular commodity/sub sector such as floriculture and in economic impact of the neighbouring
community.140
4.6.1 Examples of Foreign Direct Investments’ Impact on Tanzania
Capital
In Tanzania FDI has significantly contributed to capital formation despite the fact the large share
of capital formation is held by the domestic investment. Using the official statistics, between
1999 and 2004, FDI averaged about 5 percent of GDP.141
Employment Generation
In Tanzania foreign investment demands the use of many expatriate managers and professionals,
whose skills are domestically available, this could be regarded as holding back local skills
development. In Tanzania there are a lot of people with all the skills and expertise required for
various projects. Unfortunately the tendency has shown that foreign companies most of the times
like to import their own people on the ground that there are no people with such skills in the
country.
The researcher is of the view that for the country to benefit more and create more jobs for
unemployed population, it is important for legislations to introduce a ‘National Qualification
Framework’ within the labour laws. Globally, a qualification framework aims to organise
information for coordination perspectives. By setting up a framework, it helps people to make
logical decisions and coordinate them from a large perspective. A Qualifications Framework is
the structure into which accredited qualifications are placed. This allows learners, training
providers and employers to gain information about the broad equivalence of qualifications. For
example, a Vocational Qualifications Framework (VQF) helps to create parity of esteem between
vocational and academic qualifications.
140
(n 138 above) 14
Kabelwa GC ‘Potential Impacts of FDI on Economic Development in Tanzania’ (2006)
http://www.tzonline.org/pdf/potentialimpactsofFDIoneconomicdevelopmentintanzania6.pdf (accessed 24 January
2012) 12
141
61
Labour law legislation should provide reform. It should be reformed to accommodate this
framework and provide relevant data base to Tanzania Investment Centre.
Technology, Knowledge and Skills Transfer
As Kabelwa discusses,142 there are four channels through which technology transferred by FDI
can be diffused in the host country. These include: FDI establishing linkages with domestic
enterprises-as suppliers (backward linkage) or users (forward linkage), skills transfer through
training, learning-by-doing, learning-by-interacting, and job mobility, demonstration effects as
local firms copy or adapt new technologies, market channels and management techniques
introduced by foreign investors. This can take place in activities that involve processing or
manufacturing and it can also be diffused in services and strategic technology partnership
between a foreign investor and a domestic partner in areas such as R&D; and know-how, design
and technical specifications and R&D capability.
For example, with backward linkage the Tanzania Breweries (TBL)143 initiated a comprehensive
programme of local sourcing. TBL identified a number of inputs to the production of beer that
could be sourced locally from the primary inputs (barley) to other intermediate inputs in the
packaging process. It is approximated that TBL’s sources about 30 percent of its barley
requirement from domestic sources. For this purpose it has set up a malting plant in Moshi144 to
systemise the purchase of barley from over 500 farmers in the region. In 2000, approximately
US$ 2.4 million were paid to farmers for the crop, representing the single largest source of direct
income for farmers in the region. TBL also planned to meet the entire barley requirement from
local sources (increasing from 6,000 to 26,000 tones) through further investment in research and
development of the crop to improve yields and deepening of the present linkages with the
farming community.
142
Kabelwa (2006)
In November 1993, South African Breweries acquired 46% of Tanzania Breweries Ltd. (TBL) for US$ 21
million. As part of its achievements, in September 1998, TBL became the Dar es Salaam Stock Exchange’s second
company to acquire a listing and South African Breweries had its share increased to 50.5%. Since the joint venture
agreement with Tanzanian Government, the company has increased its interest in Tanzania Distilleries Ltd to 100%
and its interest in Darbrew Ltd, a sorghum beer producer to 60%
144
A district in Kilimanjaro region
143
62
Other important backward linkages established by TBL are the sourcing of locally manufactured
glass beer bottles. Another supplier in Tanzania for TBL is Carnaud Metal Box, manufacturer of
metal crown corks. This supplier is also a long established foreign affiliate and was the first
supplier to enter into a technical collaboration with TBL. In addition, TBL sources plastic crates
and shrink-to-fit packaging from Simba Plastics and is currently sourcing some of its bottle label
requirements from Tanzania Printers, a local printing company (labels). TBL has also established
strong backward links with Showerlux Ltd, manufacturer of industrial chemicals. Around 36
percent of TBL’s inputs are sourced locally and plans are to increase this percentage to 50.
Skills and management
Tanzania Cigarette Company (TCC)145 gives a good example of the importance to human
resource training and development. For TCC, the human capital component was vital in the
achieving various forms of upgrading and benefiting from the forms of technology transfer from
the parent company. Locals are employed in key management positions (such as technical,
administrative and sales and marketing positions) as a result of the extensive capabilities and
host country experience they possess.
TCC has now put in place extensive internal and external training programs. It is one of the main
employers in Tanzania, and seeks and retains the best young graduates in Tanzania, providing
them with career advancement opportunities as well as external training and secondments to
other plants around the world. Other training programs have been aimed at broadening
managers’ international exposure within the parent network and the training centre in St.
Petersburg, Russia. For example, a system of secondments of TCC personnel to sister affiliates
has picked momentum in recent years and a number of local personnel from middle management
upwards have already benefited. These training programs are emphasised for the development of
senior management in supervisory and technical staff.146
Competition
145
A Tanzania based company engaged in the manufacture, marketing and sale of cigarette and tobacco products.
The Company exports to DRC, Mozambique, Malawi, Zambia and Comoros
146
Kabelwa (2006)
63
The entry of South African firms provides a vivid example of the benefits from competition.
Competition from South African companies has resulted into the improvement of product
quality, the availability of additional products in the market, and expansion of the product
market. TBL for example, has managed to introduce new brands in the market. Three beers
(Kilimanjaro Premium Lager, Castle Lager and Ndovu Lager), have proved successful in the
market. The new brands have done remarkably well to grow the beer market and replace
imported beers.147
Revenue generation
The table below shows the contribution of 10 privatised industries (to foreign investors) in tax
revenue in Tanzania between 2001 and 2003. According to the Table the privatised companies
contributed about 6.7, 9.1 and 9.2 percent of total tax revenue in 2001, 2002 and 2003
respectively.
Contribution of the Privatised Firms to the Tax Revenue in Tanzania
Name of Company
Year Tax
TBL
Year of
Privatisation
1993
TCC
CARNAUDMETALBOX
TZ PORTLAND
CEMENT
147
2001
2002
2003
Contribution
(Tsh Million)
30,052.1
45,065.5
58,665.8
% of Total Tax
Revenue
3.2
4.3
4.8
1995
2001
2002
2003
11,445.8
15,781.3
24,443.2
1.2
1.5
2.0
2000
2001
412.6
0.0
2002
815.8
0.1
2003
1,210.8
0.1
2001
3,445.1
0.4
2002
4,083.2
0.4
1997
Kabelwa, G ‘South African FDI into East African: the case of Tanzania’ (2002)
64
DAR BREW LTD
THA
DAHACO
NBC (1997) LTD
1997
2000
2000
1997
TANZANIA
DISTILLERIES
CRDB
1997
2003
6,217.1
0.5
2001
347.0
0.0
2002
5,537.2
0.5
2003
293.2
0.0
2001
5,681.6
0.6
2002
7,670.1
0.7
2003
7,415.8
0.6
2001
893.6
0.1
2002
2,023.2
0.2
2003
1,060.1
0.1
2001
4,217.3
0.5
2002
5,797.4
0.6
2003
6,506.4
0.5
2001
4,163.5
0.4
2002
5,781.5
0.6
2003
3,198.8
0.3
2001
1,498.8
0.2
2002
2003
2,201.6
3,215.5
0.2
0.3
Source: Adopted from Ulanga (2005)
4.6.2 Analysis of Foreign Direct Investment in Various Sectors in Tanzania
Tourism
65
Tanzania’s tourist sector is still a leading sector in the Tanzanian economy. Tanzania is the only
country in the world to allocate more than 25 percent of its total area to wildlife parks and game
reserves. It has 14 national parks, 17 game reserves, 50 game controlled areas, a conservation
area, two marine parks and two marine reserves.148 According to the Ministry of Natural
Resources and Tourism, the sector in 2000 to 2003 accounted for roughly 14 to16 percent of
GDP and the Tourism Policy of September 1999 calls for a GDP contribution of 25 to 30 percent
by 2010. To meet the 2010 goal, the industry had to grow at a rate of 15 percent per year,
assuming that GDP grows at a 6 percent average.
In Tanzania tourism is claimed to be a sector with significant linkages to other sectors such as
agriculture, fishing, retailing and arts and crafts; and that it has economic spin offs into other
sectors such as communication, education, energy, construction and the general development of
the infrastructure thereby benefiting the economy as a whole. This make tourism become one of
the options to diversify the economy and supplement a declining agricultural sector; create jobs
in both rural and urban areas; and offer entrepreneurial opportunities for small and medium
enterprises as well as community cooperatives.
So in promoting it, the country expects to earn foreign exchange hence increase of tax revenues.
It is expected in the process could lead to enhanced living standards, economic well-being, social
and cultural development.149 With this ambivalent stance on the role of tourism in development,
Tanzania came out with a comprehensive tourism policy which more or less accorded with the
new changes in 1991.
There has been an increase in the number of investments in tourism through buying of existing
facilities, leasing and direct investments. But, there are cast doubts about the claims made by the
government officials, policy makers, politicians and even some academicians who have
researched on the sector, on its contribution to the economy and development in general. Given
all of the above, the pertinent issue still remains what Tanzania actually benefits from tourism.
148
Tanzania Investment Guide 2008 and Beyond, http://www.tic.co.tz/ticwebsite.nsf /FILE/TICGuideline.pdf
(accessed 20 February 2012)
149
Chambua, G ‘Tourism and Development in Tanzania: Myths and Realities’
http://www.iipt.org/africa2007/PDFs/GeofreyChambua.pdf (accessed 4 May 2012)
66
The government claims that besides foreign exchange earnings, the sector generates money in
the form of taxes, creates employment and stimulates growth in other sectors such as agriculture
and construction. As critically examined by Chambua in his article,150 these claims shows that
although these claims are based on certain facts, he argued the reality is different. He said, and
the researcher agrees with that what is not concealed behind these claims is the fact that the
sector is premised on the destruction of other sectors such as agriculture, livestock keeping,
fishing and other rural and coastal and marine based resources by encroaching on resources that
are indispensable for the survival and prosperity of the rural dwellers. Moreover, the exploitative
and dehumanising working conditions of those employed in the sector are not considered at all. It
is claimed that among the benefits accrued directly to people are employment opportunities.
Official figures show that the sector employed about 157,000 workers by 2001. What is not
pointed out is the fact that working conditions in tourism are notoriously exploitative and
humiliating, given the low wages in the sector as it is difficult to have viable unions in the face of
dominance of seasonal, unskilled and casual labour and outsourcing of some functions.
Too often tourism only creates a few permanent paid jobs, and even these are very lowly paying.
Wage levels are determined by the grade of the restaurant or hotel, whereby workers in five star
hotels command higher wages. Tourism is by nature a seasonal industry and all hotels, hunting
companies, travel and tour agents employ casual or part time staff at certain times of the year to
perform some core services. Employment of casuals is particularly common in out sourced
services (laundry, cleaning, security and others). Out sourcing often means lower wages, loss of
benefits and retrenchments. This, combined together with the high levels of unemployment in the
country, and the policies of retrenchment has in most cases led to lower levels of trade union
membership and an erosion of worker power. This allows employers to pay no overtime, sick
benefits or pensions.151
George Chambua keeps on arguing that tourism has a leakage factor in that substantial amounts
of money earned from the sector leaves the countries of destination to pay for the imports
consumed by the sector or in terms of repatriation. The country is not only losing money in terms
150
151
(n 149 above)
(n 149 above) 19 20
67
of foreign exchange and leakages, but also the amounts of money it has been compelled to use
from taxes and loans for privatisation of facilities, sustenance of incentives for investors and
creation of infrastructure to service tourism.
Manufacturing sector
The largest sector for FDI is believed to be the manufacturing sector. Tanzania is an economy
increasingly oriented towards manufacturing and export. In 2007, the sector grew by 8.7 percent
compared to 8.6 percent in 2006, while the contribution of the sector to real GDP grew by 7.8
percent in 2007. The increase in growth was mainly attributable to increased production in
sectors such as cement, beverages, corrugated iron sheets, iron and steel products, cigarette,
plastic and textile products; where much of the FDI went to food and beverages.152
Mining sector
The mining sector continues to play an important and growing part in the Tanzanian economy.
Mining is the fastest growing sector in Tanzania in terms of its share of exports. The value of
mineral exports increased from US$14 million in 1996 to US$711 million in 2005. Mining is
believed to be the second largest sector for FDI with about 28 percent of total FDI stock by 2001
and the largest single sub-sector in terms of FDI has been the gold mining industry.
The growth in mining sector has being contributed by Tanzania’s ability to attract mineral
explorations and investment. This ability has been highly dependent on the country’s abundance
of mineral resources. The county has extensive mineral resources, the major ones being gold,
diamond, base metals such as nickel, cobalt and copper. Tanzania also has gemstones such as
ruby, sapphire and tanzanite; industrial minerals such as soda ash, kaolin and phosphate and iron
ore and coal. Tanzania is the world’s only source of tanzanite, a precious stone found in the open
mines around Arusha region.
The growth in mining sector was also boosted with 1990s revised, investor friendly investment
and mining code which was introduced in 1998, which was well received by international
152
Tanzania Investment Guide (2008) 22
68
investors. There has been a dramatic growth in the mining sector since that time and made
Tanzania to be the continent’s third largest gold producer after South Africa and Ghana. Reports
from the Ministry of Energy and Minerals show that mining sector contribution to GDP was
around 1 percent in 1998. In 2000s this figure rise and accounted for 2.5 to 2.8 percent of GDP.
According to the Development Vision 2025, the sector is predicted to account for 10 percent of
GDP in 2025.
Agricultural sector
In agricultural sector several reforms have been undertaken including granting the private sector
permission to compete in the processing and marketing of cash crops; land laws have been
revised to allow for long term leases of up to 99 years for foreign companies. Tanzania’s
agriculture and agribusiness have a number of competitive advantages, making the country a
viable investment destination. The comparative advantages include, among others, biodiversity,
competitive input costs, infrastructure such as deep water ports, international airports, a network
of roads and railways, and a fast growing sophisticated financial sector.153
The share of agriculture is 25.8 percent of the total GDP. Crops account for almost 34.6 percent
and livestock almost 6.0 percent. However, the share of agriculture has been declining since the
1990s as a result of considerable growth in other sectors such as mining and manufacturing. In
Tanzania major cash crops include coffee, cotton, tea, tobacco and cashew nuts as well as
horticultural and floricultural products while main food crops include maize, rice, pulses and
wheat.154
Although agriculture is the backbone of the Tanzania’s economy, the sector contributes only
about 6.7 percent of the total FDI stock. This is a challenge for the government to attract foreign
investors who may have competitive advantage in the sector. The researcher agrees with
Kabelwa who said Tanzania can attract foreign investors in areas like cattle breeding, fruit
production and canning, fruit juice production, flower production, cattle and game ranches and
153
154
(n 152 above) 10 11
As above, 5
69
timber production. Attraction of FDI in the agro processing industries can also be a key in the
development of the agriculture sector.155
So far the government has made commendable efforts to pursue macroeconomic policies that
will motivate investment in agriculture by small and large scale commercial farmers through
creation of enabling environment and provision of proactive support to private operators,
farmers’ organisations and other stakeholders and by ensuring a strong regulatory mechanism.
There have been substantial improvements in road infrastructure through TANROADS whereby
roads connecting major regional centres and to neighbouring countries have been improved to
tarmac level. Also TIC in collaboration with the Ministry of Lands, Housing and Human
Settlements Developments has been mandated to establish land bank for investors. In this regard,
4.0 million acres of land have been identified and modalities for ownership are underway. The
Land Act has also been amended to allow land to be used as capital for investment.156
Fisheries
Since 1998, the fishing industry has seen some changes, most notably increased access to foreign
investment. Foreign investors can operate through joint venture operations with Tanzanian
companies, and are strongly encouraged to do so. In addition, the division has become more
customer service oriented with better service, quicker turnaround times, more transparency, and
overall improved support. In 1999 to 2004 the fishing industry reported to have contributed to
1.6 to 3.1 percent of GDP.
The government of Tanzania though is concerned about over fishing, so is taking a cautious
stance on the fishing industry. It is trying to promote underutilised areas, such as EEZ fishing
and aquaculture, and some changes have been made that encourage investment. They see these
as areas with immense potential for foreign investment. Despite the division’s efforts, two of the
areas with the largest potential, EEZ and aquaculture, seem to be growing slowly. As discussed
in Tanzania Investor Roadmap: Primers on Regulations report of 2004, if the government wants
155
156
Kabelwa (2006)
Act 2 of 2004 ‘The Land (Amendment) Act’
70
to exploit these areas further, it should continue its advertising campaign and closely examine the
reasons for weakness in these areas.
4.6.3 Other Challenges and Way forward
Challenges of utilities in the country
Concerning utilities, one major complaint by all investors is the cost of electricity, a cost that
includes not only the tariffs but also the damages to equipment caused by TANESCO’s
operation. Apart from the cost of electricity the power is also not stable and enough for
operations. Water is not cited for its cost, but rather for its unstable supply, if not its
unavailability. Telecommunication is perceived as expensive; however, the business community
deems it less of an issue today than before.
Complaints on tax burden in Tanzania
As observed in the Tanzania Investor Roadmap of 2004 which the researcher tend to agree
partly, is that most fundamental problem with business regulations in Tanzania is the pretext to
extract revenue from the private sector. A multitude of charges with concomitant procedures and
paperwork transfer money from the private sector to the public sector that is from the more
productive to the less productive sector. While the tax collector finds these punctures attractive,
they weaken the private sector. They cut its working capital and drag it through time consuming
procedures that ultimately have no real economic meaning. This contributes to repel investors
away from Tanzania.
The researcher does not agree on foreign investors’ perspective as foreign investors enjoy a
number of tax incentives while this is not the case with local investors. The researcher is of the
view that the government need to change its strategy and not depend only on foreign investment
for its development goals and discourage the local investors. There must be a balance between
the two. So incentives should be provided to local investors as well to encourage them. Without
incentives to local investors, it is hard to envisage prospects for significant growth.
71
The researcher agrees with the fact that the cost of running the government is still too high for
the private economy to support. So the government of Tanzania has to embrace a higher
dimension of reform: intelligent taxation that does not push the brakes where acceleration is
needed, and vice versa.
Another issue is the restriction of Export Processing Zone (EPZ) status to new export businesses
only. The policy cannot be found in the EPZ law or regulations, but it is currently practiced.
Agro-processors, agro-processing are natural economic avenue for Tanzania. New EPZ agroprocessors would displace existing ones due to their cheaper operational costs. The policy can
potentially destroy existing agro-processing businesses and the local experience that these agroprocessors have accumulated over time. As all these issues increase costs directly or indirectly, it
follows that the international competitiveness of Tanzania is at stake if reforms do not continue
to rationalise its economy. This is due to the spread of wireless and the reduction of its cost in the
last 5 years, in addition to a similar phenomenon for the Internet. A new issue is the restriction of
EPZ status to new export businesses
Corruption and ambitious plans
Corruption is one of obstacles pose challenges to country’s development. Corruption practices by
political leaders are wide spread in Tanzania. This has led to inefficiencies in the public
service.157 The circumstances under which various government institutions entered into
agreements with foreign companies pose a lot of questions and doubt. The arbitration case that
involved Richmond Development Company (Richmond) and Dowans Holdings SA (Costa
Rica)/Dowans Tanzania Limited (Dowans) is one of the examples of cases that ignored experts’
opinions because of corruption.
In 2006 Tanzania faced a serious crisis in electricity supply and as an emergency measure
Richmond was awarded a contract to supply generators to provide 100 megawatts at a cost of
Tsh. 172 billion equivalent to US$ 150 million. The generators failed to arrive on time, they did
not work as required and the pipeline was never built. However, the government had to keep the
157
Corruption-the latest, Business and the Economy, Issue 99 http://www.tzaffairs.org/category/business-theeconomy/ (accessed 18 May 2012)
72
contract and keep paying a non-existing company US$ 137,000 a day without power being
generated. And now Tanzanians are faced with the problem of repaying the debt, with the
government increasing the electricity bill by 40 percent.
Richmond and Dowans instituted a case against TANESCO to the International Chamber of
Commerce (ICC) for arbitration,158 claiming US$ 169 and 149 million respectively. The two
claimants had gone to ICC after TANESCO moved to High Court to restrain the power
producers from disposing its turbines. Dowans wanted to sale the turbines after the government
terminates power production and purchase agreements between TANESCO and the firm on
grounds of underperformance.
Dowans came into Tanzania in 2007 after taking over the contract of Richmond which had failed
to deliver after signing an agreement with the government to produce emergency power. On 23
June 2006 TANESCO entered into the Emergency Power Supply Agreement with Richmond
which assigned its contractual rights to Dowans Holdings SA. Thereafter, Dowans Holdings SA
assigned its duties to its subsidiary company, Dowans Tanzania Limited. It is alleged that after
the review of the agreement and irregularities in the contract, TANESCO wrote to Dowans on 30
June 2008 stating a decommissioning of the plants because the contract was void and hence
contract termination by the government. This is what makes the companies to file their claims to
the ICC.
Looking on section 31 of the Tanzania Public Procurement Act159 it explicitly states that no
public body shall award any contract unless the award has been approved by appropriate tender
board. Under the Act, the Richmond/Dowans contract is the product of an illegal tendering
system because it was not awarded by TANESCO’s own tender board. This was the basis for
TANESCO’s ultimate decision to terminate the contract assigned to Dowans Tanzania Limited
by Richmond. The ICC ruling made on 15 November 2010 held TANESCO responsible for the
158
Dowans Holdings SA (Costa Rica) and Dowans Tanzania Limited v. Tanzania Electric Supply Company Limited
(Tanzania), International Chamber of Commerce – International Court of Arbitration, Case No. 15947/VRO, 2009
159
Act 21 of 2004
73
breach of the agreement and ordered it to pay the claimants US$ US$ 65.8 million for breach of
a contract.
4.7 Conclusion
Despite the impact that foreign investment that has been brought to Tanzanian economy, the
impact is still not vigorous given the means through which that impact occurs and the structural
constraint that are characteristic of the economy. There are still some weaknesses and challenges
that need improvement. There are weak sectoral linkages in the economy and limited structure of
investment distribution. The impact on the local community is rather temporary and voluntary
depending on the discretion of large investors. It is then imperative for the Act to be amended to
include the clause which will address the mentioned challenges.
74
CHAPTER FIVE
FINAL CONCLUSION
This chapter combines the findings of the entire dissertation and draws some final conclusions.
Recommendations are also given under the chapter.
5.1 Summary of findings
Generally, chapter two is on conceptual and theoretical framework for regulation of FDI; where
principles underlying FDI and economic theories of FDI were reviewed. Relationship between
FDI, economic development and regulation was explained. The research find out there is a link
between FDI and economic development and classical theory is of the view FDI can play an
important role to promote economic development. However this study has learnt a host country
need to have sound regulatory framework, efficient supporting institutions to enforce the laws
and regulations in order to reap the benefits of FDI. The dependency theory which is opposed to
the classical theory has the view that unless a developing state break out of the dependence
situation, foreign investment will not bring meaningful economic development.
Under the chapter efforts made at international level to regulate investment were examined.
Although the efforts to have comprehensive treaty over the regulation of foreign investment did
not succeed, their contributions have helped in the development of the main principles of law
governing treatment of foreign investment under international law.
In chapter three overview of legal, regulatory and institutional framework for FDI in Tanzania
was conducted. The study learnt that the act governing investment and investment agency have
not managed to demonstrate on empirical evidence the achievements of what were anticipated.
Theoretical review of the Centres performance has revealed inadequacy in regulating FDI. On
the other hand, the Act is also not adequate as there are silent features that pose challenges in
regulating FDI effectively.
75
In chapter four discussions has been grounded on the assessment of the strengths and weaknesses
of existing legal framework, to see the need for critical imperative for review of legal and
regulatory framework for FDI. Silent features in the 1997 Act on joint ventures, duties to
investors and developmental goals pose challenges that need amendment.
5.2 Conclusion
From the literature reviewed, this study has learnt that as attraction of FDI emerged as important
policy, regulation of the same has also emerged as an important part. Regulatory reforms have
become an important policy area where it requires the establishment of appropriate legal and
institutional frameworks. The absence of regulatory controls over the sudden inflow of foreign
investment brings economic misunderstanding within the state.
The host country needs to have policies in place in order to reap the benefits of FDI. Despite the
success of Tanzania in attracting foreign investment there are still some weaknesses in terms of
its structure in regulating investment. The country faces challenges in creating an improved
business environment this including regulatory uncertainty. The general public is of the view that
the government had not adequately assessed foreign investment to ensure they were in the
countries interest.
5.3 Recommendations
To conclude, the major findings of this thesis relate to effectiveness in regulating FDI, legal
framework, regulations and institutional structure pose challenges that need to be addressed.
Therefore this study’s main recommendations are directed towards developing a sound
regulatory framework which should be efficient and supporting institutions that enforce the
relevant laws and regulations.
Drawing from the findings on the silent features in 1997 investment Act, joint venture clause
need to be accommodated in the Act. This will open opportunities for local and foreign investors
to join hands for more prosperity. It is also recommended for Corporate Social Responsibility
76
clause to be incorporated in the Act. Its inclusion to the Act will enable foreign investors to have
certain duties as well.
It is recommended for Tanzanian regulatory oversight to be strengthened. Tanzania Investment
Act of 1997 being the primary act in governing investments in Tanzania need review especially,
its structure in order to bring a clear understanding of who is responsible for regulating. There is
need for legislation to give the organ responsible for monitoring foreign investment more power
to be able to play its rightful role of monitoring investment effectively and conduct proper
assessment. An effective mechanism will help in tracking foreign investment.
Due to the nature of bilateral investment treaties, the suggestion is for the introduction of a new
BIT model which contains development purposes. As said by Boulle and Klaaren which the
researcher agrees, it is suggested for the model to be drafted with a particular focus in balancing
between development of Tanzania and the protection of foreign investor rights.160 Various ways
can be used include its inclusion in the preamble.
It is recommended for legal instruments granting tax incentives to be reexamined to be sure they
achieve policy objectives with a minimum leakage of tax revenue. The government of Tanzania
can as well refrain from huge tax exemptions for foreign investors. Improvement on tax laws by
abolishing tax holidays and reduced corporate income tax rate is highly recommended. Lower
corporate income tax rate may be set as an exception to the general tax regime in order to attract
FDI into specific sectors or regions. Tax incentives may be targeted at investment in regions that
are disadvantaged due to their remoteness from major urban centres.
Introduction of Electronic System (E-platform) is recommended by this study for more
efficiency and effectiveness in licensing and registration procedures. Deadline for these
processes can be legislated and TIC as ‘one stop centre’ given mandate to make a follow up on
those deadlines.
160
Boulle, L & Klaaren, J ‘Developing countries, BITs and ICSID Arbitration: Views from Africa’ (2009)
77
Rutaihwa recommended for rules and regulations to be observed when granting investment
permit to Chinese. The researcher agrees with him as it has being observed some of Chinese may
come as investors but ending up engaging themselves in petty business that can be done by local
traders.
It is recommended for Tanzania to have a plastic recycling plant as suggested by Dijk.
Drawing from UNCTAD report161 the study recommends for Tanzania to promote investment in
promising sectors. As a strategy to benefit more from FDI, it is recommended for the country to
request for IPR of UNCTAD assistance to conduct analysis of the sector/s with high potential.
This will assist Tanzania to further exploit its comparative advantage.
161
UNCTAD report on Investment Policy Review Programme: a Framework for Attracting and Benefiting from
Foreign Direct Investment (2008) www.unctad.org/ipr (accessed 17 November 2011)
78
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83
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85
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