tic 2008. report on the study of growth and impact of investment in tanzania

Tanzania Investment Centre

2008

REPORT ON THE STUDY OF GROWTH AND IMPACT OF INVESTMENT IN TANZANIA

REPORT ON THE STUDY OF GROWTH AND IMPACT OF INVESTMENT IN TANZANIA

REPORT ON THE STUDY OF GROWTH AND

IMPACT OF INVESTMENT IN TANZANIA

2008

Tanzania Investment Centre

iiThe United Republic of Tanzania - Tanzania Investment Centre

Table of ConTenTs

List of Abbreviations and Acronyms .......................................................................vLIST OF TABLES ......................................................................................................viiLIST OF FIGURES ...................................................................................................viiiExecutive Summary ................................................................................................. ix Background and Context .................................................................................... ix Objectives ......................................................................................................... ix 1. Scope of the study ...................................................................................... x 2. Methodology ................................................................................................ x 3. Key messages from the study .................................................................... xi 4. Recommendations ...................................................................................xiiiAcknowledgements .................................................................................................xv1.0 Introduction ........................................................................................................1 1.1 Background .................................................................................................1 1.2 Objectives and Rationale ............................................................................2 1.3 Scope of Work .............................................................................................2 1.4 Methodology ................................................................................................3 1.4.1 DefinitionofInvestment ....................................................................3 1.4.2 Overall Approach ..............................................................................3 1.4.3 Field Survey ......................................................................................4 1.4.4 Data Analysis ....................................................................................5 1.5 Organisation of the Report ..........................................................................52.0 Trends and Magnitude of Foreign and Domestic Investment in Tanzania ... 7 2.1 Trends and the Structure of Capital Formation ...........................................7 2.1.1 Trends in Total Capital Formation .....................................................8 2.1.2 Capital Formation by Public and Private Sector ..............................9 2.1.3 Capital Formation by Type of Assets .............................................. 11 2.1.4 Capital Formation by Sectors of the Economy ................................15 2.2 TrendsandtheStructureofForeignDirectInvestment ...........................16 2.2.1 SizeandGrowthofForeignDirectInvestmentinTanzania ............ 16 2.2.2 FDIbyModeofEntry,SectoralDistributionandOwnership ........... 18 2.2.3 FDIbyCountry/RegionofOrigin .....................................................20 2.2.4 SpatialDistributionofFDI ..............................................................22 2.2.5 PortfolioInvestmentsintoTanzania ................................................23 2.3 LevelofDomesticDirectInvestment(DDI) ...............................................23 2.3.1 IdentificationofDomesticDirectInvestment(DDI) .........................23 2.3.2 RelationshipbetweenForeignandDomesticInvestment ............... 25 2.3.3 Literature Review ............................................................................26 2.4 PolicyImplications .....................................................................................28

iii Report on the Study of Growth and Impact of Investment in Tanzania

3.0 Investments Adequacy in Relation to Development Goals .........................29 3.1 Development Goals ...................................................................................29 3.2 LinkbetweenInvestmentandGrowth .......................................................29 3.3 Tanzania’sHistoricalExperienceonInvestmentandGrowth ...................31 3.4 ExplainingTanzania’sInsignificantLinkagebetween InvestmentandGrowth .............................................................................32 3.5 InvestmentAdequacy ................................................................................35 3.6 RaisingInvestmentandGrowth:Whatcanbedone? ...............................37 3.6.1 ImprovingtheEnvironmentforInvestment .....................................37 3.6.2RaisingInvestmentProductivityandSustainingGrowth ............... 38 3.6.3 Diversifying Sources of External Finance and Raising EffectivenessofOfficialDevelopmentAssistance ..........................40 3.6.4 Mobilising Domestic Resources .....................................................41 3.6.5MakingFurtherProgressinTanzaniaInvestor Roadmap-typeIssues .....................................................................414.0 MeasuresforEvaluatingtheCostandBenefitsofInvestments made in Tanzania .............................................................................................45 4.1 Introduction ...............................................................................................45 4.2 CurrentMeasuresforInvestmentApproval ..............................................45 4.3 Cost-benefitMeasures .............................................................................47 4.3.1 SocialBenefitMeasures .................................................................47 4.3.2 Social Cost Measures .....................................................................48 4.4 CalculatingtheSocialCost-BenefitMeasures(ModusOperandi) ............ 49 4.5 PostInvestmentMeasures ........................................................................50 4.5.1 Statutory Measures ........................................................................50 4.5.2 Other Follow-up Measures ..............................................................50 4.6 Recommendations for Addressing the Key Remaining Constraints ....... 51 4.6.1 BecomingmorePro-activeinPromotingLocalInvestments .......... 51 4.6.2 FurtherPromotionofForeignInvestments ....................................52 4.6.3 TakingAdvantageofBilateralInvestmentTreaties .........................52 4.6.4 ImprovingProspectsforTechnologyTransfer .................................52 4.6.5 ImprovingthelinkagesbetweenSMEsandexistinginvestors. ...... 53 4.6.6 Facilitating the Creation of Employment .........................................53 4.6.7 Protecting the Environment .............................................................54 4.6.8 FacilitatingandServicingExistingInvestors ...................................54 4.6.9 Undertaking more regular follow-up of investors ............................545.0 Investment Impact Analysis ...........................................................................55 5.1 ImpactonEconomicGrowth .....................................................................55 5.2 ImpactonBalanceofPayments ...............................................................57 5.2.1 ImpactonExports/Imports ..............................................................57

ivThe United Republic of Tanzania - Tanzania Investment Centre

5.2.2 ImpactontheBalanceofPayments ...............................................61 5.3 InvestmentImpactonGovernmentRevenue ............................................62 5.4 ImpactofInvestmentonSavingsLevel ....................................................65 5.4.1 Introduction .....................................................................................65 5.4.2 Trends in Government and Private Savings ...................................65 5.4.3 ImprovingSavingsMobilisation ......................................................66 5.5 InvestmentPerformanceandProfitability .................................................67 5.6 ImpactonEmploymentGeneration ...........................................................69 5.6.1 Introduction .....................................................................................69 5.6.2 Investmentandemploymentcreation .............................................70 5.6.3 EmploymentImpactsthroughLinkageswiththe Rest of the Economy .......................................................................76 5.7 ImpactonHumanResourcesDevelopment .............................................77 5.7.1 Introduction .....................................................................................77 5.7.2 Development of Human Resources ...............................................77 5.8 ImpactofInvestmentonTechnologyTransfer ..........................................79 5.8.1 Introduction .....................................................................................79 5.8.2 Tanzania’ Experience ......................................................................80 5.8.3 Transferring Business Skills and Working Styles ............................80 5.8.4 Examples of Technology Transfer in Selected Sectors ...................81 5.8.5 TechnologyTransfer-throughImportsofCapitalGoods .................82 5.9 ImpactofInvestmentonEntrepreneurialGrowth ......................................83 5.9.1 Entrepreneurship Growth ................................................................83 5.10CommunityandNeighbourhoodImpact ....................................................86 5.11 IllustrativeCasesofSomeofthePerformingInvestments ......................89 5.11.1TanzaniaCigaretteCompany(TCC) ...............................................90 5.11.2KiooLimitedCompany(KLC) .........................................................91 5.11.3MissionMikocheniHealthandEducationNetwork(MMHEN) ........ 92 5.11.4StandardCharteredBankTanzania(SCBT) ..................................93 5.12Cross-cuttingIssues ..................................................................................96 5.12.1 The Environment ............................................................................96 5.12.2 The Gender Dimension ..................................................................97 5.12.3HIV/AIDS .........................................................................................99 5.12.4RegionalIntegrationInitiatives ......................................................100 5.13PolicyImplications ...................................................................................1016.0 Conclusions and Recommendations ..........................................................104 6.1 Key Conclusions .....................................................................................104 6.2 Recommendations .................................................................................106References .............................................................................................................109Appendices ............................................................................................................ 113

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lisT of abbreviaTions and aCronyms

AIDS - AcquiredImmuneDeficiencySyndromeBITS - Bilateral Investment TreatiesBOT - Bank of TanzaniaBRELA - Business Registration and Licensing AuthorityCAER - Consulting Assistance on Economic ReformCDTT - Centre for the Development and Transfer of TechnologyCEDAW - Convention on Elimination of all forms of Discrimination Against WomenCEM - Country Economic MemorandumCGE - Computable General EquilibriumCOMFAR - Computer Model for Feasibility Analysis and ReportingCOSTECH - Commission for Science and TechnologyCUTS - Consumer Unity and Trust SocietyDANIDA - Danish International Development AgencyDDI - Domestic Direct InvestmentEIA - Environmental Impact AssessmentESRF - Economic and Social Research FoundationFDI - Foreign Direct InvestmentFR - Financial RulesSTL - SunflagTanzaniaLtdGDP - Gross Domestic ProductGFCF - Gross Fixed Capital FormationHIPC - Highly Indebted Poor CountryHIV - HumanImmuno-deficiencyVirusICOR - Incremental Capital Output RatioIDA - International Development AssociationIFC - International Finance CorporationILO - International Labour OrganisationIMF - International Monetary Fund IPI - Institute of Production Innovation IIRT - International Investors Round TableKIDT - Kilimanjaro Industrial Development TrustKTM - Karibu Textile MillsLDC - Least Developed CountryMDGs - Millennium Development GoalsMIGA - Multilateral Investment Guarantee AgencyMKUKUTA - Mkakati wa Kukuza Uchumi na Kupunguza Umasikini TanzaniaMNEs - Multinational EnterprisesMWATEX - Mwanza Textile Mills

viThe United Republic of Tanzania - Tanzania Investment Centre

NBC - National Bank of Commerce LimitedNBCL - Nyanza Bottling Company Limited NBS - National Bureau of StatisticsNDC - National Development CorporationNEMC - National Environmental Management CommissionNSSF - National Social Security FundODA - OfficialDevelopmentAssistanceODI - Overseas Development InstituteOECD - Organisation of Economic Cooperation on DevelopmentPERs - Public Expenditure Reviews PPP - Public-Private PartnershipPRS - Poverty Reduction StrategyR&D - Research and DevelopmentSADC - Southern Africa Development CommunitySIDO - Small Industries Development OrganisationSME - Small and Medium EnterprisesTBL - Tanzania Breweries LimitedTBs - Treasury BillsTIC - Tanzania Investment CentreTIRDO - Tanzania Industrial Research and Development OrganisationTNCs - Transnational CorporationsTNSRC - TanzaniaNationalScientificResearchCouncilTRA - Tanzania Revenue AuthorityTTCL - Tanzania Telecommunication Company LimitedUK - United KingdomUNCTAD - United Nations Conference on Trade and DevelopmentUNIDO - United Nations Industrial Development OrganisationURT - United Republic of TanzaniaUSA - United States of AmericaUSAID - United States Agency for International DevelopmentUTT - Unilever Tea Tanzania LimitedVAT - Value-Added TaxVOIL - Vegetable Oil Industries Limited

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lisT of Tables

Table 2.1: FDI stock in Tanzania 1999-2004 .........................................................................16

Table2.2: StockandflowofFDIbyRegionalDestination,1998-2004(US$million) ..........21

Table 3.1: Investment and Growth in Selected Countries .....................................................29

Table 3.2: Investment and Growth in Tanzania......................................................................32

Table 3.3: Sources of Growth in Tanzania .............................................................................32

Table 3.4: Roadmap on Institutional Facilitation of Investment .............................................42

Table5.1: TanzaniaExports(US$Million) ............................................................................55

Table 5.2: Trends in Import-Export Ratio for Selected Agricultural Firms ..............................55

Table 5.3: Trends in Export-Import Ratio for Selected Manufacturing Firms .........................56

Table 5.4: Trends in Import-Export-Ratio for Selected Mining Firms .....................................57

Table 5.5: Investment-related Income tax .............................................................................58

Table 5.6: Investment-related Value-added tax .....................................................................59

Table 5.7: Investment-related revenue from Customs ...........................................................60

Table5.8: PerformanceofLargeTaxpayers(2003-2004) .....................................................64

Table5.9: Profitabilityofsomeinvestments(2002-2004) ......................................................65

Table 5.10: Actual Investment Created Employment by Sector and

CategorisationforMainlandTanzania(2001-2003) ..............................................67

Table 5.11: Trends in Total Actual Employment of Selected Firms ..........................................70

Table 5.12: Network of Suppliers of Raw Materials and Other Inputs .....................................79

Table 5.13: TCC Performance .................................................................................................90

Table 5.14: Kioo Limited Performance ....................................................................................91

Table 5.15: Number of patients treated between 2002-2004 ..................................................92

Table 5.16: Tax paid during the year ending December 31 2004 ............................................94

Table 5.17: Additional list of some of best performing enterprises ..........................................95

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lisT of fIGURESFigure2.1: CapitalFormationasa%ofGDP(CurrentPrices) ................................................9

Figure 2.2: Relative Importance of Public and Private Investment ......................................... 11

Figure 2.3: Value of Capital Formation by Types of Assets .....................................................12

Figure 2.4: Structure of Capital Formation by Types of Assets ...............................................12

Figure 2.5: Structure of Capital Formation by Components of Building Works .......................14

Figure 2.6: Structure of Capital Formation by Components of Other Works...........................14

Figure 2.7: Structure of Capital Formation by Components of Other Works...........................15

Figure 2.8: Capital Formations by Kind of Economic Activity 1989-2002 ...............................15

Figure 2.9: Capital Formation by Kind of Economic Activity as % of Total 1989-2002 ............16

Figure2.10: FDIInflowsintoTanzania,1990-2004...................................................................17

Figure2.11: ForeignDirectInvestmentInflowsbySector1990-2003 ......................................19

Figure 2.12: Sectoral Distribution of FDI Projects in Tanzania 1999-2001................................19

Figure 2.13: Number of FDI projects in Tanzania 1990-2004 by Country of Origin ..................21

Figure2.14: InvestmentbyCountryofOrigin,Leadingcountries1990-2004 ...........................21

Figure2.15: IdentificationofDomesticPrivateInvestment .......................................................24

Figure 2.16: Trends in the Foreign and Domestic Private Investment ......................................25

Figure 2.17: FDI as a Share of Total Capital Formation ............................................................27

Figure3.1: RealGDPGrowthandInvestment(1965-2004) ...................................................32

Figure5.1: FDI,DDIandGrowthofRealGDP .......................................................................57

Figure5.2: TanzaniaExports(US$Million) ............................................................................58

Figure5.3: TrendsinExports/ImportsofSelectedAgriculturalFirms(1999-2004) ................59

Figure 5.4: Trends in Exports/Imports for Manufacturing Firms ..............................................60

Figure 5.5: Investment-related Income Tax .............................................................................62

Figure 5.6: Investment-related Value-added tax revenue .......................................................63

Figure 5.7: Revenue from Customs ........................................................................................64

Figure5.8: TanzaniaSavings,1990-2003(PercentageofGDP) ............................................66

Figure5.9: ActualemploymentofTICapprovedforeignaffiliatesinTanzania,

byindustry,2001-2004 .........................................................................................74

Figure5.10: TrendsandStructureofTanzania’sImports(CIF) ................................................83

Figure 5.11: Percentage Distribution of Investor Donations to Communities- 1998-2004 ........87

Figure 5.12: Value of Investor Donations to Communities -1998-2004.....................................88

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exeCuTive summary

Background and Context

In 1996 the government of Tanzania reviewed the investment policy of 1990 and in 1997 a new investment law replaced the previous investment law of 1990 in order to streamline investment incentives and make the TIC a “one-stop-centre” for investment facilitation and promotion. In response,inthelastdecade,TanzaniahasachievedsignificantprogressinattractingthemuchneededinvestmentespeciallyForeignDirectInvestment(FDI).Thequestioniswhetherthelevelof investment attained is adequate to achieve the national development goals and what kind of investmentismostbeneficialandwhatthemostcost-effectiveandsociallyharmoniouswaystostimulate investment are. Although a majority of investment in both developed and developing countriesaredomestic,manydevelopingcountriesfacethechallengeofdevelopingdomesticinvestments in the context of very low levels of domestic savings rates. This poses a major challenge in investment promotion programmes.

Investmentpolicyhasanumberofchallenges toaddress.First,how tomake the investmentpromotionandfacilitationpoliciesmoreefficientandeffective.Second,determiningtheappropriatebalancebetweeneffortstopromoteforeignasopposedtodomesticinvestment.Third,whetherthebenefitsfrompromotingFDIoutweightheassociatedsocialcosts.Finally,howbesttodeploythe benefits of FDI to achieve the country’s development goal.Addressing these challengesrequiresreliableinformationandstatisticsaboutthenature,structureandimpactofinvestmenton the economy.

Objectives

The main objective of this study is to evaluate the growth and impact of investment on the economy; to assess the role played by TIC in investment promotion and facilitation, andrecommend measures for enhancing the favourable impact of investment for economic growth and poverty reduction.

Inthisregard,thestudymakesthreeimportantcontributions.First,itexaminestheavailabledataand information toestablish themagnitude,natureand trendof total investment inTanzania,thekeyissuebeingthelackofaccurateinformationonthemagnitudeof(particularlydomestic)investmentinTanzania.Second,thereportassessesoftheadequacyofrecentlevelsofinvestmentforachieving thenationaldevelopmentgoals relating togrowth. Third, thestudy reviews thecriteria used by TIC in evaluating the impact of investment and makes recommendation on the need for more robust criteria that incorporate the strategic need of promoting investment for enhancinggrowthandpovertyreduction.Fourth,onthebasisoftheidentifiedcriteria,thestudyassesses theactual impact of thegrowthof investment inTanzania so far.Finally, the studyrecommends on how the situation could be improved.

xThe United Republic of Tanzania - Tanzania Investment Centre

1. Scope of the studyThisstudycoveredfiveissues:

Providing the trends and magnitude of both local and foreign investment in Tanzania;(i)

Assessing the adequacy of investment level to meet the goals of Tanzania Development (ii)Vision 2025;

Identifying measures for evaluating the cost and benefits of investments made in(iii)Tanzania;

Evaluatingtheimpactofinvestments,and(iv)

Recommending measures for enhancing the impact of investment on Tanzania’s (v)economic growth and poverty reduction.

2. MethodologyThe overall approach taken aimed at adding value to the study by evaluating both primary andsecondarydata.Thefirst task involvedreviewofvariousdocumentsand literature inbothdeveloping and developed countries to enrich and inform the study findings. In addition, theconsultants involved a large number of stakeholders in discussions and reviews that aimed at soliciting information and opinions on investment issues. The stakeholders included government ministriesanddepartments,researchandacademicinstitutions,theprivatesector,developmentpartnersandthecivilsociety.Inaddition,extensiveconsultationsweremadewiththeclient,i.e.theTIC management to review progress and share valuable information on the study. Fieldwork for thisstudywasconductedduringthefirsttwoweeksofDecember2006.Theconsultantsdevelopedsemi-structuredinterviewsandquestionnairesandmadeextensivefieldconsultativesessions.

Purposive sampling technique was used to obtain sectors and regions for interview. The sectors selectedincludeAgriculture(themainstayoftheeconomy),Manufacturing(thefutureofeconomictransformationandimportantdestinationofFDI),theServicessector(oneofthelargestrecipientofFDIandSMEsparticularly in tourismsectors),and theMiningsector (the largest recipientofFDIinTanzania).Sevenregionsweretargetedforthesurveycorrespondingtotheselectedsectors,whichwereMorogoro,Iringa,Kilimanjaro,Arusha,Mwanza,MaraandDaresSalaam.The study team interviewed and administered semi-structured questionnaires to over 75 local andforeigninvestmentsintheseregions.Theactualnumberoffirmsthatfullyrespondedtotheinterviewsandfilledinthequestionnaireswas55(about75%responserate),outofwhich49(orabout90%)werebasedintheupcountryregions.

Dataprocessingandanalysisincludedtrendanalysis,cost-benefitanalysiscausaleffectanalysisandimpactassessment.Theanalysiswasextendedtopolicyadequacyandlinkageassessment,atthemacroandsectorallevels.Giventhepolicynatureoftheenvisagedendproduct,thestudyadoptedthetriangulationapproach,usingthecombinationoftheabove-mentionedapproachesto derive key conclusions.

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3. Key messages from the study

(i) Achievements made in attracting investments are encouraging

Between1997and2007TICregisteredover4,084investments,ofwhich25.04percentwereforeign.TIC,BOTandNBSsurveyfindingsshow thatduring theperiod2001-2005, thestockof foreignprivate investments (FPI) inTanzania continued to increase, growingat anannualaveragerateof13.6percenttoUSD5,785.2millionin2005.TheshareofFDIremainsthelargestin the totalstockofFPIas itcontributed88.8percent. Investors’confidence in theTanzanianeconomy is increasingly getting stronger. Equity from shareholders remains the major source offinancingofFDI.ThistypeoffinancingrosefromUSD1,921.3million(55.1percent)toUSD3,651.3million(71.9percent)in2005.Sectorsthatbenefitedmostfromtheincreasedinflowsare:manufacturing,mining,servicesandtourism.Agriculturereceivedlessthan10percentoftheinvestments – in part due to unfavourable infrastructure that continues to retard this sector.

(ii) …but more investment is required as well as increased productivity

The current level of investment is not yet adequate for realising Tanzania’s Development Vision 2025 goal of reducing poverty and promoting sustained development through GDP growth of over 8percent.Thestudy,usinghistoricaldata,finds insignificant relationshipbetween investmentand growth. The weak link is associated with low productivity of investment and inadequate complementary factors particularly lack of skilled human resources and poor infrastructure. However,thestudyhasalsoestablishedthatthissituationhaschangedforthebetterinrecentyears.StudiesfromothercountriessuchasChina,Japan,SouthKoreaandTaiwanshowthatinvestments averaging 25-30 percent of GDP have been pivotal in their country’s fast economic growth.IfTanzaniaistoachieveitsdevelopmentgoals,recentinvestmenttoGDPratiohastobe increased to at least 25 percent to achieve a growth rate of at least 8 percent. This entails making furthereconomic improvements (e.g. inpolicyand institutionaleffectiveness) thatwillattract furtherboth localandforeign investments.For instance, further liberalisationof foreignaccount may raise funds for investors to invest outside the country.

(iii) TICisatruly“onestop”centrethatcangreatlybenefitforeignaswellasdomesticinvestors

TheoverarchinggoalofTanzaniaInvestmentCentre(TIC)istofacilitateandpromoteinvestmentinTanzania–thusfacilitatingeconomicgrowthandpovertyalleviation.Toalargeextent,findingsof this study indicate that TIC is making commendable progress. Stakeholders interviewed applaud TIC as a truly “one-stop” centre for investment facilitation and promotion. Apart from promotinginvestment,TICisalsoofferinginvestor-friendlypost-investmentservices.However,one major criticism on the way the investment promotion policy has been implemented is that TIC hasnotgivensufficientattentiontopromotingdomesticinvestmentespeciallytheSMEs.ManydomesticstakeholdershavetheperceptionthattheplayingfieldistiltedinfavourofFDI.

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(iv) Robustcriteriaarerequiredtoevaluateimpactofinvestment

Inevaluatingtheimpactofinvestmentontheeconomy,differentcriteriashouldbeinvolvedsoastoexaminethecostsandbenefitsofinvestment.Inadditiontotheconventionalcriteriasuchasemploymentandtaxrevenuegeneration,itisimportanttoemphasisethattheoverallobjectiveofpromoting investment is to improve productivity and competitiveness of the Tanzania’s economy. Forinstance,oneoftheimportantcriteriaforevaluatingtheimpactofforeigninvestmentistheextent of linkagesgenerated to the rest of theeconomy,and to thedomestic investments inparticular.Thereportalsoemphasisesuseofsocialcostbenefitanalysisinevaluatinginvestmentproposals so that social and environmental concerns are also mainstreamed in investment decisions.

(v) Investments are having desirable impact …

Inexamining the impactof investmentsat thecommunity level, therearemarkeddifferencesbetween the impact of foreign and that of local investment in terms of corporate responsibility. Foreign investment embraces the practice of corporate responsibility more than the local investment, and the former has further impacted favourably on the surrounding community,especiallybyimprovingthesupplyofpublicutilitiesandinfrastructure.However,atamacrolevel,andingeneralterms,domesticsavingsarerising,jobsarebeingcreatedandnewskillsarebeinglearnt as a result of growth of both domestic and foreign investments. There is also evidence on transferoftechnologyandinnovation,albeitslowly.Investmentsarealsofosteringentrepreneurialgrowth through forward and backward linkages, revamping exports and contributing towardscommunity development and government tax revenue.

Together with the solid achievements being made in fiscal and monetary management,investments are contributing towards the country’s economic growth - which is poised to grow by 8-10 percent per annum in the next 2-3 years. Impressive impact has been apparent in certain areasandweakinothers.Forinstance,whilemanyofFDIandprivatisedfirmshavegeneratedsignificanttaxrevenuestothegovernmentandmodestemploymentopportunities,stillimpactonaddingvalue,technologytransfer(includingR&D)andenvironmentalconservationisrelativelyweak.DespitesignificantinflowofFDIandimprovementinthebusinessoperatingenvironment,the manufacturing sector is still struggling to improve productivity. Existing FDI in the agriculture sectorhasmanagedtobringaboutsignificanttransformationbothintermsoftheperformanceof the particular commodity/sub sector (such as Floriculture) and in economic impact of theneighbouring community.

The key message is that investment has had favourable impact generally on the economy andintherespectivecommunities.However,theimpactofinvestmentislessrobustgiventhemeans through which that impact occurs and the structural constraints that are characteristic of theeconomy. First, thereareweaksectoral linkages in theeconomyand limitedstructure

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of investment distribution. Second, the impact on the local community is rather ad hoc andvoluntarydependingon thediscretionof large investors.Finally, theweakand ratheradhoclinkages between foreign and local investment demeans the trickle down effect of investment to the domestic economy and to SMEs in particular for broad based growth that is consistent with effective poverty reduction.

4. Recommendations In order to amplify both themagnitude and impact of investment in Tanzania, ten importantrecommendations are made as follows.

First,makefurther improvement in the investmentclimate, especially in the taxation area (multiplicityoftaxesespeciallyatlocalgovernmentlevel)andprovisionofinfrastructureincludingcompetitive public utilities.

Second,reducefurtherthecostofdoingbusinesstostimulatesupplyresponseatmicro-level. This is important in order to complement the current achievements on macroeconomic and political stability by greater efforts to improve the investment climate.

Third,solicithigherqualityinvestmentsbytargetinginvestmentinvalue-addingandkeysectorsforgrowth. Experience with the promotion of mining sector reveals that targeting sectors ispossibleandcanbeeffective.However,ithasalsorevealedthatproblemsoflinkageswithlocalsuppliersend,communitiescanariseifnoeffortsmadetopromotesuchlinkages.

Fourth, promote domestic investment effectively in order to enhance synergy and complementarity between foreign and domestic investment and in particular between large and small enterprises. The study argues that the domestic investment has undisputable role and potentialinenhancinggrowthandreducingpoverty.Tostartwith,alevelplayingfieldcouldbeattained by extending incentives that are applicable to FDI to domestic and especially SMEs. In addition,optionsforspecialadditionalincentivestostimulatethedevelopmentofSMEsshouldbeexplored. PromotingSME,typeofinvestmentmayrequireselectedinterventions,butadditionalincentives could be provided to domestic investors that have demonstrated success particularly in key sectors for growth or and in the economically disadvantaged regions/locations. Greater engagement of TIC in promoting DDI would imply extending TIC services nearer to the local areas.

Fifth,TIC is urged toundertake targetedpromotionof investments internally and abroad based on thorough research. Market research-driven investment promotion tends to be more efficientincuttingcostsofpromotionandachievingmoredesirableinvestmentoutcomes.

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Sixth,make regular post-approval follow-up of investors. This will help in understanding whether the actual investments being undertaken in the country are in line with those approved and/orbenefitedfromTICincentives.Inthisway,itwillbeconvenienttoassessthebeneficialimpact investors bring to the nation as a whole and in accordance with plans and objectives of TIC.

Seventh,improveinvestmentafter-careservicesthroughTICzonaloffices.TIC has been performing well in the area of investment after care services through its headquarters in Dar es Salaam.Theseafter-careservicesarebeneficialbothtotheinvestorandTICinrealisingcustomer-oriented investment promotion and support. It is suggested that the services be provided through TICzonalofficesinordertocutcostsandincreaseefficiencyinserviceprovision.

Eighth,improvehumancapabilitiesandencouragetechnologytransfer as a precondition for enhancing productivity of investment and attaining the desired level of competitiveness.

Ninth,Institute Presidential Investor Awards. Some investments make large contributions to thesocio-economicdevelopmentofthecountry,notonlybycreatingmuch-neededjobsbutalsobyhavingnetresourceinflowswhilefosteringhighlinkageswiththerestoftheeconomy.It isrecommended that outstanding investment performers be publicly recognised through bi-annual Presidential Awards that would be managed by TIC.

Tenth,strengthenbalancebetweensocialandprivategoalsofinvestors in order to achieve the social goal of promoting investment.

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aCknowledgemenTs

In 2006 TIC commissioned ESRF to conduct Research Study of Growth and Impact of Investment in Tanzania. The purpose of this study was to evaluate the growth and impact of investment on the economy; to assess the role playedbyTIC in investment promotion and facilitation, andrecommend measures for enhancing the favourable impact of investment for economic growth and poverty reduction.

Whilethisisthefirststudyofitskind,TICintendstoundertakeitafterevery5years.Sincethefactors and parameters that lead to the conclusions change over time.

We wish to thank ESRF for their efforts and time that they devoted to this work. We also wish tothankallstakeholdersincludingMOA’s,individualsandNGO’swhoinonewayortheotherparticipatedinmakingcontributionsthatledtotheproductionofthefinalreport.

EXECUTIVE DIRECTOR TANZANIA INVESTMENT CENTRE

xviThe United Republic of Tanzania - Tanzania Investment Centre

1 Report on the Study of Growth and Impact of Investment in Tanzania

1.0 inTroduCTion

1.1 Background

The national investment policy of 1990 and Investment Code of 1990 were reviewed in 1996 and 1997 respectively taking into account the new policy developments in the country as well as the experiences of TIC during the 1990-96 period. The thrust of the new legislation was to unifyallinvestmentincentivesunderthegeneralfinancialsystem.Thelegislationprovidesthebasis forTanzania InvestmentCentre (TIC) tobecome the “primaryagencyofgovernment toco-ordinate,encourageandpromoteinvestmentinTanzaniaandtoadvisetheGovernmentoninvestmentpolicyand relatedmatters”. In this regard,TIChas transformed itself intoa “one-stop centre” for investment facilitation and promotion, creating a positive climate for privateinvestment,stimulatingandattractinglocalandforeigninvestmentandprovidingassistancetoall investors. The revised policy and code included greater emphasis on promoting domestic capacitiesandencouragementofdomesticentrepreneurship,exportdevelopment,facilitationofnew 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.

The review of the literature shows agreement that investment is critical for the growth process andhencesocialwelfare(seePhillipset al.2000).Thequestioniswhatkindof investmentismostbeneficialandwhatarethemostcost-effectiveandsociallyharmoniouswaystostimulateinvestment? Although a majority of investment in both developed and developing countries are domestic,manydevelopingcountriesfacethechallengeofdevelopingdomesticinvestmentsinthecontextofverylowlevelsofdomesticsavingsrates(Phillipset al.2000:5).Thisposesamajorchallenge in investment promotion programs. Yet FDI tends to be subjected to political economy concerns when it involves governments making major concessions in order to compete for foreign investment,oftenprovokingdomesticdebatesonthebalanceandrelationshipsbetweenforeignand domestic investors.

Theaboveargumentsimplythatinvestmentpolicyhasanumberofchallengestoaddress.First,onhowtomaketheinvestmentpromotionandfacilitationpoliciesmoreefficientandeffective.Second,determiningtheappropriatebalancebetweeneffortstopromoteforeignasopposedtodomestic investment.Third,addressing thebalancebetweenthebenefits frompromotingFDIandtheassociatedsocialcosts.Finally,onhowbest todeploythebenefitsofFDI toachievethe country’s development goals. Addressing these challenges requires important information

2The United Republic of Tanzania - Tanzania Investment Centre

andreliablestatisticsaboutthenature,structureandimpactofinvestmentontheeconomy.Thisstudy seeks out to address these concerns.

1.2 Objectives and Rationale

InthecaseofTanzania,significantprogresshasbeenachievedinattractingFDI.Thisimpliesthatthecurrentinvestment(promotion)policyhasbeeneffectiveontheabovefirstchallenge.However,the promotion of FDI has not matched expectations of its perceived impact. To corroborate this concern,Kabelwa(2003)notes:“…debateonFDIinTanzaniahassomehowneglectedtheroleofforeigninvestmentinthecountry.Thatis,whetherforeigninvestmenthasmetthecountry’sexpectationsandwhatimpactithasonTanzania’seconomicdevelopment”(2003:18).Therefore,the issue that lies ahead is to ensure that attracting more FDI goes in tandem with the analysis of costsandbenefitsofthisinvestment,whichrequiresmonitoringandevaluatingofFDI.

Monitoring and evaluating FDI in Tanzania is constrained by poor data. However, efforts bythe Bank of Tanzania (BOT), Tanzania Investment Centre (TIC) and the National Bureau ofStatistics (NBS) iscommendable inputting togethermanysourcesofdataand information inorder to generate a more plausible data series. These efforts should also include establishing aneffectivemechanismfortrackingprivateforeigninvestmentinallitsforms,andsubsequentlycapital flight. In thecaseofdomestic investment, twochallengesarekey forTanzania inhereffort tomake investmentpolicymorerobust.First,given thestructural featuresofTanzaniandomesticinvestment,whataretheviableandeffectivepolicies(specificincentivesormodalities)forpromotingsuitabledomestic investment?Second, towhatextenthasdomestic investmentbenefited fromFDI in away thatwill augment the formers’ productivity and competitiveness.Thesechallengesareamplifiedfurtherbytheseverelackofreliableinformation/statisticsabouttheprecisemagnitudeofdomesticinvestment,moreso,domesticprivateinvestment.

Themainobjectiveof thisstudy is toevaluateof thegrowthand impactof investment,assesthe role played by TIC in investment promotion and facilitation and recommend for measures for enhancing the impact of investment on Tanzania’s economic growth and poverty reduction. In particular, the specific objectives of the study as provided for in the Terms of Referencecorrespond to its scope as outlined in section 1.3 below.

1.3 Scope of Work

Thisstudyidentifiedfiveareasforanalysis,namely:

Providing the trends and magnitude of both local and foreign investment in Tanzania;(i)


Assessing the adequacy of investment level to meet the goals of Tanzania Development (ii)Vision 2025;

Identifyingmeasures for evaluating the costs and benefits of investmentsmade in(iii)Tanzania;

Evaluatingtheimpactofinvestments,and(iv)

Recommending measures for enhancing the impact of investment on Tanzania’s (v)economic growth and poverty reduction.

1.4 Methodology

1.4.1 DefinitionofInvestment

In standardeconomic conceptualisation, investment canbedefinedasanyuseof resourcesintendedtoincreasefutureproduction,outputorincome.Invalueterms,investmentismoneydirectedtowardthepurchase,improvementanddevelopmentofanassetforcreationofvalueinexpectationofgenerating incomeorprofits.Clearly, thisdefinitiondistinguishes investmentfromtradeenterprise,whichisbasicallyabusinessdealingwithexchangeofgoodsorservicesatapremium.Inotherwords,foraparticularassetormoneytobecomeaninvestment,ithastoinvolve creation of output not premium.

Inthecontextofthisstudy,itiscrucialtomakethedefinitionofinvestmentcleargivendifficultiesinvolvedinmeasuringinvestment,andthevarietyofinvestment(bysize,source,andownershipetc.)Therefore,notallbusinessenterprisesareinvestment(andofcourse,notallinvestmentsarebusinessenterprises.For instance,roadconstruction isan investmentbutnotabusinessactivity. In this case, thewholesale and retail trading enterprises notably preoccupyingmostenterprises in Urban Tanzania or SMEs that do not involve creation or use of asset to generate output,incomeorotherassetsmaynotbeconsideredasinvestment.

Grossfixedcapitalformationisusuallyusedasaconvenientdefinitionof(orproxyformeasuring)total investment,assuch itmeasuresassetscreatedorused ingeneratingoutput (marketorpublic)orincome.Grossfixedcapitalformationisdividedintoprivateandpubliccomponents.However,asdiscussedinsection2.3,fromthewayofficialstatisticsareconstructed,theprivatecomponent is not disaggregated further to make possible a distinction of relative contribution of foreignandlocalfundstocapitalformation.Nevertheless,insection2.3,thisstudyproposesaway to estimate the domestic private investment.


1.4.2 Overall Approach

The overall approach taken aimed at adding value to the study by evaluating both primary and secondary data. The first task involved reviews of various documents and literature inbothdevelopinganddevelopedcountries toenrichand inform thestudyfindings. Inaddition,the consultants involved a large number of stakeholders in discussions and reviews aimed at soliciting information and opinion on investment issues. The stakeholders included government ministriesanddepartments,researchandacademicinstitutions,theprivatesector,developmentpartners and the civil society. In addition, extensive consultationsweremadewith the client,i.e. the TIC management to review progress and share valuable information on the study. The stakeholder discussions and evaluations were pivotal in the process of evaluating growth and impactof investment.Further, thedocumentaryand literature reviewenabled thestudy teamtodesignapurposivesemi-structuredfieldsurvey instruments tocollectkey information frominvestors that was considered critical for achieving the study’s goals and objectives.

1.4.3 Field Survey

Fieldwork for this study was conducted in December 2006. The consultants developed purposive unstructured and semi-structured interviews and questionnaires and made extensive fieldconsultativesessions.Thepurposeofthefieldworkwastocollectprimarydata,solicitadditionalinformation that was considered key in complimenting secondary information and gather contextual information for validating and updating existing investment information. Purposive sampling technique was used to obtain sectors and regions for interview. The sectors selected were as follows:

Agriculture: Information was collected on the magnitude as well as quality of investments (i)in the sector. The agricultural sector is particularly important because at the moment it is dominant in terms of contribution to GDP and employment in Tanzania.

The services sector: This was included in the sample, in part because documents(ii)reviewed showed that this sector receives considerable FDI and domestic investment resourcesinparticularly,servicesrelatedtothetourismindustry.Theseweresurveyedto obtain information lacking in most reviewed documents.

Themanufacturingsector:Thishasincludedtocapturethesignificantshareofdivested(iii)parastatal enterprises that are in this category and some information relevant to the study that lack from reviewed documents.


The Mining sectors: Apparently given its notable the special position of mining in having (iv)its own policy and code in addition to general investment policy and code.

Oncethesectorshadbeenselected,thenexttaskwastoidentifyregionsthatcouldbestprovidethe sector-wide information needed. Morogoro and Iringa regions were selected largely to provide informationonagricultural-related investments infarming,agro-basedindustriesandservices.Kilimanjaro and Arusha regions were selected to provide information on mining and related mining services, agriculture andagro-based industries and tourism-related services.Mwanzaand Mara regions were selected to provide information on mining, mining-related services,manufacturing and services. Dar es Salaam was selected to provide data on manufacturing and investments in services. The study team envisaged interviewing and administering semi-structured questionnaires to over 75 local and foreign investments in these seven regions. The actualnumberoffirmsthatrespondedpositivelytotheinterviews55,ofwhom49(or89percent)of them are located in up country regions.

1.4.4 Data Analysis

Thestudyteamcollectedawidearrayofprimary(throughtheinterviewsandquestionnaires)andsecondary(publishedandunpublishedfromTIC)dataoninvestmentthathasbeentabulated,computerised and stored within ESRF data bank. Data processing and analysis included trend analysis,cost-benefitanalysis,causaleffectanalysisandthusimpactassessment.Inadditionanalysiswasextendedtopolicyadequacyandlinkageassessment,atthemacroandsectorallevels.Given thepolicynatureof theenvisagedendproduct, thestudydidnotuseempiricalmodels to analyse the investment or linkage impacts. However, triangulation approach wasadopted using the above mentioned study approach to derive key conclusions. That is using different(threeinthiscase)approaches:fieldworkinformation,literatureandsecondarydatatoexamine the issue under investigation.

1.5 Organisation of the Report

Thereport isorganisedasfollows.After this introduction,Chapter2examinesthetrendsandstructureoftotal(domesticandforeign)investment,andidentifiedthemagnitudeofinvestmentinTanzania.AsTanzaniahasmadesignificantprogressinattractingFDIflows,itisnotknownif the current level of investment is adequate for the desired poverty reducing economic growth rate. This challenge is discussed in Chapter 3. Chapter 4 presents the proposed measures for evaluatingthecostandbenefitsof(particularly foreign) investment inTanzania.Theaimis toprovide consistent criteria upon which to promote particular investment and recognise its impact in relation to the costs associated with its promotion and operation. The impact of investment


on the Tanzanian economy using some of the suggested criteria and various other economic dimensionsofinvestmentisdiscussedinChapter5.Givenunreliableandofteninsufficientdata,the problem is not to identify the net impact of investment in ways suggested in Chapter 4 rather attenuatethepolicyinquiryonthegeneralimpactofinvestmentinthecountry.Finally,Chapter6provides the main conclusions and recommendations.


2.0 Trends and magniTude of foreign and domesTiC invesTmenT in Tanzania

One of the main objectives of this study was to identify the precise magnitude and structure of total investmentinTanzania.Althoughthereareobviousdatalimitationsinachievingthisobjective,inthis section we attempt to put together and use the available data to show the revealed structure and trends in investment while discussing some existing data gaps/limitation. This is important sinceanyobservedlimitationdoesimpairafullassessmentofthebeneficialimpactandcostofinvestment,hencetheleveragetoformulateorregulatecredibleinvestmentpolicies.

The chapter begins in section 2.1 by utilising data on the familiar Gross Fixed Capital Formation (GFCF)toshow,atleastforgeneralandconvenientpurposes,therevealedtrendsandstructureofinvestmentinTanzania.Insection2.2thechapterpresentstrendsandstructureofFDI,dataofwhicharewidelyavailable from theTIC. In this section,wealso reiterate thekeyfindingsfromthevariousjointsurveysonFDIbytheBankofTanzania,TICandNBS(seeBOT,relevantyears).Identificationandtrendsofdomesticdirectinvestment(DDI)ismadeinsection2.3whilediscussingevidenceontheempiricalrelationshipbetweenFDIandDDI.Thekeyissueisthat,thedataonDDI isundeveloped,yet it is important indistinguishing the impactof investmentpolicyfromtheperspectivesoflocalversusforeigninvestment.Withsuchlimitation,thischaptermay contribute to the debate on the need to develop such a database. Finally in section 2.4 the chapter concludes by bringing to the fore key policy issues arising from the trends and structure of investment in Tanzania.

2.1 Trends and the Structure of Capital Formation

Totalinvestmentincludesforeignanddomesticinvestment.However,thetwocomponentsaredifferentinmanyaspects,afactthatposeschallengeinestimatingtotalinvestmentforTanzania,but also showing the imperative of knowing the exact structure of each. Domestic investment may also be distinguished into private and public investment. On the one hand, domesticprivate investment or for convenience, Domestic Direct Investment (DDI), despite being thelargestcomponentof total investment, its investmentactivitiesaremainlycharacterisedby(i)predominanceofsmallandmicro-enterprises(SME)mostlysupplyinglowtechnologyproductsandservicesinthelargestsectionofthemarket;(ii)existenceoffewlargescalefirmsmainlyin lightmanufacturingactivities.Moreover, thepublicdomestic investment ischaracterisedbysignificantshareof infrastructureandconstructionactivities,mainlythebuildingsandphysicalinfrastructures.Ontheotherhand,FDIhasbecomeanimportantcomponentofprivateinvestmentinthelastdecadeintermsofitseconomicsignificance(taxrevenue,technologicalcapacityandexportperformance)despiteofitsrelativelysmallersizecomparedtoDDI.FDIisalsoamajorplayer in the privatisation of the former state-owned enterprises and boosts development of some sectors such as mining and tourism.


Nevertheless, statistics on the magnitude and structure of domestic and foreign investmentarenecessaryinformulatingpoliciesforincreasingthevalue(benefits)andflowofinvestment.However,suchstatisticsarenot readilyavailable. First,dataonFDIhasbeenavailableonlyfrom 1992 (and revised in 1998), so that comparable trend with domestic investment is notpossible for theearlierperiod.Second,domestic investmentvarieswidely insizeandnatureofactivities,whichmakes itdifficult todefine,comparedtoFDI that iseasier to tracethroughthe investmentpromotionagency(TIC)andhasalmostuniversaldefinition.Third,unlikeFDI,domestic investment is composed of public and private components – whereas most of the former isalsoundergoingdivestitureandprivatisation, informationwhich isdifficult toaccess.Therefore,GrossFixedCapitalFormation(GFCF)isusedforconvenienceasaproxyfortotalinvestment in the country.

2.1.1 Trends in Total Capital Formation

Inaggregateterms,GFCFhasfluctuatedovertime,withsomeyearsshowinggrowthandothersadecline.Thisisdividedintoprivateandpubliccomponents.Nevertheless,fromthewayofficialstatisticsareconstructed,theprivatecomponentisnotdisaggregatedfurthertomakepossibleadistinction of relative contribution of foreign and local funds to capital formation.1 Capital formation in Tanzania as a percent of GDP is still too low relative to its desired role of fostering the economic growth at levels that are adequate for sustainable per capita income growth and therefore poverty reduction(CUTS,2002).

The GFCF declined from the peak of nearly 30% of GDP in 1992 to only 12% in 1997. Although arecoverywasobservedintheyearsthatfollowed,ithasnotbeenabletogobacktotherateachievedintheearly1990s.In2003,GFCFasaproportionofGDPwasnearly19%.AsFigure2.1clearlyshows,therecoveryinoverallinvestmentsince1997isentirelydrivenbyarecoveryininvestmentbythepublicsector,whiletheinvestmentbytheprivatesectorcontinueditsdownwardtrend.Thisgivesreasonforconcern,sincemuchoftheliteratureoneconomicgrowthsuggeststhatprivateinvestmentiscloselyassociatedwitheconomicgrowth,whilethelinkagebetweenpublic investment and growth is much weaker (Utz, 2005). The relationship between publicinvestmentandgrowthisinfluencedconsiderablybythenatureofpublicinvestmentandwhetherit has a crowding in or crowding out effect on private investment. Previous decline in investment starting from 1992 has been mainly associated with a marked decline in public investment as a result of parastatal sector restructuring and privatisation of the former state-owned enterprises as well as cuts in public expenditure that was not matched by a proportional growth of private investment.

The notable increase in the share of GFCF by public sector may also wrongly imply expansion of thepublicsector.Morethananythingelse,wepresumethegrowthintheshareofpublicGFCF

1 ThejointsurveyonFDIbyBOT,TICandNBSfoundthatlocal/domesticinvestmentshareanaverage14%ofthejointventureFDI’s.


toarise fromthesurge in foreignaidmostlyused indeveloping infrastructure.Surprisingly, inthesameperiod,privateGFCFhasstagnatedatlessthan15%ofGDP.SinceFDI(consideredtobepartof theprivateGFCF)hasbeen increasingdramatically in thesameperiodof time,thisstagnation implies thatDomesticPrivateGFCF (DDI)hasbeendecliningatamore thanproportionalincreaseinFDI–aclaimthatisdifficulttoestablishintheabsenceofreliabledataondomesticprivateinvestment.Inaddition,itisnotclearifandtowhatextentthevalueofprivateGFCFdataincludesthatofFDI.Nevertheless,weproceedwiththeseshortcomingsinmindtoexaminetrendsineachofthetwo(publicandprivate)componentsoftheGFCF.

Source: Calculated using data from the Economic SurveyandNationalAccounts(variousyears).

2.1.2 Capital Formation by Public and Private Sector

Asaproportionoftotalcapitalformation,therelativeimportanceofpublicandprivateinvestmenthas also varied in the last decade. Until 1999, the relative contribution of public investmentin total investment declined continuously. This may be attributed to the changing role of the government and the decision to shift from direct production of goods and services by the state to facilitating growth of the private sector2.Nonetheless,since2000therelativeimportanceof 2 Theroleofthestateisnowattunedtomaintenanceoflawandorder,provisionofbasic

infrastructural and social services and building of a suitable environment for the private sector to take control of production activities.


publicinvestmentintotalinvestmenthassincebeenincreasing(SeeFigure2.2).Thiscouldbe attributed to increased investment in infrastructural and social services for poverty reduction,financedheavilybyforeignaid.3 The percentage of GDP capital formation by the public sector declined steadily until 1997 reaching its lowest level of 2.9% in 1997 and did not grow much until 2000. In 2000 the proportion of public investment as a percent of GDP grew to about 6% and althougharecoveryhasbeenobservedsincethen,theincreasehasnotbeenabletomatchthelevelsexperiencedintheearly1990.GrowthoftotalfixedcapitalformationasapercentofGDPhas also been modest.

Nevertheless,therewasamarkedincreaseinprivateinvestmentasaproportionofGDPfrom7%in 1989 to 19% in 19944,buthassincethenbeenadeclinegraduallytojust10%in2003(whichisclosetointernationalaverage,accordingtoWorldBankdraftCEMfor2005).ThedeclineinprivateinvestmentcoincidedwiththedramaticincreaseinFDIsincethemid1990s,whichpeakedin2000exceeding5%ofGDP,buthasreturnedtothepreviouslevelofabout3%ofGDP(SeeFigure5.1).Asashareoftotalcapitalformation,privateinvestmentdoubledbetween1989and1995from40%to80%(SeeFigure2.2).Thereversalexperiencedatthistimecouldbeattributedto inadequacies of the institutional reforms for which more rigorous measures started to feature only in mid 1990s. Inadequacies of the institutional reforms that remained as liberalisation efforts started limited the ability of the system to redress the high transaction costs experienced by the private sector. The unsatisfactory performance of the private investment from 1995 after peaking in 1994 could also be linked to persistent high interest rates and shortage of credit facilities followingtherelativelytighterfiscalstancebythegovernment.Nonetheless,privateinvestmentinTanzania is currently an important contributor to overall investment since public sector has withdrawn fromproductiveandcommercialactivities;hencealimitedshareintotalcapitalformation.However,the relative decline in the share of the public sector experienced in the 1990s is likely to reverse inthenearfuture.Forinstance,accordingtoFigure2.2,havingdeclinedfrom65%in1989to20%in1995,theshareofpublicsectorintotalcapitalformationhasbeenincreasinggraduallyto about 50% in 2003.

A World Bank CEM study established a close relationship between central government capital formationandinflowsofdevelopmentassistance.AsithasbeenshowninvariousPERs(e.g.WorldBank,2003),about90%of thedevelopmentbudget inTanzania isfinancedby foreignaid.Interestingly,duringthedecadeoffiscaladjustmentinTanzania(1985-1995),developmentbudgetwasthemostaffected(Utz,2005:24).Anothersourceofinformationoninvestmenttrendsaredataonimportsofcapitalgoods,whichdeclineddramaticallyfrom14%ofGDPin1992toabout4%in1997,recoveringtoabout7%in2003.

3 Itisworthnotingthattheshareofforeignaidintotalgovernmentexpenditurehasin-creasedtremendously,currentlyaccountingforcloseto50%oftotalspending.

4 Note that the real exchange rate depreciation between 1990 and 1994 increased the priceof(mostlyimported)capitalgoodsoverthisperiod.


Source: Calculated using data from the Economic Survey and National Accounts (various years).

2.1.3 Capital Formation by Type of Assets

It isnotsufficient toexaminethecomponentofcapital formationbyprivateandpublicsector.Oneotherstructuralfeatureofcapitalformationisthetypeofassetsthatconstitutefixedcapitalformation either in the public or private sector. Examining this can unveil important insights about the relationship between capital formation and economic growth. Capital formation includes residential and rural own-account buildings and various public expenditure mainly on infrastructure. These expenditures are not productive in themselves but complements private investment activities to flourish.AccordingtoUtz(2005),theshareofdirectlyproductiveinvestmentintotalinvestmenthas been declining during the past decade by 10 percentage points from 63% in 1993 to 53% in 2003. This raises the question about the appropriate balance between public and private sector investment; and whether public funds should be used to fund public expenditures and public investment. Officialdataonnationalaccountsandeconomicsurveysconsistentlyreportstatisticson the composition of capital formation by different assets. Although these sources of information donotreportsuchcompositionforseparatelypublicandprivatesector,itmaybeimportanttoonly examine the major sources of capital formation because such results will inform on the differentialimpactofadopted(hencetheprospectsforalternative)investment/economicpoliciesthatcouldhaveinfluencedsuchcomposition.

Trends in the value and structure of the three broad types of assets that constitute capital formation in Tanzania namely buildings, equipment and other Works are shown in Figures 2.4 and 2.5respectively. The value of capital formation has been increasing in real terms from 280 billion Tshs in 1997 to about 500 billion Tshs in 2003 after it declined from around 400 billion Tshs in 1991. ExceptforEquipments,thevalueofotherassets(BuildingsandWorks)isshowntobeincreasingover time.


Source: Calculated using data from the Economic SurveyandNationalAccounts(variousyears).

Equipment that include transport, machinery and other equipments constitute the largestshare(about50%onaverage)oftotalcapitalformation,whileworks(developmentofphysicalinfrastructure)constitute thesmallest (about20%onaverage),hencebuildingsoccupyabout30% on average. There have also been some marked changes in the trend of capital formation by assets. The composition of Buildings and Works has both been increasing notably from 2000. One clear explanation for this trend is the relative importance of infrastructured development beforeandafter 1995. Asnotedearlier, significant shareof donoraidmoneyhasgone into


developing of infrastructure. In addition, the share of building is increasingmuch faster from1998onwards–inpartreflectingtheboomintheconstructionindustryevidencedbyexistenceof large buildings and ‘own home’ construction throughout the country especially in Dar es Salaam.Equipmentshareoftotalcapitalformationincreasednotablyin1998,perhapsindicatingapurchaseofparticularhighvalueequipment in thatyear,mostprobably,miningequipment.Fromabovetrends,itseemsthatinthenearfuture,buildingsandworksarelikelytoincreaseevenfasterincompositionthanequipments,asthegovernmentdevelopmentpolicyasoutlinedinvision2025andintheMKUKUTA,placecontinuedemphasisoninfrastructuraldevelopment.Andmostequipments(includingtransport)arenotreplaceableintheshortrun.

FurtherdecompositionofcapitalformationbyspecifictypeofassetsisshowninFigure2.5forBuildingworks, Figure 2.6 for otherWorks and in Figure 2.7 for Equipment. The purpose of this decomposition is to bring on the surface information that may be useful in explaining the changing structure of capital formation and which may not be easy to pursue using only broad categories of assets.

Overall, each type of asset has experienced differential growth of itsmajor constituentswitha more consistent and structured trends in the case of Buildings and equipment compared to somewhat sharp and erratic trends in the case of Works. The major items in Building works is rural ownaccount (for obvious reasonsof the subsistence character of rural sector), but therest of the items: residential and non-residential buildings have variably changed in importance until from 2000 when the importance of non-residential building increased sharply surpassing residential and rural dwellings whose share continue to fall.

InthecaseofotherWorks,weobserverathererratictrendsisvariousitems.Thelargestitemin this type of asset has alternated between roads and bridges on the one hand, and otherinfrastructure works on the other. The former has risen sharply since 1997 to become the largest component,asopposedtothelatterwhoseshareoftotalhasfallenfrom90%in1990tolessthan5%in2003.Overall,theimportanceofwatersupplyincapitalformationhasalsoincreased–itsshare has doubled from an average of 10% between 1990-1997 period to about 20% in the later period. There are indications that roads and bridges construction and water supply will continue toincreaseinsharereflectinggovernmentpolicyemphasisonpovertyreduction5.

The structure of Equipment is much more clearer and steady. Equipment is composed of two majoritems:transportandother(includingmachineryandelectrical)equipmentwherethelatterconstitute close to 60% and 40% for the former.

5 OneoftheHIPCconditionisthatthemoneyresultingfromdebtforgivenessbespenton social services and infrastructure development for poverty reduction. These services includeeducation,health,waterandsanitation.



2.1.4 Capital Formation by Sectors of the EconomyIntermsofsectoraldistribution,capitalformationinTanzaniabetween1989and1998wasmainlyconcentratedinmanufacturing,transportandcommunication,andstorage.Between1989and1997 manufacturing and transport communication and storage activities contributed more than 56% of total capital formation of the economy while the remaining seven sectors contributed only44% in total.Constructionandmininggrew in importanceconsiderablystarting in1998,before which their contribution to total capital formation was only modest. Investment in the agricultural sectors has been very small throughout the last decade. The highest level recorded as a percentage of total investmentwas 4.7% in 1991.On average, capital formation in theagriculturalsectorhasbeenaround3.4%between1989and2002(Figure2.9).

Notes: Data for 2002-2004 could not be availed as the most recent series of National Accounts by economic sectors are for year 2001. Similar note apply for Figures 2.9 and 2.12.

Source:CalculatedusingdataNationalAccounts(variousyears).


Notes: Data for 2002-2004 could not be availed as the most recent series of National Accounts are for year 2003.Source: Calculated using data National Accounts (various years).

2.2 Trends and the Structure of Foreign Direct Investment

Havingdiscussed total investment (GFCF)byvariousaspects,weproceed todistinguish theforeignanddomesticcomponentofinvestmentfortwobasicreasons.First,theinvestmentpolicy(promotionandfacilitation)hasgivensignificantpolicyemphasisonattractingforeigninvestmentasone“sure”waysoffinancinggrowthanddevelopment.Secondly,therehasbeenconcernbyvariousstakeholders(especiallytheprivatesector)thatdomestic(local)investorshavenotbeenfacilitated to access the kinds of incentives that FDI is accessing despite the dominant share of DDI in total investment. Below we examine the structure and trends of FDI in Tanzania.

2.2.1 Size and Growth of Foreign Direct Investment in Tanzania

ForeigndirectinvestmentflowsintoTanzaniagrewconsiderablyinthesecondhalfof1990s.Thisisalsotheperiodthatwasmarkedbyimprovementsintheeconomicsituation,rigorousreformeffortsto improve the investment environment and beginning of the privatisation programme. UNCTAD (2002) notes that themarket oriented reforms reacheda criticalmassand sound foundationsforanenablingframeworkforFDIwereputinplace,whichtriggeredthepositiveresponsefromprizvate investors fromabroad.Total FDI intoTanzania between 1995 and 2004 totalledUS$2476.4millioncomparedtolessthan$2millionbetween1986and1991.Onanannualbasis,from1992FDIinflowsintoTanzaniaincreasedfaster,reaching$150Millionin1996.Althoughthegrowthrateslowedbetween1996and1998theachievedratesofFDIinflowswereremarkable.Theyear1999and2000experiencedthehighestrecordofFDIinflowsintoTanzaniamostofwhichcame forth with the proliferation of mineral prospecting activities in the country.


Source: TanzaniaInvestmentCentre,EconomicSurvey

TheinwardstockofFDIinTanzaniahasalsogrownconsiderablyandwasrevised(upwards)bytheinformationcollectedintheBOT/TIC/NBSsurveyfor2001.AsapercentofGDP,UNCTAD(2002)estimatesthatthestockofFDIinTanzaniain1980wasaround0%ofGDP.Nevertheless,itrecoveredwiththegrowthofFDIinflowsandin1998ithadreached2.1percent.Fortheperiod1990-1998 the stock of FDI as a proportion of GDP in Tanzania averaged 1.3%. In 1999 FDI stockasapercentofGDPhadreached11.2%(UNCTAD,2002)6. Data from local sources on FDI stocksforyearsbefore1998isnotavailable.However,theBOT/TIC/NBSsurveyofforeignfirmsestablishments between 1998 and 1999 and in 2001 revealed that the stock of FDI had grown considerably. FDI stock as a proportion of GDP has almost doubled between 1998 and 2001 from closeto20%in1998to38%in2001(Table2.1).

Table 2.1: FDI stock in Tanzania 1999-2007

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

FDI Stock Millions US$ 1,637.7 1,903.0 2,891.6 3,637.0 3,877.4 4,125.2 4,385.4 4,833.0 5,307.5 5,820.0

GDP (mp) Millions US$ 8,382.4 8,637.9 9,093.7 9,476.6 9,660.9 10,047.3 11,201.1 14,220.5 15,167.2 16,399.3

FDI stock as % of GDP

19.5 22.0 31.8 38.4 40.1 41.1 39.2 33.99 34.99 35.49

Source: FDI stock up to 2001 are from Tanzania Investment Centre and from 2002 –2007 are own computationbyaddingflowstopreviousyearsstockusingdatafromEconomicSurvey(2007).

6 WhileindicativeofthegrowthtrendofFDIflowsandstocksTIC/BOT/NBScensusofforeign establishments reveals that the UNCTAD reports and many other sources may seriouslyunderestimatetheFDIinflowsintothecountry.In1998forinstanceUNCTADreportedFDIstockstostandatUS$803Million,whilethecensusestimatedthestockstostandUS$1637.7Million


2.2.2 FDI by Mode of Entry, Sectoral Distribution and Ownership

ThemainchannelofFDIentry intoTanzaniahasbeenGreenfield investments (Figure2.11).According toUNCTAD (2001),acquisitionsof companiesby foreign investorshavebeen fewinnumbersbuthaveneverthelessgivenasignificantpushtoannualFDI inflows.Overall, theshare of foreign acquisitions in FDI inflows until 2003was about 28%while new investmentestablishments accounted for 72% of total number of projects into Tanzania. Cumulative data on foreign investment projects approved by TIC between 1990 and 2003 thus points to the dominanceofinterestinGreenfieldinvestmentsbyforeigninvestors.

AnalysisofsectoralstructureofFDIdistributionhasimportantpolicyimplications.Insomecases,sectoral distribution of FDI has not matched the corresponding sectoral economic impact. For instance,evidencebyKabelwa(2003)indicatesthatservicessectoraccountsforover85%ofallemploymentgeneratedbySouthAfricanbusinesses(excludingmining)inTanzania.Therestofthe15%iscontributedbythreesectors:manufacturing(10%),tourism(2%)andothers(3%).ThesamestudynotesthatMiningaccountsforthelargestshare(47%)ofallSouthAfricaninvestmentduringthatperiod,followedbytelecommunication(21%)andmanufacturing(16%);whiletourismcontribute5%andservices6%.This impliesthat,althoughtheservicessectoraccountsforarelativelysmallershareoftotalSouthAfricaninvestment,ithasthemostsignificantemploymentgeneration potential compared to others.

Basedon thenumberofapprovedprojectsbysector (Figure2.11)onecanobserve that themanufacturing and tourism sectors seems to have attracted more establishments compared to other sectors of the economy. This may be attributed to a number of reasons one being that establishments in these sectors have been mainly small in size and therefore do not require high initial capital. But another reason could be that the efforts to promote local manufacturing and tourismactivitiesarepayingoffandencouragingfirmstoinvestinthesectors.

Given the relative importance of the agricultural sector on economic growth and development in Tanzania,thenumberofprojectsattractedtotheagriculturalsectorisstilltosmalltomakeamajorimpact. Although it is encouraging to note that efforts to counter the bottlenecks of investment in the sector are underway (e.g. example the Agricultural Marketing systems DevelopmentProgramme,andParticipatoryAgriculturalDevelopmentProgramme,etc)itisneverthelesstooearlytoassessthedirectionofprogress.Atthemomenthowever,mostprojectshavegonetocutflowersubsectorsleavingfoodcropandtraditionalcashcropsubsectorslaggingbehind.Variousrisksassociatedwiththesector,lackofcreditfacilitiesforbothlongterminvestmentandworkingcapitalandthegenerallackofincentivesspecificallydesignedtoattractinvestmentintothesector,willstillneedtobeaddressedtoensureadequacyofinvestmentparticularlyinfoodcrop production.

However in terms of stock of FDI in Tanzania the picture is different. The manufacturing sector


continues to lead, it is followed bymining and quarrying and service sectors such as trade(wholesaleandretailtrade),andfinancialsectorinsuranceandrealestate.ConcentrationofFDIin the mining sector is possibly due to expensive equipment given the small number of projects attracted to the sector.

Source:TanzaniaInvestmentCentre,ReportofCensusofForeigninvestmentinTanzania2001Examinationofthekeysectorsforgrowth(namelyagriculture,manufacturingandservices)and


theprioritysectorsforpovertyreductionshowsthatthetypesofFDIinflowtoTanzaniaarelesspovertyfocused(KwekaandMboya,2004).Forinstance,theminingsectorhasveryinsignificantsectoral linkage and multiplier effects compared to the agricultural cash crop sector such as cottonoraservicesectorsuchastourism(Kweka,MorrisseyandBlake,2003).TherevealedstructureofFDIinflowismoreatestimonyofFDIpreferencesandopportunitiesavailableinthehigh concentration sectors than promotion efforts by the TIC in such sectors.

Inaddition,socialsectorsidentifiedaskeyforpovertyreduction(inthefirstPRS)haveattracteddisappointedly smaller share of total FDI. This implies that the impact of FDI on poverty in Tanzania is not consequential. The small share of FDI into the agricultural sector in total FDI isalsoattributedtotheadverseconditionsintheagriculturalsector(includingadverseweathercondition,lowpricesofagriculturalproductsintheworldmarket,insufficientdomesticmarketsandothersupplysideandinstitutionalbottlenecks).AstudybyESRF(forthcoming)analysedthefactorsconstrainingsignificantinflowofFDIintotheAgriculturalsectorasbeinglackoffavourableagricultural infrastructure and slow privatisation of existing state owned parastatals.

Thatis,sufficientpolicyeffortshavenotbeenmadetoattractFDIintotheagriculturalsector.Thegovernment needs to make deliberate efforts to attract more FDI to the agricultural sector as a wayofenhancingitseffortstoalleviatepovertybyamongotherthings,expeditinglandownershipreforms and addressing the infrastructure and other supply side bottlenecks to rural enterprises.

Intermsofownershipstructure,thereisagrowingtrendtowardsformationofjointventures. Of foreigninvestmentprojectsthatwereregisteredinthecountrybetween1990and2003,about52% were joint ventured while foreigners wholly owned projects accounted for the remaining 42%. This tendency is encouraging especially because formation of joint ventures is associated with transfer of proprietary knowledge and skills; thus encouraging faster development of human capitalthroughlearningbydoing.However,theshareoflocalinvestmentinjointventureshasremainedlow(onaverage14%)especiallyinservicesectors.

2.2.3 FDI by Country/Region of Origin

Data from TIC on approved projects by country of origin between1990 and 2002 shows that investment from Western Europe (both in value and in numbers) dominated the scene. Innumbers, UK has been the largest single source of investment projects coming toTanzania(35%)followedbyKenya(13%),UnitedStates(10%)andIndiaandSouthAfrica(7%)asshownin Figure 2.13.


Source: Tanzania Investment Centre

The large number of projects from UK may be attributed to the long established relationship betweenTanzaniaandUK,whichdatesback to the colonial era. In termsof valuehowever,projects fromIndiathoughfewinnumbers(accountingfor7%onlyofallprojectswithforeigninterestsestablishedinTanzaniabetween1990and2002),accountforthelargestshareinvalueterms of all the projects established since early 1990s (see Figure 2.14).Most projectswithIndianinterestswereestablishedbetween2000and2002,thuschangingthestructure,whichuntil 2001 was dominated by investments from UK.

Data Source: Tanzania Investment Centre


2.2.4 Spatial Distribution of FDI ConcentrationofFDIremainsinthesameregionsnamelyDaresSalaam(42.5percent),Mwanza(26.4 percent) and Shinyanga (12.7 percent). Apart from its commercial and infrastructureadvantage, concentration of FDI in Dar es Salaam is partly attributable to the location ofheadquarters of some companies, which have reported consolidated data that includes up-country investments. Large share of investments in Shinyanga and Mwanza is on account of theregions’richnessindiamondandgolddeposits.InZanzibar,NorthUngujareceivedlargestamount of FDI. The government is urged to enhance the efforts that are already in place to improve infrastructure and utilities especially in the regions that have attracted less FDI.

Table2.2:StockandflowofFDIbyRegionalDestination,1998-2005(US$million)

REGIONS1 2001 2002 2003 2004 2005p % of total for 2005

Dar es Salaam 1,762.90 1,742.80 1,973.40 2,125.20 2,184.40 42.5

Mwanza 332.5 400.3 770.5 1,128.90 1,354.90 26.4

Shinyanga 151 465.3 693.7 657.6 652.4 12.7

Arusha 145 124.8 135.5 206.1 183.8 3.6

Morogoro 179.5 134.3 166.7 193.6 180.7 3.5

Mara 122.1 128.6 125.3 123.9 122.3 2.4

Iringa 50.7 49 52.5 54.2 90 1.8

Kilimanjaro 37.6 35.4 49.1 53.2 70.2 1.4

Kagera 0.2 0.2 0.1 0.1 55.1 1.1

Mbeya 13.2 17.9 18 22.7 22.8 0.4

Manyara 10.6 10 11.2 12.7 14.6 0.3

Tanga 27.8 14 13.1 13.8 13.9 0.3

Pwani 7.5 8.6 8.6 8.9 8.8 0.2

Tabora 3.1 3 2.7 2.8 2.5 0.0

Ruvuma 0.6 0.6 0.4 0.3 0.3 0.0

Singida 0.2 0.1 0.1 0.1 0.1 0.0

Total for Mainland 2,844.30 3,134.90 4,021.10 4,604.30 4,956.70 96.5

North Unguja 44.7 38.9 43.6 75.9 92.3 1.8


Urban West 38.2 40.3 47.5 52.4 61.4 1.2

South Unguja 31 27.3 24.1 23.6 22.7 0.4

South Pemba 0.1 0.1 1.1 1.2 1.3 0.0

North Pemba 1.4 1.2 1.2 1.2 1.1 0.0

Total for Zanzibar 115.4 107.8 117.5 154.3 178.9 3.5

Total for Tanzania 2,959.70 3,242.70 4,138.60 4,758.50 5,141.8 100.0

*Notes: CellscontainingzerovaluesmeansthattheFDIvaluewasinsignificant;emptycells(-)meanstherewasnoFDIflow.Figuresfor1998areFDIinStock,andflowsforsubsequentyears.

Source:CollatedfromTanzaniaInvestmentReportsanddatabase,2001and2005.

2.2.5 Portfolio Investments into Tanzania

AlthoughmostoftheforeigninvestmentflowispopularlyconsideredasFDI,itcanalsotakeotherdifferent forms including portfolio investment. Until the opening up of the Dar stock Exchange MarketforEquityparticipationbyforeignfirms,portfolioinvestmentintoTanzaniawasclosetoabsent. The Capital Markets and Securities Authority was established in 1994 but wasn’t until 1998thatthefirstStockExchangemarket,TheDaresSalaamStockExchangeMarket(DSE),started operations with only one company listed—the Tanzania Oxygen Limited (TOL). Thenumber of companies listed to participate in the market has since then increased to seven and 3crosslistedcompaniesandtheopeningupofthemarketforparticipationbyforeignfirmshasopenedthewayforportfolioinvestmentfundstoflowintoTanzaniawithmoreease.Thelevelofactivity in the market is nevertheless still low.

2.3 Level of Domestic Direct Investment (DDI)

2.3.1 IdentificationofDomesticDirectInvestment(DDI)

Except for the generous series on theGross FixedCapital Formation (GFCF), there are nosystematicdataonprivatedomesticinvestmentinTanzania,whichmakesacompleteanalysisofdomesticprivateinvestmentdifficult.Intheabsenceofabetteralternative,belowwedescribea methodology for identifying DDI using the available information data on FDI and GFCF. Since FDIisbasicallyprivateforeigninvestment,wecanobtainthevalueofDDIbynettingFDIfromtheprivate GFCF. Figure 2.15 describes the major components of investment to identify DDI.


Thisapproachmayhavevarioussnags,butthreearenotable.First,notallforeigninvestmentiscapturedintheFDIdata.ThepublisheddataonFDIarethoseproducedbytheTIC–andreflectinvestmentsthatpasstheTICthreshold/definition.Foreigninvestmentflowsinanon-FDIform,andthosenotcapturedbyTICwillbelargelyleftout,henceundervaluethetruemagnitudeofforeign investment.Secondly, thisapproachmaynoteffectivelydistinguish the foreignversusdomesticcomponentinthejointventuresFDIs.However,theTIC/NBS/BOTsurveysestimatetheshareoflocalprivateinvestmentinjointventureFDItobeonaverage14%.Nevertheless,somesectorssuchasmanufacturingandfinance/insurancehadasgreatershareoflocalinvestmentasabout50%and20%respectively.However,weconsider thisweakness lessserioussinceits effect can be cancelled out with the value of domestic investments that has foreign joint ventures.

It should be noted that we use the above approach as a second best alternative while recognising asusual,unreliabilityoftheinformationonthevalueofdomesticinvestmentandtheseverelackof statistics on the number of domestic establishments. Figure 2.16 shows the resulting trends of DDI relative to FDI.

AclearertrendintherelativesignificanceofdomesticandforeigninvestmentisshowninFigures2.17and5.1.Ingeneral,thetwofiguresshowthatalthoughpublicpolicyhastendedtobemorefavourabletotheFDI,domesticprivateinvestment(orDDI)hasbeenasignificantcomponentoftotalinvestmentinTanzania.However,itisonlyintherecentyears(since2000)thatdomesticinvestmenthasbecomeaconsistentcontributortoeconomicgrowth(seeFigure5.1insection5).Domesticinvestmentisthesignificantpartoftheeconomyunlikeforeigninvestmentwhoseimportance in economy has been recognised only since the last decade.


Source: Own computation based on data from TIC and National Accounts of Tanzania

2.3.2 Relationship between Foreign and Domestic InvestmentOne of major concerns by most developing countries’ appraisal of policy on FDI is the extent to which FDI has had a positive externality to domestic investment. This is because FDI is expected,atleastintheory,toprovidelinkageandstimulitolocalenterprises,wherethelatterisexpected to learnandgrow from the relationshipwith the former. Inpractice,however, therelationship between the two may not be as automatic and useful. It may require deliberate public intervention to steer the relationships in the direction that is consistent with achieving the national development goals.

First,theinstitutionalframeworkguidingpromotionandfacilitationofFDIdoesnotprovidepolicyleverage for enticing foreign investors to relate to local investors. The relationship between the two has not been developing according to existing market requirements and opportunities. Second,existinginitialconditionsdonotreadilyenhancesubstantivelinkagesbetweenforeignandlocalinvestments.Suchsupplysideproblemsasunderdevelopedmarketsinsomesectors,weakproductionbaseonthesideoflocalenterprises(poorquality,lackofstandardsandpoorinfrastructures)andweakmarketinstitutionsdemeanprospectivecollaborationbetweenthetwo.Third,manyFDIdevelopfromor/andhavealreadydevelopedinternationallinkages(forsupplychain)thatmayfurtherlimittheextentofcollaboratingwithlocalsthatcannotcompeteonsimilarfooting unless deliberate effort is made to support their development.

Finally,therecanbemismatchbetweenforeignanddomesticinvestorsintermsofthesectors


ofinterestsorstrategicinterestsoftheirrespectiveestablishment.Ifthismismatchissignificant,itimplieslittleroomforanysubstantiallinkages.Forinstance,asminingisthebiggestrecipientofFDI forTanzania in the lastdecade, ithas feeblesectoral linkagewithothersectorsof theeconomy,hencelimitedparticipationofthelocalenterprises.Evenwhenthelatterareengagedinthissector,theyaremostlyundertakingartisanminingusingrudimentarytechnology,productswhich are exported indirectly through dealers from neighbouring countries. Technical composition of many FDI activities is too advanced for the local enterprises to learn/adopt in the short run. The learning/adaptationbylocalfirmsoftheadvancedtechnology/skillsoftheforeignenterprisesmaybecompromisedifthestrategicmotiveofthelatterisexportmarketopportunities(i.e.productsarenotsoldinthedomesticmarkettherebylearningoradopting).

2.3.3 Literature Review

One controversial area in which FDI has received critical examination in the literature is its impact andrelationshipwithdomestic investment.AppendiceA2.2andA2.3summarisekeyfindingsfrom the theoretical and empirical literature. The literature is unfortunately inconclusive on this matter(fordetailedliteraturereviewseePhillipset al.2000).Inallthecases,thereseemstobefirmagreementontheaffirmativesideoftheequation(thatFDIisgenerallybeneficial),butcontroversiesonthenegativeside.Thedebatehasincludedthreeissues.First,howbeneficialisFDItogrowth.Second,whatisthestatisticalrelationshipbetweenFDIanddomesticinvestmentorDDI(i.e.isforeignnessthatimportant)andthethirdissueis,whatistheimpactofFDIonthedomesticinvestment(DDI).

Thefirstquestionhasreceiveda lotofemphasis inpolicydebatesandanalysiscomparedtothelasttwoquestions.Since,inaddition,thisquestionhasbeentreatedinchapter3inseveraldimensions, our purposehere is to focuson the last twoquestions, butmore specifically onthe last one7.Notehowever,thattheanalysesinvestigatingthestatisticalrelationshipbetweenFDIandDDIaimatdeterminingwhichofthetwoinvestmentsleadtheother.Thatis,istheFDIthe leader or follower of the DDI? Various studies conclude that the relationship can go either way(blurred),butnotinglikethestylisedfactthatDDIisinprinciple,theprimesourceofcapitalformationandwhichisexpectedtocontributetoGDPgrowth.Subsequently,ifgrowthandmarketsize are key determinants of FDI, thenDDI is the leader of FDI. The opposite is truewhenDDIhas to learnandadoptamoreadvanced(ornew) technologyandexportmarkets.Suchliteraturerecommendinviewofthesefacts,policiesthatintendtobettertheoverallinvestmentenvironmentasthesearemostbeneficial.Anotherfindingfromempiricalstudiessuggeststhat,incountrieswhereDDIgrowthisfinancedfromdomesticfinancialsector,FDItendtoparticipatemoresubstantially(hencefollowDDI).

OuraiminthelastquestionistofindoutwhetherandtowhatextentFDIisbeneficialtoDDI,

7 Initssimplestformation,FDItheorysuggeststhatFDIcanpromoteeconomicgrowththroughincreasesinthecapitalstock,taxrevenue,trade,wagelevelsandemployment.


since one of the principle and theoretical objectives of promoting FDI is to enhance its positive externalitytoandforthegrowthofdomesticfirms.Asexpected,FDIhasbeencontributingtothegrowthofcapitalformation(Figure2.17).AlthoughtheshareofFDItototalcapitalformationhasbeendecliningsince1999afterasharprisein1998,thereareprospectsthatitwillincreaseinthe medium term.

Source: Own computation based on data from TIC and National Accounts of Tanzania

In addition, economic theory points to at least twoways throughwhich FDImay affectDDI.First, FDI may have an impact on the profitability of domestic investment by, for instance,improvinginfrastructure.ThisistrueinthecaseofTanzania,where,asdiscussedinchapter3,many FDI companies have developed infrastructure in the local communities surrounding them (electricity,water,roadandotherproductiveamenities).Inaddition,thecountryenjoyssubstantialimprovementinhertelecomsectorasaresultofforeigninvestmentinthatsector(establishmentofworld-classtelecommunicationsystemsandavailabilityofmobilephones).Secondly,FDImayalter the ownership structure of total investment in the host country thereby easing availability of investmentfundsthrough,forinstance,privatisationsales(thatcanbeusedtoincreasepublicdomesticinvestmentorofferfinancetoDDI).

Otherstudies(SeeAppendixA2.3)haveshownthatFDIcanhaveapositiveoranegativeimpactondomesticinvestmentdependingontheleveloftradebarriers(TBs)andfinancialregulation(FR)imposedbythehostcountry;suchthatthemorerestrictivearetheTBsandFR,thelessbeneficialFDIaretoDDI.However,itisimportanttonotethefactthatFDIcancrowdoutDDIbydemeaningprofitabilityoftheDDI.ThisnegativeeffectisamplifiedifthedomesticinvestmentisnotassociatedwithjointventureswithFDI.However,FDIisunambiguouslybeneficialinajointventure type of ownership.


The above discussion plus information in Appendix A2.2 and 2.3 implies that the precise impact of FDI on DDI can vary by country and time – such that each country case can provide a different experience. The impact should be assessed in a dynamic context as impact can change as policies/investment environment changes over time. In general, the studies make clear thefact that neither the theoreticalwork nor the empirical evidence provides a definitive answerregarding the impactof theFDIondomestic investment.Onbalance,however, theempiricalworkseems tosuggest thatFDIhasapositive impactondomestic investment (Phillipset al. 2000:24).Yetanotherconclusionfromliteraturesuggeststhat,whilethebenefitsofFDIforMNEsareeasilyquantifiable,thepotentialhostcountrybenefitsarelessapparent.CriticsofFDIarguethattheprofitseekingmotivesofMNEsareofteninconsistentwiththeobjectivesofdevelopingcountries.

FordevelopingcountriessuchasTanzania,FDI’simportancefordomesticinvestmentmayalsobedemeanedbystructuralweaknessescharacterizingboththeeconomyatlargeandspecificfirmsinparticular.Forinstance,accordingtoMashindano(2004:70),Tanzaniahasacknowledgedand recognized the importance of attracting FDI in order to attain a desirable economic growth rate and improve living standards. It is the economic deficiencies in poor country’s thrive fordevelopment. more than impact on domestic investment that actually drives their quest for FDI. ThegovernmentshoulddesignpoliciesthatwillenhancepossiblebenefitsofFDIonDDInotonlythosethatmaximize inflowsof investment.However,accordingto theFDIpromotionpolicieshaveshort-termbenefitstothedomesticinvestmentinTanzania,especiallywhenthosepoliciesare targeted at regional level.

2.4 Policy Implications

The review of literature shows agreement that investment is critical for the growth process and hencesocialwelfare(seePhillipset al.2000).Thequestion isaboutwhatkindof investmentismostbeneficialandwhatthemostcost-effectiveandsociallyharmoniouswaystostimulateinvestment.Tocorroboratethisconcern,Kabelwa(2003)notes“…DebateonFDI inTanzaniahassomehowneglectedtheroleofforeigninvestmentinthecountry.That is,whetherforeigninvestment has met the country’s expectations and what impact it has on Tanzania’s economic development. The issue that lies ahead is to ensure that the attracting more FDI gores in tandem withtheanalysisofcostsandbenefitsofthisinvestment…”(2003:18).

MonitoringandevaluatingFDIinTanzaniaisconstrainedbypoordata.However,effortsbytheBankofTanzania(BOT),TanzaniaInvestmentCentre(TIC)andtheNationalBureauofStatistics(NBS) is commendable in putting togethermany sourcesof data and information in order togenerate a more plausible data series. These efforts should also include establishing an effective mechanismfortrackingprivateforeigninvestmentinallitsforms,andsubsequentlycapitalflightsince,asNyoni(2000)notes,Tanzania’s investment incentivesstructure lends itself tocapitalflight(Mashindano,2004:61).


3.0 invesTmenTs adequaCy in relaTion To developmenT goals

3.1 Development Goals

Tanzania’s Development Vision 2025 provides a statement of hope in the country’s quest for socio-economicdevelopment.Nevertheless,ithasambitioustargets:halfabjectpoverty;createabase forsustaineddevelopmentof theeconomy;and fashionadiversified,middle-income,marketeconomy.Toachievethesetargets,thestrategyistocreateasustainedexport-ledgrowthof8.0percentormoreperyear,throughjudiciouslyexploitingthecountry’srichnaturalresourcebase and fostering domestic and foreign investment.

TanzaniaisalsopartytotheMillenniumDevelopmentGoals(MDGs).Thesearealsoambitious:eradicate extreme poverty and hunger by 2015; achieve universal primary education by 2015; promote gender equality and empower women; reduce child mortality; improve maternal health; combatHIV/AIDS,Malariaandotherdiseases;ensureenvironmentalsustainability;anddevelopglobal partnership for development. To attain these goals it requires an increasing amount of qualitydomesticandforeigninvestments,sustainedoveralongperiod.

Inordertoprogressinachievingtheabovedevelopmentgoals,economicgrowthisnecessary.This section answers the question: “Is Tanzania’s investment adequate to attain its development goals?”Toanswerthisquestion,wefirstestablishthelinkbetweeninvestmentandgrowth.ThenwediscussTanzania’s historical experience in relation to investment andgrowth.Finally,weexamine what should be done to make investment more productive in support of growth.

3.2 Link between Investment and Growth

Experience in other countries shows that there is a strong link between investment and economic growth. In the long run,economicgrowth ishighly linkedwith investment innewcapitalandincreases inproductivity that isassociatedwith investment innew technology,ResearchandDevelopment (R&D) and training. Empirically, most growth regressions, including those thatfocusonSub-SaharanAfrica,showthatinvestmentisthelargestandmostrobustdeterminantof economic growth.

Empirical work by Chi Hung Kwan (2004), reveals that for China, Japan, South Korea andTaiwan,investmentwastheengineofeconomicgrowthinthosecountries.Kwan’sfindingsaresummarised in Table 3.1:


Table 3.1: Investment and Growth in selected countries

Country YearInvestment Ratio

(% of GDP)a

GDP Growth (%)b

ICOR

a/b

1 China 1991 - 2003 39.1 11.6 3.4

2 Japan 1961 - 1970 32.6 10.2 3.2

3 South Korea 1981 - 1990 29.6 9.2 3.2

4 Taiwan 1981 - 1990 21.9 8.0 2.7

Source:Kwan(2004),Analysisbasedonofficialstatisticsofeachcountry.ICOR = Incremental Capital Output Ratio

With regard to Sub-SaharanAfrica, Barro and Lee (1994), Collier and Cunning (1999) andCalamitsisetal(1999)usinggrowthregressionshaveallshownthat investment isoneofthemain determinants of growth1.SimilarfindingswereobtainedbyYoung(1994,1996),andMankiw,Romer,Weil(1993).AstudyonTanzaniabyWangwe,etal(2001)alsoconcludedthatphysicalcapitalaccumulation(investment)iscrucialforlong-rungrowthinTanzania.

Despitetheaboveempiricalevidence,therearealsostudiesthatshownegligiblelinkagebetweeninvestmentandgrowth.Forexample,between1960-75Zambiahadanaverageinvestmentrateofover35percentofGDPbutachievedonly0.4percentpercapitagrowth(Easterly,WilliamandLevine,Ross,1997).Similarly,cross-countryanalysislinkinginvestmenttogrowthinAfricaconductedbyDevarajan,EasterlyandPack(2002)showlittlecorrelationbetweeninvestmentand growth. During 1960-94 Africa invested 9.6 percent of GDP but achieved only 0.5 percent real per capita growth. The study tested several theories by examining the relationship between the change in investment ratios and the change in growth per capita. One of the most famous predictionsindevelopmenteconomics,datingbacktoSirArthurLewisandWaltRostov,isthatincreases in investment ratios lead to growth accelerations. The study on 29 African countries did notestablishsignificantassociationbetweenincreasesininvestment inAfricaandchangesingrowth from 1960-79 to 1980-1999. Only Botswana had high investment and high growth. Private investmenthadasignificantpositiveimpactongrowthbutonceBotswanawasfactoredout,theeffect of private investment on growth became relatively small.

Several factors have been cited as being important in facilitating high investment and growth in the countries shown is Table 3.1 above. These are:

Economicandpoliticalstabilityandtransparency:AccordingtoOliviaJensen(2001),•social and political stability in a country is almost a sine qua non for investment.

1 Otherexplanatoryvariablesincludeschoolenrolmentrates,lifeexpectancy,macroeco-nomicpolicyvariables,theinflationrate,politicalstabilityandgeographyvariables.


A steady policy-making environment is conducive for both investment and economic growth.Similarly,transparencyindecision-makingisimportantforinvestors.Investorsseeking sites for long-term investment attach great importance to the predictability of the operating environment. Integral to this issue is the degree of transparency of policy choices and the accountability of policy makers. Investors also value highly a transparent and reliable legal system.

Stable macroeconomic policies: The size and growth rate of the market and low cost of •productionareimportantforinvestment.Lowinflationandcommitmentbygovernmenttopursuenon-inflationarypolicies,includingfollowingappropriatemonetarypolicyarevaluable for investors.

Supportiveconduciveinfrastructure:StudiesconductedbyAmarBhattacharya,etall•(1997) indicate that good physical, financial, human and institutional infrastructureisessential in facilitating investmentandgrowth.Aneducated,hard-working labour-force was found to be crucial for investors in the above-mentioned countries. Good roads,wellfunctioningandefficientharbours,stableandreliableelectricitysupplyandsupportivefinancialinstitutions,wereallingredientsforattractinghighinvestmentandfostering high growth.

Government resolute commitment and pro-active support for private domestic and foreign •investment: Inmostof thesecountries,OliviaJensen (2001)observes that therewassignificantactiveparticipationbygovernmentinfacilitatinginvestmentthroughextensiveprogrammes aimed at creating a conducive environment for investment and growth.

AsthestudybyEasterlyetal,(1997)amplyshows,countriesthathavemarkedinadequaciesof the attributes outlined above have experienced low growth despite high investments in some of these countries. The upshot of this is that in order for Tanzania to accelerate investment and achievehighergrowth,relentlesseffortsmustbemadeinimprovingtheenablingenvironment.Inparticular,focusshouldbeoncontinuedandsustainedeconomicandpoliticalstability,enhancedtransparencyinallaspectsofeconomicandsocialmanagement,stablemacroeconomicpoliciesthatfosterlowinflation,greaterimprovementsinthecountry’sinfrastructureandmorepro-activegovernment support for domestic and foreign investments.

3.3 Tanzania’s Historical Experience on Investment and Growth

Tanzania’sexperience(Figure3.1)showsthatinvestmentandgrowthhardlyseemtocorrelate.The period of highest investment 1980-83 when the investment ratio as percentage of GDP averaged24.6percentcoincideswiththelowestgrowththataveragedonly0.3percent.Similarly,whenTanzaniaachievedaninvestmentratioof25.8percentbetween1991-94,averagegrowthofGDPwasonly1.6percent.Incontrast,between1960-79aninvestmentratiothataveraged16.5percentachievedagrowthof3.8percent.Similarly,aninvestmentthataveraged16.8percentbetween 1995-2002 coincides with a growth of 4.5 percent.


The resultsdepictedonFigure3.1appear tobeconfirmedbya recentWorldBankstudyonTanzania (Devarajan, Easterly, and Pack 1999). The study that used “growth accounting”methodology revealed that the correlation between output growth and capital growth was insignificant.TheR2 wasonly0.10,indicatingthatcapitalgrowthexplainsonly10percentofthevariation in growth of output. This apparent lack of correlation between investment and growth in Tanzania is explained in sub-section 3.4.

Source: BasedonBureauofStatisticsandBankofTanzaniastatistics(variousyears).

3.4 ExplainingTanzania’sInsignificantLinkagebetweenInvestmentandGrowth

There are several reasons why Tanzania’s relatively high investment has not achieved high growthrates.OnereasonconfirmedbytheresultsofthegrowthaccountingstudybyDevarajan,etal.(1999)relatestolowproductivityofinvestment. Value-added in manufacturing sustained a39percentdeclinebetween1975and1990.Accordingtothestudy,themainreasonsforlowproductivity were lack of complementary human skills needed to use complex capital gainfully. EmpiricalstudiesbyElbadawi,Ndulu,andNdung’u(1997)andJaspersenetal.(1995)provethatproductivity of FDI is higher in countries with a higher educational attainment. Both studies cited confirm that the interactionbetweenFDIandsecondaryeducationalattainment isstatisticallysignificantinexplaininggrowth,whiletheinteractionwithprimaryeducationisinsignificant.Thus,giventhatTanzaniahasthelowestlevelofsecondaryeducationintheworld(about6percentoftherelevantschoolagepopulation);thiscouldbeanexplanationoftheslowergrowthrate.

AccordingtoPaulKrugmanofPrincetonUniversity,the“EastAsianMiracle”(calledsobecauseofthehighratesofgrowth)wasachievedthroughariseinproductivityandanincreaseinthe


use of larger amounts of factors of production – especially capital and labour. When considering investment efficiency (productivity), the “incremental capital-output ratio (ICOR)’ serves asa guide2. Japan, forexample, invested32.6percentof itsGDPbetween1961and1970andachieved10.2percentsustainedgrowth, implyingan ICORof3.2. Inotherwords, inorder toboostgrowthbyonepercentagepoint, theequivalentof3.2percentofGDPhadtobenewlyinvested. Similarly South Korea invested 29.6 percent of its GDP between 1981 and 1990 and achieved9.2percentgrowth,implyinganICORof3.2.Inallthesecountriessustainedgrowthwas achieved through improved productivity. Now lets turn to the experience of Tanzania.

The relationship between investment and growth in Tanzania is shown in Table 3.2.

Table 3.2: Investment and Growth in Tanzania

Investment ratio(% of GDP)

GDP growth(%)

ICOR

1965 - 73 20.8 5.2 4.0

1974 - 79 20.6 2.5 8.2

1980 - 85 16.4 1.1 14.9

1986 - 90 27.7 3.9 7.1

1990 - 95 24.6 2.5 9.8

1995 - 2000 16.0 4.1 3.9

2000-2004 17.6 5.6 3.2

Source: WorldBank(2002),“TanzaniaattheTurnoftheCentury–BackgroundPapersandStatistics,”WashingtonD.C.BankofTanzania(2004),“EconomicandOperationsReportfortheyearended

30thJune,2004,”DaresSalaam.NationalBureauofStatistics,“TheEconomicSurvey2001,”DaresSalaam,June2002.

The data provided in Table 3.2 indicate that there is hardly any direct relationship between investment and growth. Periods of high investment are not automatically translated into high growth. For example, during the period 1973-87 and 1987-99, investments were 17 and 20percentofGDPbutregistered–1.3percentand1.0percentgrowthrespectively.Theefficiencyofinvestmentwaslow,registeringanICORof15.7and20respectively.Inthelattercase,itmeansthat in order for Tanzania to achieve a one-percentage point growth it has to invest 20 percent ofitsGDP–ahighlyinefficientwaytoachievegrowth.Whatarethereasonsforlowinvestmentproductivity?

2 The“incrementalcapital–outputratio(ICOR)”isobtainedbydividingtheratioofinvest-mentasapercentageofGDPwithrealeconomicgrowth(realGDPgrowth).ThesmallertheICORis,themoreefficienttheinvestment.Forexample,asTable3.2shows,Tanza-nia’sICORformostyearsarehighcomparedwiththoseofdevelopingcountries.Accord-ingtoWangweandTsikata(1999),thehighICORisareflectionoflowproductivityofpublic investments and low rates of industrial capacity utilisation.


According toDevarajan,Easterly,andPack (1999), the lowgrowth inTanzania isnotdue tolack of investment but is associated with inefficiency.ThisfindingisalsosupportedbystudiesbyWangwe et al (2001) using “GrowthAccounting” analysis. The results of their study arereproduced on Table 3.3.

Table 3.3: Sources of Growth in Tanzania

Output per worker Capital per worker Education per workerTotal factor productivity

1960-1970 1.9 0.4 0.3 1.2

1970-1980 1.3 1.0 0.1 0.3

1980-1990 -0.3 0.2 -0.1 -0.4

1990-1998 -0.2 -0.2 0.0 0.0

1960-1998 0.7 0.4 0.1 0.3

Source:IMFcalculations.CountryEconomicMemorandum(1999).

As shown inTable3.3, output perworker increasedby0.7percent per yearover theperiod1960-98.Increasesincapitalperworkercontributed0.4percentperyear,whileeducationperworker contributed only 0.1 percent. The remaining 0.3 percent of annual growth is attributed totheresidual,totalfactorproductivitygrowth.Noticethatthereisalargedeclineintotalfactorproductivitybetween1960and1990.Fromahigh1.2percentbetween1960-70, it fell to0.3percent per year between 1970-80 and turned negative between 1980-90. This happened despite an increasing level of investment during this period. The empirical evidence suggests that productivity of public sector investment and industrial capacity utilisation rates were too low to sustain high levels of growth. More generally, the lack of complementary investment(presumablyduetoadverseinitialconditionstypicalinlowincomecountriessuchasTanzania)andespeciallyinservicesectorsandrequiredskills(thatfacilitateefficientutilisationofresources)have exacerbated the high ICOR.

The observation made above shows that during 1960-70 increases in total factor productivity were the main driving force behind the relatively high economic growth – contributing 1.2 percentage pointstooverallannualgrowth.However,after1970,totalfactorproductivitybegantodecline,turning negative between 1980-90. The main reasons for declining productivity were3:

Poorincentivesforincreasingproductivityunderthesocialistregime,

Weakmacro-economicpoliciesthatledtoforeignexchangeshortages,

3 Pritchett(1999)arguesthatlowratesofproductivitycouldalsoindicateproblemsinmeasuringthevalueofthecapitalstock.Inparticular,corruption,lackofgovernmentef-ficiencyininvestment,patronage,andavarietyofmanyotherfactorsmayleadtocostsof investment that overstate the actual contribution of investment to capital accumulation.


Inadequateinstitutionstosupporthighproductivity,

Insufficient availability of inputs and complementary investment into the productionprocess,

Poorinvestmentdecisionsbyparastatalorganisationsthatresultedinover-capacities,and

Inadequate supportive legal and regulatory framework.

The reforms initiated in the 1990s reversed the declining factor productivity but have not been sufficienttoboostgrowthtohighlevels.

Thecontributionofeducationtogrowthissmall,averagingonly0.4percentperyearbetween1960-98 (Table 5.3). Experience in other countries shows that investing in human capital intheformofeducation,training,healthcare,orimprovednutritioniskeytofasterandsustainedeconomic growth. Investment in human capital is particularly important for growth because it affects the development of entrepreneurial, managerial, and organisational skills, as well asinnovation,learning,andadaptationofnewtechnologyandmodernpractices.Thus,apartfrombeinggrowthenhancing,investmentinhumancapitalalsodirectlyimprovesthequalityoflifeofthebeneficiariesandthesocietyasawhole.Unfortunately,thequantity,relevanceandqualityofTanzania’seducation,especiallypost-primary,areamongthelowestinSub-SaharanAfrica.Asaconsequence,theexpectedcontributionofeducationtoeconomicgrowthhasbeenweak.Education,therefore,isanareathatrequireshigherinvestmenttoboostgrowthinthefuture.

The low observed investment productivity is also due to inadequate or weak infrastructure. A studybyDeepacketal,(2001)illustratesshowthatinvestmentproductivitytendstobehigherincountries with well-developed physical infrastructure. Tanzania’s erratic and unstable electricity supply,inadequatewatersupply,poorroads,inadequatecommunicationinfrastructureandthelike,tendtoreducetheproductivityofinvestment.

3.5 Investment Adequacy

In this section the question posed in Section 5.1: “Is Tanzania’s investment adequate in relation toherdevelopmentgoals?”AsdiscussedinSection5.1,thecountry’svision2025requiresaGDP growth rate of 8.0 percent or more to achieve desired development goals. The discussion in Section 5.2 to 5.4 above is not conclusive about the relations between investment and growth. SomecountriessuchasJapan,SouthKorea,TaiwanandChinainvestedover22percentoftheirGDP and achieved a sustained 8.0 percent growth or more over a period of 10 years. Others suchasBotswanainvestedaboutthesamelevelasTanzania(averaging17.0percentofGDP)andachievedover7.0percentgrowthsustainedforaperiodof10yearsormore.Others,likeZambia invested over 35 percent of their GDP but achieved only 0.4 percent per capita growth for 15 years between 1960-75. Tanzania like Zambia achieved a dismal growth as discussed in Section 7.3. Similarly most Sub-Saharan African countries invested over 9.6 percent of their GDP


between1960-94buthadthelowestgrowthintheworld(Hoeffler1999).However,despitealltheseobservations,thereareanumberoflessonsthatwecandrawfromtheaboveempiricalevidence.

First, investment isoneof the fewmost robustvariables incross-countrygrowth regressions(LevineandRenelt,1992).ThisimpliestogettheTanzanianeconomygrowingat8.0percentperannum or more requires higher levels of investment that are channelled to sectors of the country’s highestcomparativeadvantage.Inaddition,thereisneedforgreaterpublic-privatepartnershipsindevelopment,eachcomplementingoneanother.Further,greaterfacilitationoflocalinvestorsis needed in tandem with current efforts to promote foreign investments. Other complementary conditions are discussed further below.

How much more investment is needed? Using empirical studies quoted by William Easterly (1998),anincreaseofdirectinvestment/GDPof1.3percentagepointsresultsinanincreaseofone percentage point in growth. This means for Tanzania to increase its growth from the current 5.0percentto8.0percent,weneedtoraiseinvestment/GDPby3.8percentagepoints.Inotherwords,investment/GDPneedstorisefromthecurrent17.6percentto21.4percent.Forexample,Taiwaninvestedaboutthatlevel(21.9%)between1981-1990andachieved8percentsustainedgrowth over that period.

Alternatively,wecanknowhowmuchinvestmentisneededbylearningfromempiricalstudiesconducted using the Financing Gap approach. This approach uses the Incremental Capital OutputRatio(ICOR)toprojectgrowth.TheEBRDinitsannual1995reportonex-Communisteconomiessaid,“growthof5percentrequiresinvestmentof20percent”.ThisimpliesanICORof 4. A 1995 World Bank report on Latin America says “enhancing savings and investment by 8 percentage points of GDP would raise annual growth by around 2 percentage points – again implying an ICOR of 4. The IMF Institute in its training manual for developing countries suggests that investment requirementsbecalculatedas “Targetgrowth* ICOR.” InSection5.4,Table5.2,Tanzania’sexperiencewith regard to investmentefficiencyasmeasuredby ICORvarieswidely from a high 20.0 between 1987-97 to a low 3.2 between 2000-2004. If we assume the mostrecentexperiencecanbesustained,thenusingtheIMFapproach,Tanzaniawouldneedan investment/GDP level of 25.6 percent – about 8.0 percentage points higher than the current level of investment.

Wecannowconclude,albeitonthetheoreticallevel,thatTanzaniawouldneedtoincreaseherinvestment/GDP level by between 21.4 to 25.6 percent per annum in order to achieve her Vision 2025ofraisingGDPgrowthby8.0-10.0percentormore.However,asSection7.2to7.4amplyillustrates,sustainedgrowthrequiresnotonlyincreasinglevelsofsavingsandinvestment,butalsotheefficiency/productivityofthatinvestmentandothercomplementarygrowthdeterminants.We discuss these other growth-enhancing factors in the next section.


3.6 Raising Investment and Growth: What can be done?

3.6.1 Improving the Environment for Investment

Tanzania’s ratio of investment to GDP averaged about 17.0 percent of GDP between 1965-2004. This iswellbelow the ratioattained indevelopingcountriesofLatinAmerica (20-22percent)andAsia (27-29percent).Therefore, it is important forTanzania to strive to raise investmentto those levels achieved by other higher growth developing countries. Also, the empiricalevidence shows that Tanzania’s ratio of private investment to GDP is low. This is worrisome for tworeasons.First,privateinvestmenthasbeenfoundtohaveasignificantlystrongereffectongrowththangovernmentinvestment–probablybecauseitismoreefficientandlessassociatedwith corruption. However, both public and private investments are needed because thesecomplement one another – especially where the government improves markedly the country’s physicalinfrastructure.Second,officialdevelopmentassistance,whichprovidesthefinancingforalargeshareofTanzania’sinvestment,isdeclining–exceptforprioritysectors.Thus,Tanzaniahas to do more to attract more domestic and foreign private investment. To achieve this noble goalandfostersustainedgrowth,thefollowingstepsareimportant.

First,thereisneedtoensurecontinuedmacroeconomicstability.Cutbudgetdeficit.Reducetherateofincreaseinmoneysupplyandinflation.Managemorecarefullyarrears–bothdomesticandexternal.AnempiricalstudiesbyPritchett(1998)hasshownhighcorrelationbetweenadequatemacroeconomicpolicyandrapidgrowth.Investorstendtohavegreaterconfidenceincountriesthathavesustainablepricestability.Ndulu(1997)alsocallsforreducingthesizeofthebudgetdeficitsthroughconcertedeffortstoraiserevenuecollectionandreducewastefulexpendituresas a way of fostering sustainable price stability. Case studies on Sub-Saharan Africa cited by Nduluetal(2000)alsoshowhighlinkagebetweensustainedmacroeconomicstabilityandrapideconomicgrowth,thelatterbenefitingfromincreaseddomesticandforeigninvestment.

Second,make continuous improvements in the legal system.Private investment is not likelyto take off on a sustained level where investors and lenders lose their capital because of dysfunctional court system that fails to enforce contracts and property rights. Tanzania has made commendable progress in this area but much remains to be done. In particular making further improvements toenhanceefficiencyof the recentlyestablishedTanzania’sCommercialCourtand Tanzania National Business Council as well as considering possibilities for institutionalising rural property rights.

EmpiricalstudiesbySachs,J.etal(1997)showthatimprovementsinthequalityofinstitutionsemphasising the rule of law and security of property as well as more stable political and social environment conducive to higher investment have the potential to add 0.6 percent to a country’s annualgrowth.Similarly,cross-countrystudiescitedbyNdulu (2000)conclude that improving


governancescores(byreducingcorruption,improvingthequalityofbureaucracyandadheringtotheruleoflaw),hasthepotentialofincreasinglong-rungrowthbynearlyathirdofapercentagepoint per year.

Third, review the entire taxation system to provide for greater transparency andmore equallevelplayingfieldbetweendomesticandforeigninvestors.Hightaxesarenormallyassociatedwith low investment. This is particularly evident in agriculture where investment is low due to high taxation, inadequate infrastructure support especiallypoor roads,unavailabilityof powersupply,inadequatewatersupply,poortelecommunicationsandaworkforcethatleavesmuchtobe desired.

Forth, the debt overhang that Tanzania continues to accumulate despite recent HIPC debtreductions discourages private investment by reducing the expected after-tax rate of return on capital. Therefore better management of the country’s domestic and external debt is essential.

Fifth, refrain fromspecial “subsidies” (taxexemptions) for foreign investors.TheGovernmentof 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 thatalsoassuredinvestorsthattheirpropertyrightswouldprotected.Thatis,achievingarobustmacroeconomic policy environment and favourable investment climate is more fundamental to attracting FDI than just offering tax exemptions.

3.6.2 Raising Investment Productivity and Sustaining Growth OverallfactorproductivityinTanzaniaislow(Table5.3)becauseofavarietyofdistortionsandinstitutionaldeficiencies.Inordertospurgrowthinproductivityandoutput,thefollowingstepshavetobetakentoreducethosedeficiencies:

Make concerted efforts to improve the country’s physical infrastructure(i)

EmpiricalstudiesbyDeepaketal(2001)showthatproductivitygainsarehighincountrieswithskilled workforce and well-developed physical infrastructure that complements the investment. StudiescitedbyEasterly(1997)showthatanincreaseof1.7percentofGDPinpublicinvestmentin transport and communication can increase growth by one percent. Similarly in the case of Tanzania,findingsbyKweka(2003) indicatethat improvement in infrastructurehassignificantinfluenceongrowth.ThestudyobservesthatrealGDPgrowthincreasesby0.5percentandtotalwelfare rises remarkably by about 2.0 percent. World Bank studies on Sub-Saharan Africa have cited poor infrastructure as a major deterrent to investors. Good infrastructure is key to “crowding in”domesticandforeigninvestments.Unfortunately,Tanzania’sbasicinfrastructureandutilitiesare poor. The road network is undergoing major improvements but much more remains to be donetoensureregularmaintenanceandupgrading.Kweka(2004)observesthatinthecaseofTanzania investments being made to improve transportation infrastructure has reduced trade-


relatedtransactioncosts,butthesearestillhigh–typicallyabout5percentofvalue.Powersupplyis erratic, unreliable, and expensive and has limited coverage.Electricity costs are over 215percent higher in Tanzania than neighbouring Kenya and nearly seven-fold the charges in South Africa(Musonda,2000).Muchimprovementisrequiredinthisareatoensurethatpowersupplydoes not constrain productivity and growth. Progress is evident in telecommunication services but more competitive conditions are needed to lower costs. Water supply for productive activities is irregular and inadequate to support a growing economy. All these and other infrastructure require urgent improvement to spur investment and growth.

Improve policy and institutions(ii)

Policies and institutions are important determinants of growth. A Study by Parente and Prescott (1999)showsthatremovingpolicyandinstitutionalconstraintscouldtripleoutputthroughmoreefficient use of existing capital and adoption of new technologies.Recent projections by theWorld Bank using cross-country regressions of per capita GDP growth in 1990-97 show that if Tanzania improved its policies and institutions and thus raise its performance rating by 0.5 percent,percapitagrowthwouldincreaseby2.5percentagepoints(WorldBank,2002).Tanzaniahasmadecommendableprogressinputtinginplacesoundinvestor-friendlypolicies.However,some of the institutions are still plugged with past rigidities and do not fully support the ensuing market economy. Civil servants are still not customer-focussed and investor-friendly. Attitudes andmindsetsneedtochange.Thetaxauthority(TRA)needstomakeimprovementsinservicedelivery and avoid undue harassment of investors. This also applies to the business licensing authority and immigration which need to speed up service provision.

Improve work-force skills and knowledge(iii)

Empirical studies indicate high correlation between a country’s growth and its labour-force skills andknowledge.AstudybyEasterly,(1998)indicatesthatanincreaseof1.2yearsinaverageschoolingofthelabourforcecouldraisegrowthbyonepercent.Similarly,thesamestudyshowsthat an increase in secondary enrolment of 40 percent could raise growth by one percent. Primary educationhadnosignificantcontributiontogrowth.AsshowninTable5.3,Wangwe,etal(2001)also revealed that education per work is one of the factors contributing to growth in Tanzania. In additiontosecondaryandhighereducationthathaveahighcontributiontogrowth,theWorldBank(1998b)hasidentifiedtwosortsofknowledgethatarecriticalinenhancingtheproductivityof investment and growth. These are:

Knowledge about technology – technical knowledge or know-how. In the context of economic growth; examples would be knowledge about manufacturing processes,agriculturalmethods,andorganisationalmethods.

Knowledgeaboutattributes,suchasthequalityofaproduct,thediligenceofaworkers,orthecreditworthinessofafirm–whichareallcrucialforestablishingeffectivemarkets.


Basedontheaboveobservations,thecurrentgovernment’seffortstoexpandsecondaryeducationare in the right direction. It is also important to expand the knowledge base of the workforce through skills upgrading and improvement in the information and communication infrastructure.

Improve further the legal and judicial framework(iv)

Experience shows that investors are enticed to invest in countries that have a well functioning legal system that is capable of protecting property rights. Although Tanzania has made progress in reforming its legal and regulatory system, much needs to be done. In particular, furtherimprovements are needed in corporate and contract law, competition policy, bankruptcy law,labourlaw,andpropertyandlandrights.Thisisessentialtofacilitatethecountry’squesttobuildatransparent,expedient,andcost-effectiveregulatorysystemthatprovidesalevelplayingfieldfor both domestic and foreign investors.

Strengthen public-private partnerships (PPP)(v)

Growth comes as a result of a great deal of effort by many people and their government doing therightthingoveranextendedperiod.Acredible,transparent,well-financedandwell-managedgovernmentisessentialinimposingeconomy-widedisciplineoflaw,securepropertyrightsandprovide for adequate social safety net. This market-friendly government environment should be expected to encourage saving new investment and foster further growth through powerful public-privatepartnerships(PPP)fordevelopment.Inturn,theprivatesectorhastoreciprocatebyabidingwith rulesand regulations, improving investmentqualityandactivelyengaging thegovernment in win-win dialogues that foster social-economic development.

3.6.3 DiversifyingSourcesofExternalFinanceandRaisingEffectivenessofOfficialDevelopment Assistance

Tanzania needs to put greater efforts at diversifying its sources and composition of external finance.Prime to thiseffort relates to fostering creditworthiness toattract private investment.In this respect there is need to reduce sovereign risk as influenced partly by the ability toservicedebtandbyconstraints tocross-border transferofprofits.StudiesbyJaspersenetal(1995) and Kharas et al (1991) have shown that creditworthiness is important especially indeterminingwhetherornotprogressionfromofficialtoprivatelendingwillbesmooth.Inaddition,macroeconomicstability,policycredibilityandsustainedeffortstomaintainbothareimportantforreducinguncertaintyandraisingcreditworthiness.Helleiner(1993)reiteratesthatkeyelementsinsecuringpolicycredibilityaretheadequacyoffinanceandtheassuranceofitscontinuation.ThisunderscoresthecriticalimportanceofstabilityofOfficialDevelopmentAssistance(ODA)inreducing the perceived likelihood of policy reversals in response to sudden resource crunches. Thus,donorassistancecanbeexpected toplayasignificantcatalytic role inattractingotherforms of foreign capital in the future.


Experiencealsoshowsthatonewayofdiversifyingsourcesoffinanceistodevelopco-financingarrangements between ODA and private capital in a way that will permit ODA to leverage private resources. The scope for such arrangements is high especially in infrastructure investments (suchasIPTL,SONGAS).

3.6.4 Mobilising Domestic Resources

The current situation where development assistance plays a large role in both recurrent and development expenditure is not sustainable. A more conducive environment for progressive andorderlytransitiontolessdependenceonexternalfinancingofthecountry’sdevelopmentisessential.Inparticular,actionsareneededinfivemainareas:

Fostering domestic resource mobilisation including increases in domestic savings,generation of higher foreign exchange earnings, and making further improvement ingovernment revenue collection. These efforts are critical because experience shows that ownresourcesformthefinancialbaseforsustaineddevelopmentofeconomies–bothindeveloped and developing countries.

Reforming the country’s taxation system. High taxes and low credibility of banks tend to discourage savings and therefore retard growth. High growth and high savings are inter-related. A low tax policy is important for encouraging savings and fostering high growth. Thus,forhighergrowthtobeachievedinaccordancewiththecountry’smillenniumgoals,savings as a share of GDP has to rise from the current 12 percent to over 30 percent – a monumental task unless urgent actions are taken towards encouraging savings.

Promoting private investment to support economic expansion while sustaining on-going economic reforms. Tanzania’s experience shows that the response of private investment to the reforms that were initiated since the mid-1980s has been slow. Where response has come-forth, investments have been dominated by short-term low risk behaviour –especiallychannelledtotradingactivities(Elbadawi,NduluandNdung’u,1997,Severn,1996).Toreversethistrend,reformshavetobedeepenedfurthertocreateassurancesofnegligiblechancesofpolicyreversal,civilandpoliticalstabilityhastobefosteredatanycost,andtheinvestmentcodemustbeimplementedinfairnesswithintheframeworkofalevel-playingfieldforbothdomesticandforeigninvestment.

3.6.5 Making Further Progress in Tanzania Investor Roadmap-type Issues

Tanzania has made commendable progress in investment facilitation since the first InvestorRoadmap assessment was made in 1996. The January 2004 Tanzania Investor Roadmapindicates significant progress in removing investment bottlenecks. In this section we reviewprogress to date and recommend for further actions to improve the process further.


Tabl

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4.0 measures for evaluaTing The CosT and benefiTs of invesTmenTs made in Tanzania

4.1 IntroductionTanzaniaInvestmentCentre(TIC)wasestablishedin1997bytheTanzaniaInvestmentActNo.26of1997.ItsmainobjectiveistobetheprimaryagencyofGovernmenttoco-ordinate,encourage,promote and facilitate investment in Tanzania and advise the Government on investment related matters. In performing these functions, TIC undertakes various procedures as measures todecide on any investment approval and uses several measures to inform investment decision approval.

In thecontextofcost-benefitanalysis, investmentcanbedefinedasa long-termcommitmentof economic resources made with the objective of producing and obtaining net gains in the future. Evaluation refers to the determination of the values of project inputs and outputs. Under normalcircumstances, investorsconductprivatecost-benefitanalysistodetermineprofitabilityof alternative investment options. Therefore, before an investor submits request to TanzaniaInvestment Centre (TIC) for approval, it is expected that the investor has completed initialassessmentandhasfirmideasthattheinvestmentisviableandprofitable.Therefore,whatTIC,needstodoistosubjecttheinvestor’sprojectintosocialcost-benefitanalysis.

Themain reason for conducting social cost-benefit analysis is to subject project choice to aconsistentsetofgeneralobjectivesofnationalpolicy.Forexample,“doestheproposedinvestmentcontributetowardsnationalgoals(TanzaniaVision2025andMillenniumgoals)relatedtohigheremployment, output, consumption, savings, foreign exchange earning, income distributionand other important national objectives”. “Does the investment meet desirable environmental standards?”“Willthenetsocialbenefitsexceedsocialcosts?”Answerstosuchquestionsbeforeinvestmentapprovalareimportant,notonlytoprotectthenational interest,butalsotoensurethat all investments contribute towards higher and sustainable economic growth and poverty alleviation.

Afterthisintroduction,thischapterisdividedintothreesections.Sectiontwodiscussesstatutorymeasures that TIC has to implement before investment approval. Section three focuses on measuresrelatedtosocialbenefit-costassessment.Sectionfourisdevotedtopost-investmentthatareessentialinensuringthatinvestors“walkthetalk”–thatis,areinrealityimplementingprojectsinaccordancewithTIC-awardedcertificateofinvestmentapproval.

4.2 Current Measures for Investment Approval

Currentmeasuresforinvestmentapprovalarestipulatedinthe“TanzaniaInvestmentAct,1997”.UndertheAct,whichaimsatprovidingfavourableconditionsforinvestors,thefollowingminimum


conditions have to be met before an investment is approved.

Iftheinvestmentiswhollyownedbyaforeigninvestororifitisajointventure,theminimum♦investment capital is not less than Tanzanian shillings equivalent to three hundred thousand USdollars(US$300,000);

If locally owned, the minimum investment capital is not less than Tanzanian shillings♦equivalenttoonehundredthousandUSdollars(US$100,000).

Fornewinvestments,submissionofinvestmentapplicationforapprovalhastocontainthe♦following:

Thenameandaddressfortheproposedbusinessenterprise,itslegalform,itsbankers,- thenameandaddressofeachdirectororpartnerandthename,address,nationalityand shareholding of each share holder;The qualifications, experience and other relevant particulars of the project- management;The nature of the proposed business activity and the proposed location where that - activity is to be carried on;The proposed capital structure or the amount of investment and the projected growth - overthenextfiveyears;Howtheinvestmentwillbefinanced;- Evidenceofsufficientcapitalavailableforinvestment;and- An undertaking that the project shall be implemented as indicated in the projections of - the project.

Where the application is to rehabilitate or expand an existing enterprise or both, theapplication shall contain:

Thenameof theexistingenterprise, itsarticlesofassociationandMemorandumof- association or partnership agreement;Thequalificationsoftheprojectmanagement;- A statement of audited accounts for the three previous years;- The nature of rehabilitation or expansion;- Thecapitalstructureandprojectedgrowthoverthenextfiveyears;- Financingoftherehabilitationorexpansionproject,togetherwithevidenceofavailability- offinances;An undertaking that the expansion or rehabilitation shall be implemented as indicated - in the projection.

Wheretheapplication is forequity investment,sharesorstock inanenterprise, itshallcontain:

The name of the enterprise in which the equity investment is made or shares held;-


Constitution of the enterprise or partnership agreement;- The amount of equity investment made;- Thenumberofsharesorstockheldbytheequityinvestor,and- The currency in which the equity investment is made.-

The evaluation team finds these minimum statutory measures to be inadequate becauseinvestmentsarenotsubjectedtosocialcost-benefitanalysisasdiscussedbelow.

4.3 Cost-benefitMeasuresAsstatedintheintroductorysection,aninvestmentisorientedtowardsthegenerationoffuturenetgains. This objective can be achieved only when an investment is properly integrated within the Tanzanianbusinessenvironment.Therefore,anyproposedapplicationforinvestmentapprovalshould be viewed not only as a part of a system of supply and demand of goods and services that aimatmakingprofits,butalsoasanintegratedpartofasocio-economicandecologicalsystemwithinwhichtheinvestmentperforms.Thus,fortheinvestmenttobesociallyandeconomicallybeneficial,ithastoservetheneedsanddevelopmentobjectivesoftheTanzaniansocio-economicsystem(e.g.TanzaniaVision2025,Millenniumgoals,etc.).Sinceitisinthepublicinterestthatinvestmentsmakeefficientuseofscarceresourcesandcontributeasmuchaspossibletowardsnationaldevelopment, social benefit-costanalysishas tobeapplied toeach investment.Themeasuresmostcommonlyusedtoassessbenefitsareasfollows:

4.3.1 SocialBenefitMeasures

Employment Creation.1. Will proposed investment create jobs, both directly andindirectly?

Technology, Knowledge and Skills Transfer.2. One important measure for evaluating investment is whether the proposed project has a chance of enhancing technology,knowledge and skills transfer. Often FDI can bring into the country both hard technology (e.g.equipment,industrialprocesses)andsofttechnology(e.g.knowledge,information,expertise, organisational skills, management, marketing and technical know-how).Sometimes some investments are also associated with growth of research and development (R&D) thus increasing the country’s technological capacity.All these areimportant measures in evaluating investment applications.

Promotion of the country’s exports, competitiveness and markets.3. Transnational companiescanhelpboostthecountry’sexportsthroughtheirforeignaffiliates.Ingeneral,Foreign Direct Investment (FDI) can be an important intermediary betweenTanzaniandomestic producers and markets abroad. Foreign investors engaged in export-oriented primary manufacturing and service activities can be particularly useful in enhancing the county’s export competitiveness – in part because of their technological superiority and


quality consciousness. 4. Linkageswithsectorsoftheeconomy. Is the investment likely to source inputs in the

local market? Will the investment improve the supply chain of goods and services? Will the investment add value to domestic resources. These and other considerations that foster linkages within the economy are important for accelerating economic growth.

Improvement in thecountry’sfinancial inflowsandbalanceofpayments.5. Foreign directinvestmentcaninjectsubstantialfinancialresourcesintothecountrybeyondthosereferred to in the statutory requirements. Such resources if channelled to new investments (Greenfield-typeinvestments)orinfrastructure(e.g.electricity,telecom,waterandsanitation,roads(build-operateprinciples)canmakemarkedcontributiontonationaldevelopment.Undersocialbenefit-costanalysis,investmentinflowshavetoexceedoutflowsintermsofprofitandotherremittances).

4.3.2 Social Cost Measures

Generally,thedistinctionbetweenbenefitsandcostsissimplyoneofsign.Acostisasacrificedbenefit.Apartfromtheusualprojectcostsnormallysubmittedduringaninvestmentapplication,(e.g. costs of initial investment, production, marketing and distribution, plant and equipmentreplacement,workingcapitalrequirementsanddecommissioningattheendoftheprojectlife),there are important social costs that have to be evaluated. The rationale for assessing social cost measuresrelatestothepossibilitythatseeminglyprofitableinvestmentsmayhavedetrimentaleffectson theeconomysuchasdestroying theenvironment, reducingemployment, retardingentrepreneurial development, reducing the supply chain of domestic goods and services, tomention but a few. Some of these social costs are discussed below.

1. Crowding out local investors. Due partly to technological superiority, some FDIinvestmentshavesqueezedoutlocalproducers.Forexample,alargegarmentmanufacturerthat supplies cheap clothes to the domestic market can easily kill local small-scale garment manufacturers. Large foreign banks are known to “crowd out” local banks and due to automation reduce labour considerably.

2. Holding back local skills development and reducing entrepreneurial growth. If an investment application demands the use of many expatriate managers and professionals. whoseskillsaredomesticallyavailable,thiscouldberegardedasholdingbacklocalskillsdevelopment.Similarly,ifFDIinvestorsprefertouseforeignsuppliers,thiscanbetakenasreducingentrepreneurialdevelopment.Inthefinancialsector,excessiveautomationbyboth foreign and local banks has resulted in to reduced employment and lost opportunities for further learning. In situations where investors cut off an existing domestic supply chain duetosourcingabroad(e.g.TBLimportofbarleyfromSouthAfrica),thisactioncouldberesult in killing local entrepreneurial linkages.


3. Environmental Damage. Some investments may have negative effects on the environment althoughtheprojectmaybefinanciallyprofitable.Atypicalexampleisthepollutionofairor water by industrial plants. The discharge is a by-product of the industrial process that resultsinnetdisbenefitstothesurroundingpopulation.ForsuchprojectsanEnvironmentalImpactAssessment(EIA)ismandatory.However,forTICpurposes, it isagoodideatoinclude environmental concerns as one of the measures for investment evaluation.

4. Social costs related to systemic risk. Sometimes an economy can be exposed to significantinstabilityduepartlytostructuralandinstitutionalweaknessesoftheeconomy.Forexample,theentryofforeignfinancial institutionsmightunderminetheabilityoftheBank of Tanzania to exercise control over international capital movements into and out of the country – despite the existence of good regulations.

4.4 CalculatingtheSocialCost-BenefitMeasures(ModusOperandi)

The inclusion of social benefit-cost analysis in investment evaluation is implemented usingUNIDO’s software. The Computer Model for Feasibility Analysis and Reporting (COMFAR)developed by UNIDO is a computational tool for the analysis of investment projects. TIC has in-housecompetenceandaccesstothissoftware.UNIDOdonatedtoTICfivecomputersthathavebeen installed with COMFAR. TIC staffs have also received training on the COMFAR programme. Data for inputting onto the software is derived from the investor’s application as mandated by the 1997 Investment Act and any additional information TIC might request from the investor.

Inanutshell,COMFARcomputationalanalysisforsocialbenefit-costanalysisworksasfollows:

The model assumes tht it is desirable to assess and evaluate the impact of national ♦development projects.

Projectinputsandoutputsarevaluedatshadowpricesthatreflecttheirtruevaluetothe♦nationaleconomy.(Shadowpricesindicatethevalueofgoodsandservicesassumingnomarketdistortions).

Directeffectsontheeconomy(involvingimports,exports,employment,foreignexchange,♦supply and demand, environment and ecological conditions, etc), as well as indirecteffects (affecting theperformance inothersectors, through reducedunderutilisationofinstalled capacities, new investment initiatives, disbenefits associated with skills andentrepreneurship,etc.),areincludedintheanalysiswheresignificant.Theeffectsmaybeeconomicbenefitsorcosts,bothtangibleandintangible.

Accounts for social time preferences. (Social time preference reflects the weight that♦societyattachestothefutureasopposedtopresentconsumption.Forthesocialbenefit-costanalysis, timepreferencesareexpressedbythesocialdiscountrate,whichdiffers


fromtheindividualdiscountrateappliedinprivatebenefit-costanalysis).Parties that requiremoredetailson theCOMFARcomputational toolshould refer to:UNIDO,“COMFAR 111 Expert Reference Manual,”Vienna,1997.

4.5 Post Investment MeasuresPost investment measures have three objectives. First, to ascertain whether the approvedinvestorsaredoingwhat theapplicationsaid theywoulddo.Second, toprovide feedbackonfulfillinginvestmentgoalsandaspirations.Third,toprovideopportunityforcloserco-operationbetween TIC and investors in resolving problems and fostering greater impact of investments. This section outlines statutory and non-statutory post investment measures.

4.5.1 Statutory Measures The post investment statutory requirements are stated in the Tanzania Investment Act of 1997. These are:

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.

Ifaholderof investmentcertificateceases tooperate, the investorhas tonotifyTIC in♦writing.

AholderofaninvestmentcertificateisrequiredtoinformTICwhen:♦Apersonotherthanthepersontowhomthecertificatewasissuedhassucceededto- 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.-

TICisexpectedtoverifyaboveinformationandifsatisfiedamendthecertificate.

4.5.2 Other Follow-up Measures

Arms-lengthtrackingofapprovedinvestmentsisconsideredvaluable,bothasawayofknowingprogress and creating a more friendly business environment. TIC is resolute in its efforts to establishcloseclient relationshipwithall investors,and tobuildstrong linkageswithallotherpublic and private parties involved in the investment process. The measures most useful in tracking post investment are as follows:

Annualprogressreports. Asimple investor trackingsystem(ITS)shouldbedeveloped1. to monitor progress. The tracking system could provide minimum information such as: Number of employees disaggregated by gender and local/foreign; production; exports/imports; investment; taxes/royalties paid to government. All investors could complete the


simple ITS and e-mail or fax it to TIC.Monitoring performance of commercial courts to ensure fair play for all businesses,2. domestic and foreign. This is an important investor support by TIC to ensure prompt and amicableresolutionofinvestmentconflicts.Organising and participating in investment forums. The forums are expected to provide 3. opportunityforTICtolearnfrominvestorsuccessesandproblems.Inaddition,participationin investment forums within the country and outside is important in promoting investment and facilitating investor access to important information concerning Tanzania’s unique investment opportunities.

Facilitationofsmallandmediumenterprise(SMEs).Theaimistostimulateandfacilitate4. development of entrepreneurship skills and growth of domestic investors, especiallySMEs.EstablishmentofTICzonalofficesinMwanzaandMbeyatocomplementthatinMoshi is an important step in this direction. TIC is also keen to work closely with the Better RegulationUnitandLocalGovernmentAuthoritiestoadvocatefor theremovalof legal,regulatory and administrative barriers that face local investors.

Follow-up of investors. TIC needs to know if the investments being undertaken in the 5. country are becoming beneficial to the investors and the nation as a whole. Throughfollow-up TIC can also learn if the investments being implemented are in accordance with investors’ original plans as channelled through TIC. To date investor follow-up by TIC has been inadequate. It is urged that TIC develop mechanisms for undertaking investor follow-up and further streamline current procedures.

4.6 Recommendations for Addressing the Key Remaining Constraints

Todate,TIChasmade commendable progress in investment promotionand facilitation.Theachievements so far have been acknowledged worldwide and over 96 percent of the surveyed firmsrevealedthatTICisresoluteinitscommitmenttoturnTanzaniaintoapremierinvestmentdestination. The task ahead, however, is formidable. The investment climate must undergofurtherimprovements–muchbeyondTIC’sovertcontrolanddirection.Nonetheless,thefollowingrecommendations may be considered by TIC as a way forward.

4.6.1 Becoming more Pro-active in Promoting Local Investments

TIC isurged tomakemoreeffortsatpromotingdomestic investmentatall levels,particularlySmall and Medium Enterprises (SMEs). TIC initiative to establish Zonal Offices in Moshi,Mwanza and Mbeya to stimulate domestic investment and entrepreneurship development is to becommended.Inthisregard,TICisurgedtodevelopplansandstrategiesforsupportingSMEs.Thestrategiescouldincludesensitisationseminars,entrepreneurshiptraining,andfacilitationofSMEstosecure.TICcouldfacilitateestablishmentofSMEs“seed”fund.Inaddition,TICcouldactasmatchmakerinfacilitatingtechnologyandjointventurepartnershipswithforeignfirms.To


accomplishthesenobletasks,TIChastoworkcloselywithotherstakeholdersintheprivatesectorand government departments. SinceSMEs are pluggedwith insufficient supportive businessenvironment,TIChas towork closelywith theBetterRegulationUnit andLocalGovernmentAuthoritiestoensuretheremovaloflegal,regulatoryandadministrativebarriersthatconstrainlocal business establishment and operation.

4.6.2 Further Promotion of Foreign Investments

Tanzania,likemostAfricancountries,suffersfromnegativeimageportrayedoverdecades.ThismakesthemarketingofTanzaniaasanattractive investmentdestinationextremely important,albeitdifficulttask.Thus,asawayforward,TIChastocontinuetoimprovethefunctioningofits“one-stop shop” for investment promotion and facilitation. Investors are generally attracted to countries where the regulatory and administrative requirements are not a hustle. Image building will require relentless networking efforts.Inparticular,networkingwithInternationalinvestmentconsultants,participatinginInternationalinvestorsRoundTableWorkingGroups(IRT),fundinginvestment missions abroad, using local and international media, through seminars andconferences,moreactiveuseoftheTICandNationalWebsites,andinvestmentpublicationsofall sorts. All these efforts should sell Tanzania as a premier investment destination and insulate the country from earlier negative perceptions.

4.6.3 Taking Advantage of Bilateral Investment TreatiesBilateralInvestmentTreaties(BITs)contributetotheestablishmentofafavourableinvestmentclimate between countries by providing assurances and guarantees to investors. Currently over 158nationsaresignatoriestoalmost1,900treaties.TICisurgedtopursuethisoptionbecauseBITs play an important role in attracting investors’ attention to a country as well as building the necessary confidence thatTanzania is indeedan investment destination of choice.However,necessary precautions must be taken prior to signing any BIT treaty to ensure all provisions of suchanagreementarebeneficialtothecountry.

4.6.4 Improving Prospects for Technology Transfer

The survey conducted for this study showed that technology transfer is taking place, albeitslowly. The next steps might be for TIC in collaboration with key stakeholders such as Tanzania Commission for Science and Technology to develop guidelines for technology policy. In particular,TICmightmakeprovision forattracting foreign investors thathavehigh technologyin sectors important for Tanzania’s development – especially in agriculture, biotechnologyand agricultural processing industries. TIC could also assist in speeding up the establishment of industrial parks with high quality infrastructure to attract high technology investors. These industrial parks could be developed by private investors under appropriate support – especially in acquiring land and other infrastructure.

Equally important is the urgent need for improving domestic human resources through training.


TIC might work with relevant government authorities to place a training requirement on investors toraisethequalityofthelabourforcewithinthefirmorprovideresourcesfortrainingoutsidethefirm.AnotherapproachwouldbeforTICtocontinueimprovingitseffortsincollecting,organisinganddisseminatinginformationabouttechnicalissues,researchfindings,Tanzania’scomparativeadvantages and training facilities that can be used as springboards for technological transfer. Last,butnotleast,TICcouldfacilitateimprovementoftechnologyaccessforlocalenterprises,by providing information on foreign and local sources of technology.

4.6.5 Improving the linkages between SMEs and existing investors.

Forginglinkagesbetweentheexisting(largescale)investmentswithSMEsisimportantforthedevelopment of the latter but also in enhancing competitiveness of the former by cutting down costs ofimportingifsupplycanbesourcedlocallyatsimilarstandards.Inthisway,furtherdevelopmentof SMEs to become seedbed for industrialisation can become effective. The ensuing question is how that linkage can be forged on. TIC can play a role by encouraging existing investors to contract out some of their supplies to SMEs. The existing investors can also undertake training of SMEs so as to improve the quality of their supplies to meet the required investor standards. Additionally, the Government could institute an investor-friendly policy that would encourageand forge such linkages especially through the design of investment incentives. The role of the government in forging these linkages is extremely important not only because of the perceived economy-wideanddynamicbenefitstothenation,butalsobecausetheexistingleveloflinkagesbetweenvariouskeysectorsoftheeconomyistoolow(seeKwekaet al,2003)tobelefttothemarket forces.

4.6.6 Facilitating the Creation of EmploymentThe survey conducted for this study showed that both local and foreign investors were having significant impactonemploymentcreation.FurthereffortsarenowneededbyTICtofacilitateeven higher levels of employment creation. In particular, the following approaches could beuseful:

Targeting employment-intensive FDI through proactive market-friendly policies or selective intervention. In this regard,TIC canworkwith other government departments to attractFDI:

Inindustriesthatarelabourintensive(e.g.garments),- In industries that have strong linkages to the local economy (e.g.Agro-processing- industries),andIn particular regions with high unemployment or under employment.-

WorkingcloselywithNDC,EPZandotherstakeholderstofacilitatethecreationofindustrialparks and export processing zones as a way of increasing employment.


Providinginvestmentincentiveslinkedtothenumberofjobscreatedbythefirm.

4.6.7 Protecting the EnvironmentThe survey conducted for this study showed that investors were concerned with environmental protection and most of them conducted environmental impact assessment prior to commencement of activities. TIC is encouraged to follow-up implementation of environmentally friendly investments byensuringthatregulationsandstandardsarebeingupheld.Further,TICcanemploythefollowingstrategies with regard to environmental protection:

Conductingpre-establishmentscreeningofinvestmentonenvironmentalgrounds,

Requiring all local and foreign investors to provide their corporate environmental policy statementsandrecordswhenmakinganinvestmentapplication,

Requiringallinvestors,localandforeigntoconductanEnvironmentalImpactAssessment,

Introducing or reforming existing policies to ensure that regulatory and market incentives encourageenvironmentallysoundproductionandconsumption,

Grantingaccelerateddepreciationforcleantechnologycapitalgoods,and

Encouraging investments in industries that involve improvements to the environment such aswaste-to-energyplants,andconstructionofsanitarylandfills.

4.6.8 Facilitating and Servicing Existing Investors

Over64percentofthesurveyedfirmsindicatedmaintainingalinkwithTICafterbecomingfullyoperational.TICcontinuedtoofferafter-investmentservices,especiallyinareasofinvestmentdisputes and acquisition of foreign experts. TIC is encouraged to continue facilitatiing and servicingbusinessesthatarealreadyestablishedandoperational.Further,TICisurgedtofostercloserclientrelationshipswithallinvestors,andbuildstronglinkageswithallpublicandprivatestakeholders involved inthe investmentprocess.Theuseof therecentlydevelopedWorkflowManagement System should be valuable in monitoring investment development and proactively responding to investor’s problems and inquiries.

4.6.9 Undertaking more regular follow-up of investors

Asnotedearlier,theimperativeofconductingregularpost-approvalfollow-upofinvestorscannotbe overemphasised. Such follow up will also act as a deterrent to unscrupulous investors who aimtoabusetheincentivescheme.Inaddition,thefollowupwillalsohelptounderstandwhethertheinvestmentsbeingundertakeninthecountryarebecomingbeneficialtothenationasawholeand are in accordance with the objectives of TIC.


5.0 invesTmenT impaCT analysis

Tanzania has made progress towards facilitating and promoting domestic and foreign investment. Asaresult,thecountryisnowmorereceptivetonewideasandbetterwaysofdoingbusiness.Newfacilitiesarebeingbuiltandtheinfrastructurethatsupportsprofitableinvestmentisimproving.Investments are creating jobs and opportunities for people to apply their talents and improve their situations.Availabilityofgoodsandservicesisimprovingbothinurbanandruralareas,impactingheavilyonpovertyreduction. Investmentsarealsobecomingthemainsourceof taxrevenue,contributing topublicspending forhealth,education,waterandotherservices.Thus,overall,investments being undertaken in Tanzania are laying solid foundation for economic growth and prosperity that should translate into poverty reduction over time.

This chapter reviews the impact of investment to date. It is observed that progress is being madeinraisinggrowth,improvingthecountry’sbalanceofpayments,increasingemployment,technologyandentrepreneurialgrowth.However,theroadtosustainedhigherlevelsofimpactislong,requiringhigherlevelsofinvestmentinflows,pushingFDIanddomesticinvestmenttonewfrontiers,especiallyintheagricultureandsmallandmediumenterprisesectors,andincreasingthescaleandscopeofthebenefitsderivedfromtheinvestments.

5.1 Impact on Economic GrowthOne measure of the impact of investment is its effect on economic growth. Experience shows thatthereisastronglinkbetweeninvestmentandeconomicgrowth.Inparticular,inthelongrun,economic growth is highly linked with investment in new capital and increases in productivity that is associatedwith investment in new technology, research and development (R&D) andtraining.

WhathasbeenTanzania’sexperience?Asdiscussedelsewhere in thisreport(Chapter1and2),Tanzania’seffortstoincreaseforeignanddomesticinvestmentbeganinmid1980s,andforFDI-typeinvestmentlargelyaftertheestablishmentofTICin1997(thatisabout8yearsago).Theperiodtodateistooshorttomakeadefinitiveassessmentoftheimpactofinvestmentoneconomicgrowth.First,thepayoffofsomeinvestmentsmaytakeseveralyearstooccurduetothenatureoftheinvestment(e.g.miningactivitythatmayinvolveyearsofexplorations).Second,economic growth is an outcome of various factors other than investment; hence disentangling its separateeffectisnotstraightforwardandmayrequireanempiricalstudy.Third,notallsectorsreceiving FDI are directly growth enhancing. Some FDI recipient sectors such as mining have very low employment generation capacity and also poor linkages with the rest of the economy. Thesocalled“boomingsectors”inTanzania,andwhichhavesubsequentlyreceivedsubstantialFDI, particularlyMining andTourism, havemostly been criticized formassive capital drain –which exacerbate their (except for tourism) low level of linkage with the domestic economy.Finally,theneteffectofFDIongrowthalsodependsonthewaytheyimpactonexistingDomestic


investment.SomeFDIshaveresultedintounduecompetitivepressureondomestic investors,suchthatforthosethatcouldnotcopeexited.Inaddition,asmanyoftheFDIwereactualisedthroughsaleoftheformerStateownedEnterprises(SoE),someFDIhasledtonetjoblosses–thatisthenumberofjobslostishigherthanthenumberofjobscreated(seedetaileddiscussionontheemploymentimpactofFDIandPrivatisation,alsoseeMkenda,2005).

However,itisworthnotingthattheratioofFDIflowstocapitalformationrosesteadily,reachinganaverageof14percentbetween1996-2004,andincreasedfurtherto17.6percentbetween2000-2004period.AssumingthatallFDIis“GDPinvestment”(whichisnotnecessarilythecase),andeverydollarofinvestmentcontributesequallytoGDPgrowth,outof4.2percentand5.6%ofaverageannualgrowth rates in the respectiveperiods,onlyabout0.6and1.0percentagepointswouldbeduetoFDIrespectively.Thepointis,thelevelofFDIinflows,despiteimprovingsubstantiallyinthelastdecade,maybetoolowtohaveasignificantimpactongrowth.

An interestingfindingasshownbyFigure5.1 is that it is the trend inFDIpartof theprivateinvestment that seems to impact on the GDP growth trend rather than the domestic direct investment(DDI).However,asfurthernotedfromtheFigure,DDIandFDIhaveassociatedwithGrowthofGDPdifferentlyindifferentperiods,i.e.preandpost2000.Before2000,FDIpositivelyassociated with GDP growth – but causal relationship between the two may be blurred so that it requires a fuller empirical analysis.At the sameperiod,Domestic Investment (DDI) seemsto have been declining as GDP grew – implying a negative relationship but one that can be explainedpresumablybytwofactors.First,increasedFDImighthavehadacrowdingouteffectonDDI thereby demeaning its growth prospects. Second, the continuation of privatisation ofState-ownedenterprises (SoE)substantiallydecreased thepublic investmentassociatedwithsuchenterprises,someofwhichweredivestedintonewforeignowners(FDI)1.Thatis,asthepaceofreformsthroughprivatisationincreased,morepublicinvestmentsweredivested,andamore favourable policy environment resulted that attracted further FDI and increased growth of theeconomy.However,since2000whenmostoftheprivatisation(ofSoE)hadbeencompleted,association with GDP growth by FDI and DDI swapped; where DDI moved positively with growth and vice versa for FDI. These trends can be explained not only by the declining level of FDI inflow,butalsotheincreaseintheefficiencyandlevelofprivatesectordevelopment.

1 The share of public in total investment declined drastically from about 70% in 1989 to 20%in1995,butincreasedsincethentoabout40%in2004.


Source :Own computation using data from TIC, National Accounts and Economic Surveys (various years)

The conclusion we draw is that investments are having favourable impact on the economy. The period since Tanzania began to attract high FDI into the country may be too short to make definitiveempiricalassessmentoftheimpactofinvestmentoneconomicgrowth.However,itisusefultoaddresstheissueofinvestmentpayofftoGDPgrowthinbroadercontext;thatis,theinvestment policies being implemented in the country are laying solid foundations for attracting higher levels of foreign and domestic investment that are necessary to spur and sustain higher growth and poverty reduction in the future.

5.2 Impact on Balance of Payments

5.2.1 Impact on Exports/Imports

Another measure of the impact of investment is its effects on increasing the country’s export earnings – and thus the capacity to import more goods and services. Experience shows that FDIplaysabigroleinrevampingacountry’sexports.AffiliatesofforeignfirmsinTanzaniaoftencreatenewtradeflowswiththeirparentcompaniesorforeignsuppliersandalsoexporttothirdcountriesorbacktothehomecountry.Similarly,somedomesticinvestorsareengagedinexport-oriented enterprises.

Overall,Tanzania’sexperiencetodateshowsthattherehasbeensomeimpactonexportsearningsemanatingfrominvestments.Inrecentyears,Tanzania’stotalexportsearningshaverisentoonehalf of imports compared with only a third a decade ago. There is a growing consensus that exports earnings from domestic and foreign investment is rising rapidly. Table 5.1 and Figure 5.2 provideroughmagnitudesofthecontributionofinvestmentinthecountry’sexportsearnings.(The


impactonexporthasbeen‘massive’consideringthefactthat,by2005about50%ofTanzania’sexportsweregold–aresultofFDIintotheminingsector)

Table 5.1: Tanzania Exports (US $ Million)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

TotalExports(a) 439.3 519.4 682.9 764 753 588.5 543 663 851.4 979.9 1210.7 1473.1 1676.4 1736.0 2006.7

o/w Investment-related(b)

183.1 182.5 299.4 328 317 232.2 242 371 545.3 697 731 812

b/a (%) 41.7 35.1 43.8 42.9 42.1 39.5 44.6 55.9 37.5 59.4 57.3 55.8

Source: BankofTanzaniaEconomicandOperationsReport(variousyears).

Source: BankofTanzaniaEconomicandOperationsReport(variousyears).

AsTable5.1shows,investmentcontributiontoexportearningshasrisenfromabout37.5percentin 2001 to about 55.8 percent in 2004. The export earnings from investment have largely come fromtheminingsector,whichreceivedanaverageof47percentofallinvestmentsbetween1993-2004.Nexthasbeenthemanufacturingsector,whichreceivedanaverageof16percentofallinvestments between 1993-2004. Less than 7 percent of the investments have been channelled to agriculture – a sector that in the past accounted for over 50 percent of the country’s GDP and export earnings. The main reasons are: un conducive environment and lack of complementary public investment to attract domestic and foreign investments into agriculture.

Analysisofsampledfirmsshowsthetrendsintheimport-exportratioispositiveforagriculturalinvestments,negativeformanufacturingfirmsandmixedformineralfirms.Table5.2andFigure5.3 illustrate the trends in imports and exports for the agricultural sector.


Table 5.2: Trends in Import-Export Ratio for Selected Agricultural Firms2

1999 2000 2001 2002 2003 2004

Exports(Tshs,million) 2,778 5,524 5,159 5,732 5,586 7,420

Imports(Tshs,million) 30 40 64 104 195 275

Imports/Export (%) 1.1 0.7 1.2 1.8 3.5 3.7

Source: ESRFSurvey(2004)forTIC(Itisdoubtfulwhetherthiscanbeupdated,unlessthesurveywasdoneagainsometimesrecently)

As Table 5.2 clearly illustrates, there is almost a negligible amount of imports going to theagricultural sector compared with revenue generated through exports.

The conclusion we make here is that investments undertaken so far have had little impact on the agricultural sector.Thismay imply a need to developmore attractive policies,whichwillencourage greater investment into agriculture – especially through investment in irrigation agriculture, introducingmodern livestock production systems and importing or manufacturing agricultural equipment and machinery locally.

Source: ESRF(2004)SurveyforTIC

Thetrends inexport-importratio forsampledmanufacturingfirmsareshowninTable5.3andFigure 5.4. The picture that emerges in the manufacturing sector is completely different from that intheagriculturalSector.Exportstoimportsaverage4.5percentandasFigure5.4shows,thetrend has remained almost the same since 1999.

2 SevensampledagriculturalfirmsinMorogoro,Iringa,KilimanjaroandArushaRegions.


The conclusion we arrive at is that the trade impact of investment is essentially negative for the manufacturingsector.This implies,amongstother things thatpolicieshave tobe reviewed toencouragemoreexportsofmanufacturedgoods,especiallythosethatTanzaniahasacomparativeadvantage like garments and processed agro-products.

Table 5.3: Trends in Export-Import Ratio for Selected Manufacturing Firms3

1999 2000 2001 2002 2003 2004

Exports(Tshs,million) 29 29 32 38 47 53

Imports(Tshs,million 620 693 705 879 979 1130

Exports/Imports 4.6 4.1 4.5 4.3 4.8 4.7



Table5.4illustratesthetrendsinimport-exportratioforselectedminingfirms.Thedatashowsthatinvestmentintheminingsectorisassociatedlowimportsandhighexports.Overall,however,initial capital imports in the mineral sector are high but over time as the initial high investment bear fruit exports tend to rise.

The conclusion we draw from the data is that investments in the mineral sector have a high potential for increasingthecountry’sexportearnings.Themineralexportsearning,however,appear to 3 Seven sampled manufacturing firms in Kilimanjaro, Arusha, Mwanza, Morogoro, and

IringaRegions.


be low - in part due to under-declaration of production and smuggling through neighbouring countries. Further policy improvements are needed to entice investors in the mineral sector to contributemoretotheexportearningsofthecountry.(IamnotsureifmineralexportsinTanzaniaarelow–comparedtoanyothersector–maybe,exportsarelowcomparedtowhatshouldbethe‘optimal’level–whichhasnotbeenestablishedanyway)

Table 5.4: Trends in Import-Export-Ratio for Selected Mining Firms4

1999 2000 2001 2002 2003 2004

Exports(Tshs,million) 28,563 44,565 68,340 41,297 35,524 39,680

Imports(Tshs,million) 252 2 9 10 5 7

Import-Export ratio 0.88 0.00 0.01 0.02 0.01 0.02


5.2.2 Impact on the Balance of Payments

Another measure of impact is whether the effect of investments is positive or negative on the country’sbalanceofpayments. It isoftenargued that ifexternaloutflowsexceed inflows, theimpactonthebalanceofpaymentswillbenegative,andviceversa.

What has been Tanzania’s experience?As discussed in Chapter 2, total FDI into Tanzaniabetween1995-2004 reachedUS$2,476.4millioncomparedwithonlyUS$2millionbetween1986-1991.ThislevelofinflowsofaboutUS$309perannumischangingthestructureofexternalfinancialflowstoTanzania.Whileduringthesameperiodofficialdevelopmentassistance(ODA)declined fromanannualaverageofUS$876millionbetween1990-1994, toUS$617millionbetween1995-2003,theFDI inflowscompensatedforoverhalfof thedecline inODA.Duringtheformerperiod(1990-94),profitremittancesonFDI(US$151million)exceededFDIinflows(US$82million).InsubsequentyearsannualprofitremittanceshaveaveragedUS$170millioncomparedwithinflowsaveragingUS$309–thusimpactingpositivelyonthecounty’sbalanceofpayments.

Despiteobservationsmadeabove,theimpactisnotconclusive.ThisisbecauseitisnotpossibletomakedefinitiveconclusionsontheimpactofFDIonthebalanceofpayments.ThemainreasonisthatdataonthetransactionsofforeignaffiliatesandtheindirectimpactofFDIonconsumersanddomesticfirms(suchasthosediscussedearlierinthisreport)arenotavailablecountrywide.However,thecontributionsofforeignaffiliatestoexportearningsandhardcurrencyfromtourismimpact positively on the country’s balance of payments.

4 FoursampledminingfirmsinArusha,Mwanza,andMaraRegions.


5.3 Investment Impact on Government Revenue

Another measure of impact is the contribution of investments to government revenue. It is expected that once the incentives provided under the investor’s investment certificate haveexpired,enterprisesbeobligedtopaytaxes.

DatafromTanzaniaRevenueAuthority(TRA)showsthatsincetheremovalof“taxholidays”in1997(whichwerereplacedbycapitalallowanceincentive),investmentshavebeencontributingsignificantlytogovernmentrevenue.Table5.5andFigure5.5providesasummaryofincometaxderived from investment-related enterprises.

Table 5.5: Investment-related Income tax

Tshs, Million1998/99 171,6741999/00 224,5412000/01 210,3532001/02 170,4032002/03 201,8182003/04 317,340

Source: TanzaniaRevenueAuthority(variousyears)

Source: Based on TRA Income Tax Databank

As Table 5.5 and Figure 5.5 show income tax from TIC –related investments has been fairly stable,rangingbetweenTshs.170,000milliontoaboutTshs.200,000millionperyearbetween


1998/99and2002/03,risingtooverTshs.300,000millionin2003/04.

Withregardtotheimpactofinvestmentonincometax,theconclusionwearriveatisthatexceptfor2003/04,wheninflationisfactoredis,therehasbeenrelativelylittleincreaseinincometaxrevenuesince1999. In the future,however, if thecountrycontinues tomaintain low inflation,investments should make greater real contribution in the form of income tax.

Table5.6andFigure5.6provideasummaryof investment-relatedValueAddedTax.Overall,thedatashowsthatrevenuefromthissourcedeclinedbynearly40percentfromTshs232,908millionin1998/99tojustTshs176,450millionin2003/04.Laxityinrevenuecollectioncoupledwith increased tax exemptions is largely responsible for the decline.

Table 5.6: Investment-related Value-added tax

Tshs. Million

1998/99 232,908

1999/00 240,242

2000/01 210,925

2001/02 115,756

2002/03 145,176

2003/04 176,450

Source: TanzaniaRevenueAuthority(variousyears)

Source:TanzaniaRevenueAuthority(variousyears)


With regard to investmentcontribution tovalue-added tax, therehasbeenadeclinebetween1998/99and2000/01andareboundafter2001/02,althoughpreviouslevelshavenotbeenreached.Thecurrenttrend,however,isencouragingandhigherimpactisexpectedinthefuture.

Another important source of government revenue is derived from customs. Tanzania Revenue Authority estimates that nearly 55 percent of the custom revenue is investment related. Based on thisestimate,Table5.7andFigure5.7provideanestimateoftheamountoftaxesobtainedfrominvestment-related custom revenue. The data shows that revenue from this source has increased byover56percentfromTshs.222,803millionin1998/99tooverTshs.516,940millionin2003/04.

Thus,withregardtocustomsrevenue,thedataclearlyshowstherehasbeenpositiveandrisingimpact on this source of government budget resources.

Table 5.7: Investment-related revenue from Customs

Tshs, million

1998/99 222,803

1999/00 241,794

2000/01 412,556

2001/02 455,276

2002/03 471,096

2003/04 516,940




Therefore,themainconclusionisthatasdomesticandforeigninvestmentincreases,taxrevenuealsoshowsatendencytorise.However,theprevalenceoftaxexemptionsthroughtheinvestment“Certificateof Incentives”,especiallywith regard to investments in theminingsector, tends toreduce this impact. The government is encouraged to revisit the current regime of investment incentivesandofferconcessionswhere there isacleareconomicandsocial justificationandwhere potential for abuse can be kept to a minimum. 5.4 Impact of Investment on Savings Level

5.4.1 Introduction

Another measure of impact relates to the role of investment in assisting the country to overcome its domestic investment gap. The country’s low income and low savings rates have meant that there are limited resources within the national economy available for investment. Foreign investmentcanclosethedomesticgapbyprovidingoutsidesourcesoffinancingforinvestmentand economic growth.

Theorypostulatesthatallcapital,whetherforeignorlocal,respondstoincentivesanddisincentives,to stability and instability in an economy and to other constraints to development. Foreign Direct Investment(FDI)however,seemstohaveanaddedadvantageoverlocalinvestmentbecauseofseveral reasons.First, itallows investors to increase theirprofitswhilediversifying the riskoftheirbusinessesoutsidetheircountries.Second,itisusuallyassociatedwiththeuseofnewskillstechnologyandincreaseincompetitionwithintherecipientcountry,thusforcingnationalinvestorstoimprovetheirperformancefortheirownsurvival.Third,it isbelievedthatFDIisareliable source of capital that is less volatile and non-debt accumulating and can therefore be expectedtocomplementdomesticsavingsandcapitalresourcestofinanceinvestmentwheresuch resources are limited. Section 5.4.2 provides Tanzania’s experience.

5.4.2 Trends in Government and Private Savings

AsFigure5.8shows,duringtheperiodof1990-94,grossnationalsavingswasessentiallynegative.This negative saving was associated with the worsening of the recurrent budget position and cutbacks in donor assistance to the country. National savings turned around beginning in 1996 toabout5percentofGDP,partlybecauseofincreaseddomesticprivatesavingssince1993andachievement of positive government savings starting in 1997.


Source: BasedonNationalBureauofStatisticsData(variousyears).

A close review of Figure 5.8 above shows that gross national savings recovered after 1996 to about12percentofGDPin2004.Sincesavingsperformanceisinfluencedbydomesticpolicyandnon-policyfactorsaswellasforeignfactors,itappearsthatincreasedForeignDirectInvestment(FDI)inflowsduringthisperiodexertedinfluenceonsavings.Inparticular,duringtheperiod1995–2000,TanzaniareceivedatotalofUS$1billion(Tshs1,060billion),comparedwithlessthanUS$2million(Tshs2.2billion)during1986-1991.Inaddition,Wuyts(1997)hasshownthatthereis some correlation between the growth of national savings and investment and high foreign aidinflows.Duringtheanalysisperiodafter1996,Tanzaniareceivedincreasedaidinflowsfromthe donor community in part to support the country’s structural adjustment programme. The aid inflowshavebeenpivotal insustainingTanzania’spositive realgrowth for thepastdecade todate.

The conclusion we make here is that investments have played a role in reversing the country’s decliningsavingstrend,especiallyafter1995.However,thesavingslevelisstill inadequatetofoster higher rates of investment and growth. Section 5.4.3 examines what can be done to raise the savings level.

5.4.3 Improving Savings Mobilisation

Empirical evidence from the past two decades suggests that the best performing developing countries have had high rates of savings and investment. EastAsian countries, which grewfastest, had rates averaging between 25 and 30 percent.Therefore, forTanzania to achievehighgrowthimprovementsinpublicandprivatesavingsmobilisationarenecessary.Inparticular,itisessentialtoboostprivatesavingsthrougheasieraccesstofinancialinstitutionsandbetter


financialintermediation.Thisshouldbeexpectedtoencouragehouseholdstodeterconsumptioninfavourofinvestment.Inaddition,financialintermediationshouldbeprogressivelydeepenedanddiversifiedtodevelopflexiblemoneyandcapitalmarkets.

Equally important is the need to raise public savings by reducing budget deficits, raising taxrevenue and controlling public expenditure. Recent experience shows that Tanzania Revenue Authorityismakinggoodprogressinraisingrevenue.Whatisneedednowismuchstricterfiscaldisciplinetoensurethatspendingreflectsinvestmentanddevelopmentpriorities.

5.5 InvestmentPerformanceandProfitabilityAnothermeasureofimpactrelatestoperformanceoftheinvestmentsandtheirprofitability.Ineconomicenvironmentswhereinvestmentsperformwellmakeprofits–theprimemotiveformostinvestments,someoftheprofitscanbeploughedbackintotheinvestmentandsomechannelledfor Research and Development (R&D) – thus improving quality of supply.Additionally, goodperforminginvestmentscanregisterintheDaresSalaamStockExchange,invitesharesfromthepublic,andifprofitablepaydividendstoitsshareholders.

What has been the experience of Tanzania? Most investments in Tanzania perform well compared withtargetsestablishedbythefirmsasattestedbythedatafromafewfirmsproducingbeer,cigarettes,andsoftdrinksandprovidingmobilephoneservices(Table5.8).Investmentsinmobilephones have performed exceptionally well. Most other investments realise above 80% of their plannedtargets.Theinvestmentsarenotonlyperformingwell,butarealsoprofitableasevidentfromthesampleoffourcompanieswhicharelistedontheDaresSalaamStockExchange(DSE)(seeTable5.9).EachofthecompaniesshowninTable5.9ismakingprofits,providingdividendstoitsshareholders,increasingmarketcapitalisationandincreasinglycontributingtoGovernmentrevenue.

Theconclusionwedrawfromthesewell-performingandprofitableinvestmentsisthatTanzaniahascreatedagoodenablingenvironmentforprofitableinvestments.Asaconsequence,investorsandthecountryasawholebenefit–notonlyintermsofincreasedfinancialdeepeningoftheeconomybutalsoinfosteringfinancialmarketdevelopmentandenhancingeconomicgrowth.


Table 5.8: Performance of Large Taxpayers (2003-2004)5

Item

2003/04 2004/05

Estimate ActualPerformance (actual % of

estimate)Estimate Actual

Performance (actual % of

estimate)

Excise Duty- Local

Beer 49,785 44,587 90 50,538 52,052 103

Cigarettes 31,725 29,886 94 32,923 32,648 99

Soft Drinks 6,243 5,051 81 6,200 6,973 112

Mobile Phone 5,601 6,989 125 1,214 9,731 801

Others 2,799 2,688 96 14,177 4,261 30

Sub-Total 96,152 89,201 93 105,052 105,666 101

VAT-Local

Beer 28,347 26,763 94 34,669 32,978 95

Cigarettes 15,706 12,554 80 17,937 15,298 85

Soft Drinks 3,021 3,035 100 - 3,134 100

Others 74,707 73,628 99 135,456 115,731 85

Stamp duty 407 522 128 530 1,297 245

Sub-Total 122,188 116,501 95 188,592 168,437 89

Corporate Taxes 42,317 68,755 162 79,214 106,736 135

PAYE 43,362 50,582 117 106,904 116,230 109

B.Skills & Dev.Levy 12,301 16,266 132 20,745 19,136 92

Gaming Tax 248 187 75 248 268 108

Rental Tax 3,728 4,502 121 5,659 2,998 53

Other With/ng Taxes 24,580 24,645 100 36,123 23,961 66

Sub-Total 126,537 164,936 130 248,894 269,328 108

GRAND TOTAL 344,877 370,637 107 542,538 543,431 100

Less Transfers to refunds A/C 6,785 5,255 77 5,758 6,309 110

Net collection 338,092 365,382 108 536,781 537,123 100

Source:TanzaniaRevenueAuthority(TRA)

5 LargetaxpayersincludeinvestmentssuchasBreweries(beer),TanzaniaCigarettesCompany,etc.Thedataabovearefor188largetaxpayersasatApril2005.RecentlytheGovernment has increased the number to 278.


Table5.9:Profitabilityofsomeinvestments(2002-2004)

Indicator2002 2003 2004

TBL2 TCC3 SIMBA4 DAHACO5 TBL TCC SIMBA DAHACO TBL TCC SIMBA DAHACO

Pre-taxprofit(Tshs,billion)

34.2 22.1 7.6 1.9 47.6 24.7 9.9 3.3 57.5 25.6 5.3 3.2

Dividend paid (Tshs,billion)

25.8 30.7 3.5 0.8 30.8 21.8 1.3 1.0 36.8 15.6 1.8 2.6

Closing price (Tshs)

1,400 1,725 450 NA 1,600 1,720 700 570 1,300 1,760 1,100 560

Taxes paid to Govt.(Tshs,billion)

69.3 41.2 3.0 0.7 88.9 44.4 3.5 1.0 97.8 50.5 2.8 1.0

Market capitalisation (Tshs,billion)

330 172.5 28.6 NA 472 172 43.9 20.5 395 176 59.8 20.1

Source: DaresSalaamStockExchangeStatistics;TanzaniaRevenueAuthority(TRA).

5.6 Impact on Employment Generation

5.6.1 Introduction

An important measure of the impact of investment is job creation. Investment plays a key role in expanding jobs and offering opportunities for young people. This is essential not only for raising incomesandreducingpoverty,butalsomoreimportantlyforcreatingamoreinclusive,balancedand peaceful country.

What has been Tanzania’s experience? The assessment conducted during this study revealed that in Tanzania the qualitative effects of investment on employment has taken place through several routes:

Directly by setting up new foreign affiliates or expanding existing affiliates.A study by♦UNIDO(2003)showsthatmostFDIinTanzaniaareofthreecategories–newGreenfield(51%), jointventure(35%)andmergeroracquisition(14%).Thefieldstudyundertakenfor this study shows that Greenfield-type investments generate the largest impact onemployment.

Indirectlybystimulatingadditionalemploymentinsuppliersanddistributors(dependingon♦theintensityoflocallinkages).Forexample,KahamaMiningCorporationestimatesthatabout7,500indirectjobswillbecreatedinShinyangaregionduetoitsminingoperations.This is in part due to revamped activities supported by the company but not directly related tominingsuchasitsconstructionof87.5kilometreroad,buildingapowerline,construction


ofwaterpipeline,strivinglocalinputsuppliers,andthelike.Otherexamplesareoutlinedin Section 4.2.3.

In themedium term,employment canalso rise throughmultiplier effects from thenew♦income generated by FDI or local investments or through increased demand stimulated by improvedefficiencyandrestructuringofcompetingfirms.Thisisparticularlyevidentintheliberalisedbankingandfinancialsector–especiallyCRDB,StandardChartered,Stanbicand Akiba Commercial Bank.

WhereFDItakestheformofmergeroracquisitionasobservedinbulletoneabove,the♦investmentcanstillincreaseemploymentbyrestructuringfirmsthatmightotherwisehavebecomesickordysfunctionalsuchasthedivestedparastatals(MWATEX,AmboniSisalFarms,KilomberoSugarandSaoHill).

The qualitative impacts of FDI on employment are:

Wages:Foreignaffiliatesgenerallypayhigherwagesthandomesticfirmsdoinsimilar♦activities. The difference is more marked in industries that demand higher levels of skills, technology and marketing and in export-oriented activities that need to ensureconsistentqualityandtimelydelivery(StandardCharteredBank,Citibank,WonderFoods,Abercrombie&KentTanzania,etc).

Job security: Foreign affiliates tend to offer greater job security because of their size,♦competitive strength andneed for a stableworkforce (SONGAS,KTM, andAluminiumAfrica). However, “footloose” investment attracted by low wages may move to othercountries so jobs may be insecure over the medium term (defunct Trust Bank andGreenlandBank).

Workingconditions: In foreignaffiliatesworkingconditionsaregenerallybetter than in♦localfirms.Inparticular,largeandvisibleTransnationalNationalCorporations(TNCs)tendto comply with local and international standards and even with the labour standards in their homecountries(UnileverTeaTanzania).

Skills: FDI often has to upgrade employee skills by investing in training so as to meet ♦their quality standards. Sometimes TNCs react to the availability of skills by raising the technologicalcontentoftheirinvestments,contributingtofurtherlearningandskillcreation.This subject is discussed further in Section 6.5.

5.6.2 Investment and employment creation

Experience shows that economic growth as measured by real GDP growth per capita is necessary butnotsufficientconditionforachievingimprovementsinhumanwell-beingorreducingwidespreadpoverty. Investments that lead to employment generation are essential for reducing poverty as depicted below.


Taking the InvestmentsapprovedbyTICasaunit ofanalysis,wefind that if all investmentsapprovedbytheinvestmentpromotioncentre(foreignandlocal)werecarriedouttocompletionbetween1990and2004,over463,703newjobswouldhavebeencreatedintheeconomy.Thisisanaverageofabout33,122newjobsannually foraperiodof14years(Table5.10).Whencomparedwiththeexistingdemandforformalemployment,thisfigureisnegligible.ThePovertyandHumanDevelopmentReport(2003)andtheSMEpolicy(2002)reportthatabout700,000newjobseekersenterthelabourmarketannually insearchofemployment.About500,000ofthese are school leavers with few employable skills.

Thepublicsectoremploysabout40,000newjobseekersannually.Therestisexpectedtobeemployed by the private sector. This means that projects approved by TIC on the whole can be expected to generate about 5 percent of the country’s annual employment requirements. This in essence is an optimistic outlook in part because the actual jobs created by all investments approved by TIC are lower than the estimated potential out-turn because some approved investment projects either never started or started but ended up employing fewer personnel than it had been projected.

Table 5.10: Actual Investment Created Employment by Sector and Categorisation for Mainland Tanzania (2001-2003)

Sector Gender

Foreigners Sub -Total Tanzanians Sub -Total

Grand -TotalManagement

Non-ManagementManagement

Non-Management

Skilled Other Total Skilled Other Total

Arusha

Female 46 33 0 79 136 2,177 2,775 5,088 5,167

Male 196 89 6 291 457 3,263 4,058 7,778 8,069

Sub -Total 242 122 6 370 593 5,440 6,833 12,866 13,236

Dar es Salaam

Female 85 32 4 121 520 3,566 5,109 9,195 9,316

Male 925 524 24 1473 2155 13,611 16,633 32,399 33,872

Sub -Total 1,010 556 28 1594 2,675 17,177 21,742 41,594 43,188

Iringa

Female 2 0 0 2 29 125 3,966 4,120 4,122

Male 16 1 0 17 160 714 5,023 5,897 5,914

Sub -Total 18 1 0 19 189 839 8,989 10,017 10,036


Sector Gender




Non-Management


Kagera

Female 0 0 0 0 6 35 35 76 76

Male 7 2 0 9 50 96 104 250 259

Sub -Total 7 2 0 9 56 131 139 326 335

Kigoma

Female 0 0 0 0 0 8 6 14 14

Male 1 0 0 1 5 123 25 153 154

Sub -Total 1 0 0 1 5 131 31 167 168

K i l i m a -njaro

Female 27 1 0 28 36 1,131 760 1,927 1,955

Male 61 3 0 64 175 2,199 2,191 4,565 4,629

Sub -Total 88 4 0 92 211 3,330 2,951 6,492 6,584

Mara

Female 0 0 0 0 8 80 124 212 212

Male 24 20 2 46 41 267 489 797 843

Sub -Total 24 20 2 46 49 347 613 1,009 1,055

Mbeya

Female 0 0 0 0 4 184 316 504 504

Male 14 2 0 16 77 528 642 1,247 1,263

Sub -Total 14 2 0 16 81 712 958 1,751 1,767

Morogoro

Female 2 0 0 2 22 230 401 653 655

Male 48 13 4 65 206 1,170 3,435 4,811 4,876

Sub -Total 50 13 4 67 228 1,400 3,836 5,464 5,531

Mwanza

Female 9 0 0 9 111 673 549 1,333 1,342

Male 104 95 2 201 391 1,955 2,371 4,717 4,918

Sub -Total 113 95 2 210 502 2,628 2,920 6,050 6,260

Pwani

Female 4 0 0 4 9 76 45 130 134

Male 15 0 0 15 12 152 61 225 240

Sub -Total 19 0 0 19 21 228 106 355 374

Ruvuma

Female 0 0 0 0 1 16 35 52 52

Male 1 0 0 1 8 54 36 98 99

Sub -Total 1 0 0 1 9 70 71 150 151


Sector Gender




Non-Management


Shinyanga

Female 6 0 0 6 14 159 180 353 359

Male 201 1 0 202 112 1,199 495 1,806 2,008

Sub -Total 207 1 0 208 126 1,358 675 2,159 2,367

Tanga

Female 3 0 0 3 9 145 1,895 2,049 2,052

Male 44 9 0 53 158 1,422 3,674 5,254 5,307

Sub -Total 47 9 0 56 167 1,567 5,569 7,303 7,359

Total 1,841 825 42 2708 4,912 35,358 55,433 95,703 98,411

Source: Tanzania Investment Centre

One explanation for the low contribution to employment generation is that major investment projects in Tanzania have favoured capital-intensive techniques, especially in the mining,construction and banking sectors. Figure 5.9 illustrates employment generation by industrial categoryfortheperiodof2001-2003.Thedatashowsthatminingandfinancewiththehighestcapital intensity have the lowest employment generation – about 1 percent each. Agriculture andfishinghavethehighestemploymenteffectalthoughlessthan7percentofallinvestmentshave gone to these sectors. Field assessment conducted for this study provides data to support this assertion. Actual direct employment in mineral related investments were as follows: Mobela Gems(7),SarajevoMining(140),PapaKingS.MollelMining(150),GemsandRockVentures(130),TanzaniteAfrica(250),TANCANMining(81),MajorDrilling(13),andMeremetaMining(230). In contrast, agricultural related investmentsprovidedagreater numberof employmentopportunities:UnileverTeaTanzania (5,330),KilomberoSugar (4,377),TchiboEstate (1,550),DIMONMorogoroTobacco(780),APCLyamungoCoffee(400)andSAOHill(360).Onaverage,manufacturing and services sectors were next from agriculture in terms of employment generation: Sunflag(2,100),NyanzaBottling(442),ImpalaHotel(192),Interchempharmacy(171),Sunkist(167),MorogoroPlastics(98),andPrintcare(23).

Table5.11showstrendsintotalemploymentforsampledfirmsemployingover100workers.


Source: Based on Tanzania Investment Centre Data Bank.

Table 5.11: Trends in Total Actual Employment of Selected Firms

Firm 1999 2000 2001 2002 2003 Average% change from 1999

UTT M 25 35 36 37 48 36 44.8

F 5,875 4,465 5,564 5,616 4,933 5,291 (9.9)

Foreign 2 2 2 2 2 2 -

ST M 600 640 790 855 1,154 808 34.6

F 1,100 1,210 1,210 1,245 1,246 1,202 9.3

Foreign 30 35 40 45 50 40 33.3

DIMON M 37 67 68 68 69 62 67.0

F 443 403 772 542 821 596 34.6

Foreign 5 5 5 5 5 5 -

NBC M 582 570 484 444 427 501 (13.8)

F 12 12 10 10 9 11 (11.7)

Foreign 18 18 16 16 15 17 (7.8)

TE M - 70 100 350 750 254 262.9

F - 80 150 500 800 306 282.5

Foreign - 3 3 3 3 2 -


Firm 1999 2000 2001 2002 2003 Average% change from 1999

SHI M 360 366 270 350 285 326 (9.4)

F 52 54 46 58 47 51 (1.2)

Foreign 2 2 2 3 2 2 -

TPM M 225 276 209 112 142 193 (14.3)

F 192 226 184 153 133 178 (7.5)

Foreign 2 2 4 4 2 3 40.0

APC M 40 100 100 100 200 108 170.0

F 60 100 150 150 100 112 86.7

Foreign 1 1 1 1 1 1 -

PKM M 130 120 140 100 150 128 (1.5)

F - - - - - -

Foreign - - - - - -

TATEPA M 45 55 65 90 104 72 59.6

F 55 65 70 85 96 74 34.9

Foreign 2 2 2 3 3 2 -

Source:ESRF(2004)SurveyforTIC

UTT = Unilever Tea Tanzania Ltd.ST=SunflagTanzaniaLtdDIMON = DIMON Morogoro Tobacco Processors LtdNBC = Nyanza Bottling CompanyTE = Tchibo Coffee Estate

SHI = Sao Hill Industries Ltd.TPM = TPM(1998) LtdAPC = APC Lyamungo Coffee EstatePKM = Papa King S. Mollel

Overall,asTable5.11illustrates,thetrendintotalactualemploymentduringthepastfiveyearshasbeenpositive.However,therearemarkedinter-yearvariationsandgenderspecificemploymenttrends.Forexample,UnileverTeaTanzaniareducedfemaleemploymentbynearly10percent(584workers)butincreasedmaleemploymentbyabout45percent(11workers)–signifyingalargenet reduction inemployment.Similarly,TPM (1998) reducedmaleemploymentby14.3percent(32workers)andby7.5percentforfemales(14workers).However,formostotherfirms,overall totalemploymentshowsanupwardtrend.AsTable5.11 illustrates, foreignemployeesforman insignificantnumber (typically less than5 inmost firms)within the total employmentframework.However,theforeignemployeesplayacriticalroleintraininglocalstaff,managementand technological operation of the enterprises.


The conclusion we make from the analysis above is that although jobs being created through investmentsarefewerthannationalrequirements,thesituationwouldhavebeenworsewithoutthese investments. Continuing to entice more investments through making further improvements in the investment climate, undertaking more active promotion and facilitation and providingspecificincentivesforluringinvestmentsinagricultureandindustryshouldcreatemorejobsinthe economy.

5.6.3 Employment Impacts through Linkages with the Rest of the Economy

Another measure of impact is fostering linkages with the rest of the economy. These linkages are important because apart from creating jobs also help in the growth of small and medium enterprises(SMEs).

Tanzania’sexperienceshowsthatthereareinvestmentsthatappeartocreatejobs,bothdirectlyandindirectly, throughforwardandbackwardlinkagestotheeconomy.Forexample,KahamaMining Corporation employs high-tech mining techniques but during construction it employed over 2,000people.Currentlythemineemploys900localpersonneland200expatriates.Inaddition,the mine provides indirect employment to over 600 people as contractors for various services. Other job-relatedactivities includeeffortsbythecompanyto improvecommunityroads,watersystems,electricityandthrivingsmallbusinessessurroundingthemine.

AnotherexampleistheUS$2.6millioninvestmentbyAEFHorticultureFarms&ExportLtd.inArusha.Thiscompany,whichgrowsflowersforexport,employsover200peoplebutthroughtraininganddemonstrationeffectstothelocalcommunity,over230farmersarenowundertakingtheflowerbusiness.

Otherfieldexamplesofemploymentcreationthroughinputsupplylinkagesare:760directand1,400indirectemployeeswhosupplytobaccotoDIMONMorogoroTobaccoProcessors85directand2,500indirectemployeeswhogrowandsupplypyrethrumflowerstoTanzaniaPyrethrumCompany 360 direct and 800 indirect employees who support Sao Hill on a temporary employment basis its treeplantations.5,330directand1,500 indirectemployeeswhosupply tealeaves toUnileverTeaTanzania,and192direct,and87indirectemployeeswhosupplyvariousinputssuchas meat and fruits vegetables to Impala Hotel.

The conclusion we make is that the question of promoting linkages in the economy is gaining momentum.Inthecaseofmining,forinstance,ithasbeenpointedoutthattheTanzanianbusinesscommunityandgovernmentofficialshaveexpressedthewishtoimprovethemanagementofthelinkagesbetweenlargeandsmallscaleminerswithaviewtogeneratingmorejobs,transferringtechnology and realising balanced sustainable growth. The Mining Trust Fund could have been usedtothebenefitofsmall-scalemining.


Analysingandpromotingsupplychains isonewayofmaximisingvalueaddition,employmentandtechnologytransfer.Forinstance,theminingsectorcanbeinducedtoforgelinkageswiththemanufacturingsectorwithaviewtoenhancingvalueadditionthroughcuttinglapidary,settingandcreatingornaments. Inaddition, theminingsectorhas thepotentialofdevelopingbasicindustries for fabrication of parts used for mining equipment and machinery. Incentives should be designed to attract investments in linkages and value adding activities.

5.7 Impact on Human Resources Development

5.7.1 Introduction

Another measure of impact is the effect of investments on fostering skills development. Skill inadequacies and shortages have been for a long time a development challenge of the country (ESRF,2002;UNCTAD,2001;WorldBank,2001;Wangwe,1995).Althoughliteracyrateshaverecordedslightimprovementfromanestimated67percentin1999to82percentin2003,muchremainstobedone(URT,2003).SomeotherstudiesonTanzanianexperiencearelessoptimistic(URT, 2003) unless more efforts are made to ensure that the education system generatescompetencies required in the current labour market and globalisation.

Withskillshortagelimitingproductivitygrowth,FDImaybelookedupon,atleastintheshortandmediumterm,asaprimesourceofhumancapitaldevelopmentandnewtechnologydiffusionforthecountry.JenkinsandThomas(2002)forinstance,positsthatiftechnical,entrepreneurialandmanagerialskillsarescarceinacountry,trainingoflocalpersonnelbyforeignsubsidiariesestablished in the country could bring about an important diffusion of these skills. These would only help in multiplying jobs and raising wages but also in encouraging investment in human capital through the transfer of skills and knowledge to the local workforce. Section 5.7.2 examines Tanzania’s experience in fostering skills development.

5.7.2 Development of Human Resources

In this section we provide several examples where investments undertaken in Tanzania are fosteringhumanresourcedevelopment.First,weexaminethebankingsector.Alllocalandforeignbankshavetrainingprogramstoupgradeskillsoftheirworkforce.Theseinclude:Citibank,Stanbic,StandardChartered,CRDB,NBC,Barclays,KenyaCommercial,PostalBank,InternationalBankofMalaysia,tomentionbutafew.Thestrategyofallthebanksinvolvestrainingin-house,internalmentoringincludinguseofvisitingpersonnelexpatriates,in-countryandinternationaltrainingtobuildapoolofprofessionalswithinternationalexposure.Somebanks(CRDB,Stanbic,PostalBank)providefinancialassistance(paysfortuition)andencouragesitsstafftoundertakeprofessionalbankingcoursesonpart-timebasisfromtheTanzaniaInstituteofBankers(TIOB).

Mining is another sector where investments are having valuable impact on human resource


development. All large mining companies have training of their staff. These include: Kahama Mining,Geita,GoldenPride,AfricaMashariki,Mwadui,tomention,butafew.Skillsbeingimpartedrelate togeology,mining,electricalandmechanicalengineering related tominingoperations,undergroundmining techniquesand safetymeasures, processing, financeandmanagement.Forexample,KahamaMineshasalreadyspentoverUS$6.3milliontoconducton-jobtrainingfor its 900 local staff. TANCAN Mining Company spent Tshs. 5 million between 2002 and 2004 to train 43 workers. In 2001 to 2003 Gem & Rock Ventures Company incurred Tshs 1.4 million in upgrading skills of its professional workers.

ThetransferofskillsandknowledgeisalsoevidentinthemanufacturingSector.Forexample,WonderFoodsTanzaniaLtd,asubsidiaryofcowbellInternational(UK)hasofferedtrainingtoitsstaffinfoodprocessing,blending,packaginganddistribution.Thecompanyconductsin-housetrainingandalsosendsitstechnicalstaffforadvancedtrainingabroad.SunflagTanzania–anFDIinvestmentthatisoneofthelargestverticallyintegratedtextilemillsinEastAfrica,conductsin-houseandexternal training for its 2,450workers.Workforce skills havebeenupgraded intheareasofspinning,knittinganddyeing.Thiscompany,whichexportsqualitygarments,yarn,wovenandknittedfabrictotheUSA,EuropeanUnionandSouthAfrica,spendsoverTshs17million annually in training of its staff. TPM (1998) Limited, a local company that has beenmanufacturing gunny bags since 1998 also trains its staff to upgrade skills. During the past two years the company spent Tshs 9 million to upgrade skills of its 100 workers. Another local company,DabagaVegetablesandFoodCanningCompanyalsotrainsits18employeesatanannual cost of Tshs 3.5 million to upgrade skills and improve the quality of its products. The Company has 3 expatriates that provides regular in-house training to its staff.

In agricultural-related investments both local and foreign investors also provide training and skills development to employees. For example, DIMON – an FDI that has been processingtobacco for the export market since 1997 has incurred Tshs 20 million to upgrade the skills of its 30 professional workers. An additional Tshs 60 million has been spent to train 200 semi-skilled workers in order to raise their productivity. Tanzania Pyrethrum Processing and Marketing Company–anFDIthatstartedoperationsinTanzaniain1998,alsotrainsitsstafftoimprovethequalityofitsthreeproducts:pyrethrumcrudeextract,pyrethrumpowder,andpyrethrumdrymarc. The company has spent Tshs 37 million to upgrade skills of its 60 professional staff and an additional Tshs 43 million to upgrade the skills of its semi-skilled and unskilled workers. SAO Hill, a company thatwas divested to foreign ownership in 2000, also trains in-house its 360employees to improve the quality of its timber and pole products. The company has 3 expatriate staff that conducts the training at about an annual cost of Tshs 25 million. Another example is UnileverTeaTanzaniaLtd,anFDIthatproducesteaforthedomesticandexportmarket.Thecompanyhas2expatriatefemalestaffthatconductsin-housetrainingforover5,330employees,ofwhom85percentarewomen.Similarly,TchiboEstate,anFDIthathasbeenproducingcoffeefortheexportmarketsince2000,providesin-housetraining.In2003,thecompanyincurredTshs


10.5milliontoupgradeskillsof34employees.VasoAgroVentures,ajointventurebetweenlocaland foreign investors (25:75%sharesplit)hasexpatriatestaffs thatoffer training toover100employees at about Tshs 5 million per year.

Basedontheaboveexperientialfindings, theconclusionwedrawis that therearenodoubtsthat human skill development is taking place and being undertaken by both domestic and foreign investors in Tanzania. Incentives should thus be developed to entice investors to undertake more human skills development to their employees.

5.8 Impact of Investment on Technology Transfer

5.8.1 Introduction

An importantmeasureof impact is the transferof technology.Tanzania, likeotherdevelopingcountries, contributes little to modern science and technology.A study by Mohamed (2000)show that Less Developing Countries account for only 4 percent of the world’s application and development of modern science and technology. Tanzania, in recognition of the importanceofscienceand technologyestablished the“NationalScienceandTechnologyPolicy” in1986,whichwaslaterrevisedin1996.Overthepastfourdecades,Tanzaniaestablishedanumberofinstitutionsaimedatimprovingthecountry’stechnologicaldevelopment.Themainonesare:i)TanzaniaNationalScientificResearchCouncil (TNSRC) in1969. ii)TanzaniaCommission forScienceandTechnology(COSTECH)in1986todetermine“ResearchandDevelopment(R&D)priorities.iii)CentrefortheDevelopmentandTransferofTechnology(CDTT)formonitoringandregulatingtechnologicalflows.iv)TanzaniaIndustrialResearchandDevelopmentOrganisation(TIRDO) in 1979 to monitor services related to technology. v) Small Industrial DevelopmentOrganisation(SIDO)toprovidetheinstitutionalsupportincludingmarketingskillinformation.vi)InstituteofProductionInnovation(IPI)forproduction-relatedinnovations.Alltheseins-titutionsand organisations have played some role in enhancing Tanzania’s technological base although therearefewtangibleachievementstodate.However,ForeignDirectInvestment(FDI)appearsto have had a greater impact on fostering the country’s technological capacity, although thecountry has a long way to go.

FDIisgreatlyaccreditedasasourceofnewtechnologies,knowledgeandinnovationandotherintangibleassetstocapitaldeficientdevelopingcountries.However,asTambunan(2003)pointsout,theultimateimpactofinvestmentintheeconomydependsnotonlyontheperformanceofforeignfirms,butalsoonthediffusionofnewtechnologies, innovations,knowledge,newbestpracticesandotherintangibleassetsfromFDItolocalfirmsthroughoutthecountry.Inprinciplethediffusionofalltheseintangibleassetsshouldleadtoincreasedefficiencyandproductivityperworker.

Ingeneral,bestpracticesininvestmentcanbetransferredinseveralways,including:


Purchaseofexportsfromdevelopedcountries,

Importationofcapitalgoodsembodyingimprovedtechnology,

Technologylicensingbydevelopedcountriestofirmsindevelopingcountriesthusallowingacquisitionofknowledge,and

Employment of expatriates from developed countries that would transmit knowledge to developing countries.

Apart from theabovechannels,experienceshows thatFDI remains themosteffectivemodeof transferring knowledge and best practices to developing countries. This is because FDI embodiesandintegratestechnologicalelementsfromvariousmethods(Tambunanop cit,Kleinetal2000).Similarly,Borenzsteinetal(1998)inatestoftheeffectofFDIoneconomicgrowthusing cross country regression framework found that FDI is an important vehicle for the transfer of technology. The results show that FDI contributes relatively more to economic growth than domestic investment but the result holds only when there is some threshold of stock of human capital.

Technologytransferanddiffusionbetweenlocalandforeignfirmsworksthroughsubcontractingarrangementsbetweenforeignandlocalfirms,throughemployersponsoredandotherprofessionaltraining locally and abroad and through between job movements of experienced personnel. Batra andTan(2000)inastudyoninterfirmproductionlinkagesandproductivitygrowthinMalaysiafoundthatlocalfirmsthatenteredintosubcontractingarrangementswiththeirforeigncounterpartsbecamemoreefficient.InanearlierstudyBatraandTan(1997)establishedfoundthatfirmsthatinvest in training and upgrading of their employees’ skills and in new technology grow faster thanthose,whichdonot.Investmentsmadeinskilldevelopmentandtechnologyintheirstudyexplainsmuchof thedifference inproductivitybetween localand foreignfirms.Foreignfirmsturnedouttobemoreefficientcomparedwiththeirlocalcounterpartsbyvirtueoftheinvestmentundertakeninskilldevelopmentandnewtechnologycomparedwithlocalfirms.

5.8.2 Tanzania’ Experience

In theparticularcaseofTanzania, technology transfer,both tangibleand intangiblehasbeenweak despitemany support institutions as discussed above. Before 1990, Tanzania’s effortsaimed at improving her low technological base was hampered by its almost closed nature of the socialisteconomy(UNCTAD,2001).Significantliberalisationoftheeconomythereaftertriggeredconsiderable private domestic and foreign investment that has opened doors to acquisition of modern technology. This section will provide illustrations on lessons learned in new working stylesandculture,transferoftechnologyandtechnical/managerialskills.

5.8.3 Transferring Business Skills and Working Styles

In the past, customer-focuswas virtually absent. Public enterpriseworkerswere oblivious to


customers. Civil servants were no exception. Files went missing without explanation. Long queues symbolisedpervasiveinefficiencies.Thenmid-eightiesthingsbegantochange.Economy-widereformsusheredincompetition.InvestorsfromSouthAfrica,Mauritius,Malaysia,Britain,China,India,tomention,butafewcamein.WalkintoaShoprite(Supermarket),orNandos(Restaurant)orWoolworth(Clothes),youngwomenandmengreetcustomerswithasmile,filltheirorderswithdispatch,andsay“thankyou”astheyreceivepayment.Thisbusinessstylehasspreadquicklytoalmost all sectors of the economy. Walk into an Indian or indigenous Tanzanian shop and smiles greet you – others even offer a soft drink while the customer waits for service. Government executiveagenciesprovidingpublicservicessuchastheBusinessLicensingAgency(BRELA),TanzaniaCivilAviationAuthority,tomentionafew,arenowcustomer-focused.Civilservantsarealso emulating these business skills and offering better services. Foreign investment is paving wayforanewcultureofhardwork,customerfocusandnewwaysofdoingbusinessusingstate-of-the art technology – based especially on computers and telecommunication linkages.

5.8.4 Examples of Technology Transfer in Selected Sectors

In the mining sector there are a number of examples related to technology transfer. For example, between2000and2003,Afgem (aSouthAfricanMiningCompany) investedaboutUS$20million inTanzanitefields inMerelani.Thecompanymanaged topioneerabrandingandcertificationprocessforitsgermqualityTanzaniteproduction.Otherminingcompaniesareexpected to emulate this example by adding value to minerals produced through processing in-country and branding their products. Another example relates to leasing mining equipment. DalnickMetalLtdleasesminingequipmenttosmallandmediumscaleminers.Thistechnology,apart from increasing productivity, it has facilitated themanufacture of spare partswithin thecountry – thus enhancing technological skills in the mining sector. Mobela Gems Limited provides another example of technological transfer. The joint venture between local and foreign investors (50:50%sharesplit)startedoperationsin1999cutting,polishing,shapingandsellinggemstones.Theforeignpartnershavemanagedtotrainlocalemployeesingemstoneprocessing,andthecompanynowexportsqualitygemstonestoIndia,NorthKorea,USAandThailand.

In the cement business quality has improved through the injection of foreign investment partnerships. Wazo Hill cement factory has eliminated the dust that in the past polluted the environment. Tanga Cement invested US$ 12 million for improving operational efficiency,reducingcostsandmaintaininghighandconsistentproductquality. Inaddition, thecompanyhasintroduced“just-in-time”productionsystemsthataremoreefficient.MbeyaCementhasalsoimproved product quality to remain competitive.

Inthemanufacturingsector,SeaungukTradingCompany’sprocessingandfruit-canningplantisexemplary. The company processes and cans fruit for export and the local market. The company has transferred fruit production technology to small-scale farmers who now supply fruit of a uniform size and quality. Similarly there appears to be considerable spill over of tyre retreading


activitiesusheredinbyTredcor(T)Ltd.Theproductionofsignboardsandoutdooradvertisingfacilities pioneered by Afrigavix Ltd. and Global Outdoor Systems Ltd appear to be emulated by manyotherlocalproducers.Linlan(T)Ltdhasintroducedproductionofconfectioneries,sweetsand cool drink powder technology in Tanzania that has a high chance of being emulated by others in this category.

Although less than 7 percent of FDI has gone into agriculture, the investment made so farappearstoimpactonagriculturaldevelopmentthroughtechnologicaltransfer.Forexample,theInternationalChemicalProductsLtdthatacquiredMufindiPyrethrumExtractionPlantin1997hasintroducednewtechnologyinpyrethrumflowerproductionandfacilitatedtrainingoflocalstafftoimprove quality. Another example is Wonder Foods Tanzania Ltd. The company established a newagro-processingplant topack,marketanddistributemilkpower in thecountry. Inordertoensuregoodqualityandhygienicconditions, thecompanyhashelped localmilkproducersacquire the technology for raising high producing milk cows and equipment for hygienic sanitary storageandtransportation.In1998,thecompanyexpandeditsoperationsintoteaprocessing,blending, packaging and distribution. Small-scale farmers cultivating tea have benefited fromextensionservicesprovidedbythiscompany.Similarly,Morogorosmall-scalefarmerscultivatingtobaccohavebenefitedfromnewcultivationtechniquesextendedbyGoldenLeafGrowersCo.Ltdthatgrowsflue-curedtobacco.VasoAgroVentures,ajointventurebetweenlocalandforeigninvestors(25:75%sharesplit)startedoperations in2003growingflowers,cuttingflowersandgrowing fresh beans, largely for the export market. The company conducts seminars to outgrowersonvegetableproduction,growingflowersandsimplebookkeepingandaccounting.Thesimple technology transferred to outgrowers has enabled the producers to use less water in production and supply to the company of uniform quality products that are competitive in the international market.

Perhapsthelargestimpacthasbeenintelecommunication.Sinceit’sestablishmentinTanzania,Vodacom – amobile operator company, has invested about US$142million. This company,togetherwithCeltel,MobitelandTTCLhaverevolutionised telecommunication linkages in thecountry.Apartfromfacilitatingcommunicationthathasimpactedpositivelyonbusinessefficiency,smalllocalentrepreneurshavesprunguptoproviderepair,rechargeandhook-upservices.

5.8.5 Technology Transfer-through Imports of Capital GoodsAnother route through which investments can foster technology transfer is through imports of capitalgoods.StudiesbyDamijanetal,2001;EatonandKortum1996;OlarreagaandSchiff2001haveidentifiedapositiverelationshipbetweenimportsofcapitalgoodsandrelatedtechnologydiffusionandproductivitygrowth.AccordingtoUNCTAD(2000),Tanzaniahasbenefitedfromcapital importswith technology-embodyingproducts (machinery,equipmentand tools).Figure5.10providesbroadcategoriesofimportsaccordingtoBankofTanzaniaclassification.Overall,capital goods imports have averaged over US$ 500 million per year, slightly higher thanintermediate and consumer goods.


Source:BasedonBankofTanzaniaEconomicandOperationsReports(variousyears).

Theconclusionwemakehereisthatinvestmentsarefosteringthetransferoftechnology,albeitslowly. Further incentives are needed to entice more transfer of technology especially through FDI investors training SMEs to supply to them inputs that meet requirements of quality and standards.TheGovernment, through its institutionssuchasSIDOshouldalsobecomemoreactive in upgrading the capacity of SMEs to supply inputs to FDIs through training in skills development.

5.9 Impact of Investment on Entrepreneurial Growth

5.9.1 Entrepreneurship GrowthAnother measure of investment impact relates to fostering entrepreneurship growth. Entrepreneurship–orattitudestowardinnovation,pro-activity,andrisktakingplaysakeyrolein fostering investment and economic growth. The literature on the impact of investment on entrepreneurshipgrowthislimited(UNCTAD2004).Rodriquez-Clare(1996)forexampleshowsthatthroughnetworksandlinkageswithlocalfirms,foreigndirectinvestments(FDI)canleadtoconsiderable growth in a country’s entrepreneurship. The study illustrates how FDI spillovers fromproduction networks and linkagesmaywork: affiliates increase a host country’s accesstospecialisedvarietiesof intermediate inputsand technologies, the improvedknowledgeandskills raises productivity of domestic producers and in some cases leads to growth of a country’s number of entrepreneurs. The UNCTAD study cited above provides examples of where domestic firmsacquiresoft technologiesfromforeignaffiliatesthroughcontactwithexperts, information


flowsandobservation.Theextentofinvestmentimpactonentrepreneurshipgrowthdependsonthestrengthandbreadthofthenetworksandlinkagesestablished.Inthefieldstudyconductedforthisassignment,themaintypesofnetworksandlinkagesrelatetolocalsourcingandpurchaseof inputs, components and services. The investor’s choice of suppliers depends on severalattributes,including:

Cost, quality and reliability of local supplies–where thesewere inadequate, investors♦tendedtotransferrequisiteskillsandknowledgetothelocalfirms/individualssoastomeetstandards. Access to local information and business practices – a network of suppliers of raw materials ♦andotherinputsflourishedwellwherelocalinformationwasreadilyavailableandthelocalfirms/individualsshowedbusiness-likeacumen.Ability to develop relations of trust. Often this aspect was found to be important in part ♦because of assurance of reliability of supplies and more so because some of these local suppliers had to be advanced inputs and working capital to facilitate production and regular supplies.

Tanzania’s experience with regard to facilitation of entrepreneurial growth through a network ofsuppliers’ linkages isshownonTable5.12and further illustrated inBox5.1. Overall, localsourcing of inputs was the largest contributor to the growth of entrepreneurship.

Table 5.12: Network of Suppliers of Raw Materials and Other Inputs

Sector

FDI Non-FDI (Local) Joint Venture

Local Sourcing (%)

Import(%)

Local Sourcing (%)

Import(%)

Local Sourcing (%)

Import(%)

Agriculture 87.5 12.5 90 10 80 20

Manufacturing 80.0 20 70 30 73 27

Services 60 40 80 20 90 10

Mining 10 90 23 77 12.5 87.5


In agriculture investors sourced over 80 percent of their raw materials and inputs locally. Next wasmanufacturingfirmsthatsourcedover70percent.Servicesdidnotrevealdiscerniblepattern.Whileservice-relatedjointventurefirmssourced90percentlocally,FDIfirmssourcedonly60percentlocally.Inmining,over80percentweresourcedthroughimports–apatternthatwouldbeexpected in a country where nearly all mining machinery and equipment have to be imported. The studylearnedthatovertimecompaniestendtodevelopmorelocalinputnetworkandlinkages,thus fostering entrepreneurship growth.


LinkagesrelatedtoResearchandDevelopment(R&D)wasnegligibleamonglocalinvestorsbutforeignbasedfirmstendedtohaveconsiderableinvestmentinthisarea.Forexample,DIMONTobaccoProcessorsisanFDIthathascontractedalocallybasedfirmcalledTORITOtoresearchonissuesrelatedtoimprovementintobaccoflavour.Thecompanypaysanequivalentof5percentof its annual sales on R&D. Blue Mountain Coffee Farm is also an FDI that produces quality coffee for the export market. This company has contracted a locally based international agency called Utzkapeh to provide strategic R&D and to check the company’s compliance with environmental standardssetbyinternationalorganisations.UnileverTeaTanzania,alsoanFDI,conductsR&Donimprovementsinthequalityandcareoftea.APCLyamungoCoffeeEstate,anotherFDIthatgrowscoffeefortheexportmarket,hasastrategictechnologypartnershipintheareaofR&DwithTACRI–alocalfirmthatdoesexperimentandimprovementofcoffeeseedlings.

The conclusion we make from the above experiential analysis is that investments are fostering entrepreneurialgrowth,albeitslowly.Thereisneedtodevelopincentivestoenticeinvestorstosource more locally as well as increase their network of suppliers of raw materials and other inputs.

Box 5.1: Tanzania: Investments are Fostering Entrepreneurship Growth – Albeit Slowly

Dabaga Vegetables and Food Canning Company is a local company that started operations in 1976 in Iringa town.Itproducestomatosauce,juices,jam,pickles,vinegar,bakedbeansandT/pureeforthedomesticmarket.Only 1% of its products are for exports. The three company expatriate staffs have played a key role in fostering entrepreneurship growth through subcontracts and out-sourcing almost all its input supplies. Suppliers are trained on their own farm to produce and supply quality fruits and vegetables. To date the company has trained the followingentrepreneurs(theirnumbers inbracket):pineapples(66),mangoesandoranges(4), tomatoes(20),onions (5),cinnamon(1),andchillypowder (3).Thecompanyplans to trainmore inputsuppliersascapacityutilisation rises from the current 73% to 95% by 2007.

VasoAgroVenturesisajointventurebetweendomesticandforeigninvestors(25:75%sharesplit).ThecompanystartedoperationsinMoshi,Kilimanjaroin2003.Itsmainproductsareflowers,flowercuttingsandfreshbeans.Thecompanyhastrainedover35localsupplierstogrowflowers,toundertakeflowercuttingandproducequalityseeds.

TANCANMiningCompany (TMCL) isa jointventurebetweendomesticand foreign investors (40:60%sharesplit). Since 1999 the company has been involved in mineral exploration of gold and diamonds in MwanzaRegion. The company assisted in the establishment of a local company - Humac Laboratory to conduct test and experimentationofsamplesanddrilledrocksfromTMCL.Throughanelaborateskillstransfermechanism,TMCLappointed SGS laboratory to counter-check and verify the work of Humac while providing them with advisory services. Africa Mashariki Gold Mine has established similar arrangements. This company which deals with gold mininginTarime,Mararegionassistedintheestablishmentofalocalfirm,StanleyMiningServices,thathasbeencontractedtoprovidedrilling,quarryingandcivilworksforthecompany.

VegetableOil IndustriesLtd (VOIL) isa jointventurebetweendomesticand foreign investors (20:80%sharesplit).Thecompany,whichstartedoperationsin1966inMwanza,manufacturesdoublerefinedcottonseedoil,margarine,cookingfacts(Pride),anddrinkingwater(AQUA).Thecompanyusesanetworkofinputsuppliers–cottonseeds.Thenew localfirmsestablished tosupplycottonseed toVOILare:AllianceGinneries,COPCOTGinneries(Geita)andLINTEXGinneries(Shinyanga).


Tanzania Pyrethrum Processing and Marketing Company provide another example of networking to obtain qualitypyrethrumflowers.ThisFDIcompanywhichstartedoperationsinTanzaniain1998producespyrethrumcrudeextract,pyrethrumpowderandpyrethrumdrymarc,largelyfortheexportmarket.Thecompanyestimatesithasbroughtabout300,000farmfamiliestogrowpyrethrumthatissuppliedtothecompany.Thecompany’sextension service transfers skills and knowledge to the farmers that have enabled the supply of uniform quality pyrethrumflowers to thecompany.SimilarextensionservicesundertakenbyKilomberoSugarCompanyhasresultedintogrowthofsugarcaneout-growersfrom2,000to5,000deliveringabout600,000tonsofcaneor50percent of the company’s requirement.

Kilimanjaro Industrial Development Trust (KIDT) is a typical success story in entrepreneurship growth inTanzania.WithtechnicalandfinancialassistancefromtheJapaneseGovernment,KIDTthatwasincorporatedin2001producesoilexpellers,sparepartsfor industrialandagriculturalmachinery,coffeehuskpulpier,sugarcanesqueezer,groundnutsheller,trainweatherplates,earthenwareproducts,tomention,butafewproducts.WhileKIDTis100%localfirm,thetechnicalassistancegivenbyJapaneseexpertshastransformedKIDTintoapowerful dynamic entrepreneurial powerhouse capable of producing internationally competitive products. Over 30 entrepreneurs have graduated from KIDT training and have established their own machine/foundry or forging workshops.

Source:ESRFSurvey(2004)forTIC.

5.10 Community and Neighbourhood Impact

Another measure of impact is the contribution of investments in fostering community development. Domestic and foreign investment has community level impact that is not well documented in the literature. Field studies conducted for this assignment revealed two kinds of impacts. Those that improve the socio-economic well being of the communities within the investment area and beyond,thusfosteringpovertyreductionandthosethathavenegativeeffects–especiallyontheenvironment. This later aspect is discussed separately in Section 5.12.

Tanzania’s experience shows that investments are making a commendable contribution towards community development. For example, at the national level, the investmentmade to exploitSongoSongogashasbrought to thepeopleofTanzaniaa reliablesupplyofsafe,cleanandefficientenergywithfarreachingsocio-economicimpact(seeBox5.2).

Box 5.2: Developing a resource out of reach: Songas natural gas

Whendiscussinginvestmentimpact,theSongasstoryisexemplary.IthasbroughttothepeopleofTanzaniaareliablesupplyofsafe,cleanandefficientenergy.Eversince1974,whennaturalgaswasdiscoveredonandaround Songo Songo Island, (about 225 kilometres fromDar es Salaam), the development of this resourceremained a dream. Then in 1994 a powerful public/private investor partnership turned the dream into reality. The Government of Tanzania provided policy and logistical support. The Commonwealth Development Corporation (CDC)madeaninitialUS$6millioninvestmentinSongasin1997andprogressivelyincreaseditsstake,includingadditional capital committed to the expansion of Ubungo generating capacity. The World Bank played a key role in Songas,approvingaUS$183million,interest-freeloaninOctober2001.WorldBank’stechnicalrepresentativesprovided expertise and oversight for more than 12 years to see the Songas project through completion in 2004.


The major user of natural gas from Songo Songo is Ubungo Power Plant in Dar es Salaam. Originally built to runon imported liquid fuel, theplantwas refurbishedand converted to use the country’s ownnatural gasresources.SinceJuly2004Ubungoplant,whichiscapableofproducing45percentofTanzania’stotalelectricityrequirements,hasbeenusingnaturalgasinplaceoftheexpensiveimportedfuel.Theplantprovidessafe,reliable,efficientcleanelectricitytoDaresSalaamandthenationalgrid.

Source:ESRF(2004)surveyforTIC.

Othermorespecificexamplesofcommunitylevelimpactwereobtainedfromthisstudy’sfieldwork.Thesampleof30investorsinterviewed,bothdomesticandforeign,feelobligedtocontributepartof their earnings for some social course – especially in reducing problems related to access to socialamenities. Overall,asFigures5.11and5.12 illustrate,69percentof thedonationsornearly Tshs 4.7 billion incurred by the 30 sampled investors between 1998 and 2004 were for rural roads rehabilitation or maintenance. Others expenditures with their value in brackets are: education12percent(Tshs862million),Health11percent(Tshs773million),Water6percent(Tshs418million),Electricity1percent(Tshs87million)andothers1percent(Tshs63million).Box5.3provideselaborationofsomemainphilanthropicfirmsinthesurvey.




Box 5.3: Investors are becoming charitable and generous

AfrikaMasharikiGoldMine,anFDIthatbegangoldminingin2002,isexemplarywhenonetalksofphilanthropy.Since inception the company has contributed Tshs 400 million for construction and equipping village health facilities,Tshs550millionforprimaryandsecondaryschoolimprovementefforts,Tshs100millionforruralwatersupply,Tshs600millionforruralroadsconstructionandTshs30millionfortheconstructionofwardoffice.Over3,500householdshavebenefitedfromthecompany’ssocio-economicassistance.

KilomberoSugarCompany,anotherFDI thatbeganoperations in1998,considerssocial responsibilitypartofthe company’s vision. To this effect, the company has contributedTshs 106million in support of communityprimaryandsecondaryschools,Tshs250millionforimprovingcommunityhealthfacilities,Tshs100millionforwatersupply,andTshs4billionforruralroadsimprovementaspartofsugarout-growerssupport.Over10,000householdshavebenefiteddirectlyorindirectlyinthissocio-economicassistance.

SaoHillIndustries,anFDIthatproducestimberforthedomesticandexportmarket,providesantherexampleofcommendablephilanthropy.Since2000whenthecompanybeganoperations,Tshs.18millionhavebeendonatedforprimaryandsecondaryschoolimprovement,Tshs20millionforimprovingcommunityhealthfacilities,Tshs2 million for water supply and Tshs 6 million for improving community rural roads. Over 700 households have benefitedfromthesesocio-economicactivities.

NyanzaBottlingCompany,ajointventurebetweenforeign(64%oftheshares)andlocalinvestorsthatproducessoft drinks for the domestic market has also made valuable socio-economic contributions. The company that started operations in 1984, has contributed Tshs 30million is support of community primary and secondaryschools,Tshs30millionforimprovingcommunityhealthfacilities,andTshs10millionforimprovingruralroads.Thecompanyestimatesover1,000householdshavebenefitedfromthesecharitableactivities.


VasoAgroVentures,anotherjointventurebetweenforeign(75%oftheshares)andlocalinvestorsthatstartedoperations in 2003, is also among food philanthropic firms.The company has contributedTshs 15million insupport of primary and secondary schools and Tshs 140 million to provide reliable water supply to the surrounding communities.

Local investorsarealsogoodphilanthropistsasshowninAnnexB.Forexample,MeremetaMiningCompany,a wholly owned local gold mining company that started operations in 2002 has shown commendable social responsibility. The company has contributed Tshs 89 million is support of community primary and secondary schools,Tshs20millionforhealthimprovements,Tshs27millionforwatersupplyandTshs40millionforimprovingruralroads.Over1,000householdshavebenefitedfromthesecharitableactivities.


The considerable investment channelled to improve rural roads appears to have been made to facilitateaccessto localsuppliescritical for investor requirements.Forexample, rehabilitationof community roads in pyrethrum growing areas was meant to assist out-grower farmers to supplypyrethrumflowers throughout theyear.Similarly, improvementof roads in largesugarcane plantations such as Kilombero are meant to facilitate transport of cane by out-growers to ensure regular supply rather than fostering a charity of giving to the communities. Even improvement of roads by mining companies such as Kahama Mines appear to have self-interest inmindtoimproveinputaccessandotheramenities.However,despiteownfirm-levelinterests,improvementsinruralroadsarehavingvaluablebenefitstocommunities.Upgradedroadsareusableall year round, causing lessdamage to thevehiclesusing them.The improved roadsallowfarminghouseholdsandthefirmstomovetheirgoodsmoreoftenandmorecheaply.Insomecases,as inKilombero,somefarmershaveshifted from lowvaluemaizeproduction tosugar cane production – thus earning higher income. Investors also show a high degree of social responsibilitythroughassistingintheprovisionofeducation,healthandwaterfacilities.Annex4.1 provides a breakdown of the social-economic contribution provided by 30 sampled domestic and foreign investors that have high impact on the recipient communities.

TheconclusionisthatavailablefielddatarevealsthatFDIinvestorstendtomakelargersocialcontributionstocommunitiesaroundtheirinvestment(Annex4.1)comparedwithlocalinvestors.However,mostoftheseFDIhave“CertificateofIncentives”thatprovidemorebusinessadvantagecomparedwithlocal investors.Thus, intheabsenceofan“equalplayingfield”, it isdifficult tomakeanydefinitiveconclusiononthecontributionofFDIandNon-FDItothesociowellbeingof local communities. A policy should be developed to encourage greater contribution to local economiesinfightingpovertyandenhancingequitabledevelopment.

5.11 Illustrative Cases of Some of the Performing Investments Clearly, although most investment enterprises have performed well as a result of a betterinvestment climate and favourable policy regime, some have achieved better and at timessignificantperformancethanothers.Belowwedescribeafewcasestudiestogivesupportiveevidence of the performance of some large investment enterprises. As time and resources could notallowsamplingmanyfirms,we limitedourcasestudyof investmentperformanceonlyonthoseuponwhichinformationwasavailable,andusedforillustrativepurposes.


5.11.1 Tanzania Cigarette Company (TCC)

TCC is a joint venture between foreign (75% of the shares) and local investors. The BritishAmericanTobacco initiallystartedthecompany in1961. In2000, itsshareswere listed in theDaresSalaamStockExchange.Thecompany’smainproductsare:Sportsman,Sweetmenthol,Camel(filterand lights),Embassy(menthol, lightsandkings),Winston(lightsandfilter),Club(mentholandfilter)andCrescentstar(kali).TCChasthecapacitytoproduce4billionsticksperannum

TCC is a shining example of the success of Tanzania’s privatisation programme. Since its privatisation in1995, thecompany’sproductionefficiencyhas improveddue to investment innewtechnology,plantandmachineryandtraining.Profitshavemorethandoubled,enablingthecompanytopayhigherdividendstoitsshareholders,payinggreatertaxestothegovernmentandprovidingbetterremunerationsandtrainingtoemployees(Table5.13).Over250ofthenearly700employees(35.7%)havereceivedtrainingtoupgradeskills.Between2002and2004,thedividend paid to shareholders averaged Tshs 22.8 billion and taxes paid to government averaged Tshs 48.6 billion.

Table 5.13: TCC Performance

2002 2003 2004

Employment

Male(Local) 345 345 325

Female(Local 344 344 344

Foreigners 11 11 8

Skills Development

Number of those trained in house

295 295 200

Number of those trained abroad

50 50 50

Dividend paid to shareholders TZS,Million 22,174 24,160 22,362

Share Capital or Market Capitalisation TZS,Million 170,000 172,000 176,000

Taxes and other charges paid to government

TZS,Million 42,213 45,533 58,316

Source:TCCdatabank(Canthisinformationbeupdated?)

TCC has also contributed importantly in the transfer of technology through a network of suppliers. Thecompanyestimatesthatover40,000tobaccofarmershavebenefitedfromthecompany’simproved crop husbandry skills transfer. Similarly, over 200,000 dealers and retailers havebenefiteddirectlythroughthemarketingofthecompany’sproducts.


The company management believes that its success lies in adoption of sound investment corevalues:highqualityculture (excellence,simplicityandsatisfaction); innovation (dynamic,enthusiastic and fast); commitment (respectful, responsible and transparent) and synergy(diversity,engagementandteamwork).Thesevaluesareimportantnotonlytoenablecompaniesimproveefficiency,butalsotofostercompetitivenessinaglobalisedworld.

5.11.2 Kioo Limited Company (KLC)Kioo limited is another success story. This wholly private owned local company started production in 1966producingglassandbottles for nearly all typesof requirements.KLCcurrent (2004)productioncapacityis55,000tonsperannum.

The company is a good example of investment that has high forward and backward linkages withtheeconomy.Over80percentofthecompany’srawmaterialsaresourcedlocally(sand,dolomite, and feldspar). The company has strong linkages with other industries that use itsproducts. Foremost are beverage and liquor firms such as Tanzania Breweries, SerengetiBreweries,TanzaniaDistilleries,CocaCola,andPepsi.Thecompanyalsosuppliespackagingmaterials to the pharmaceutical and food industry.Overall, KLCexports about 60 percent ofits products to Sub-Saharan countries – earning the country foreign exchange. As Table 5.14 illustrates,KLCemploysanaverageof 267people, ofwhom8percent are foreign technicalexperts. All employees have been trained locally and in-house to upgrade skills and knowledge. The company also paid taxes and other charges that reached Tshs 2.5 billion in 2004. The company is expected to contribute higher tax revenue to the government when its Tanzania InvestmentCentrecertificateofincentivesexpires.

Table 5.14: Kioo Limited Performance

2002 2003 2004

Employment

Male(Local) 251 233 189

Female(Local 15 15 15

Foreign 22 22 21

Skills Development

Number of those trained in house

251 233 189

Number of those trained abroad

1

Share Capital or Market Capitalization TZS Million 12,000 12,000 12,000

Taxes and other charges paid to the Government

TZS,Million 1,200 2,000 2,500

Source: Kioo Limited database

Overall,thecompanyadoptsbestpracticesinitsmanufacturingprocessthatareenvironmentally


friendly, recycling used bottles and adhering with hygienic conditions on all its packagingmaterials.

5.11.3 Mission Mikocheni Health and Education Network (MMHEN)MikocheniMissionHealthandEducationNetwork(MMHEN)thatprovidesmedicalandacademicservices to the country is another investment success story. The investment comprises Mikocheni MissionHospital,TheHubertKariukiMemorialUniversityandtheholdingcompanythatdealswith administrative matters.

The re-known hospital providesmedical services to an increasing number of patients (Table5.15).Thenumberofpatientstreatedinthishospitalhasrisenfromanannualrateof6percentin2002to21percentin2003/04.Themainreasontosuccessisrelatedtoreducedtreatmentfees,in part due to reliance on medical doctor interns – making their services more affordable.

Table 5.15: Number of patients treated between 2002-2004

YearChildren Adults

Male Female Male Female Total

2002 2,877 4,220 3,836 8,247 19,180

2003 3,366 3,776 5,510 7,601 20,253

2004 3,920 4,410 5,390 10,780 24,500

Total 10,163 12,405 14,736 26,629 63,933

Source: MMHEN database

Improved services have resulted into increased recovery rate to between 75- 99 percent and reduction in the death rate to between 1-5 percent. Enrolment into the medical university has morethantripledfrom26in2002to88in2004.Similarly,thenumberofmedicalgraduateshasquadrupled from 15 in 2002 to 60 in 2004. This performance is exemplary taking into account the acuteshortageofqualifiedmedicaldoctorsinthecountry.

Theinvestmentemploysover270medicalandotherprofessionalstaff,ofwhich67percentarewomen.Between2002and2004,theinvestmentcontributedtothegovernmentoverTshs670millioninvarioustaxesandcharges.Inaddition,severalcommunitycontributionsweremade,includingTshs2.5million in2002 for roadsandspecial illnesses (OpenHeartSurgery);Tshs2.8millionin2003andoverTshs680,000forsupportingvariouscommunityactivitiesin2004.Inaddition,thecentreprovidescharitablemobileclinicsinMikocheniareathattargetspregnantwomen,tropicaldiseases,HIV/AIDSandothercommunicablediseases.


5.11.4 Standard Chartered Bank Tanzania (SCBT)

StandardChartered,withalonghistoryinTanzaniadatingbackfrom1917,ispartofthecompetitiveandefficientbankingsystemthatisevolvinginTanzaniafollowingthecountry’sfinancialsectorreforms. It is a successful FDI that re-opened in 1993with branches in Dar es Salaam (3),Mwanza,ArushaandMoshi.Thebank,beingpartfortheStandardCharteredGroupthathas950officesin50countries,hasbroughttoTanzaniathebestofbankingworldwide.Toattestthiscontention,thebankhaswonseveralprestigiousawards,including“BestBankinAfrica”(1998,1999and2000),“BankoftheYear”forseveralyearsincluding2004,and“EmployeroftheYear”in 2005 awarded by Association of Tanzania Employers.

To illustrate the contribution this investment is making in Tanzania several pointers are noticeable. The bank has developed a strong wholesale banking business by establishing relationships with major international corporations, local businesses, donor agencies, Government and publicenterprise organisations. In addition, the bank has developed businesswithin the agriculturesectorandprovidesfinancialaccess toSmallandMediumEnterprises (SMEs). Itsconsumerbusiness focuses on up scaling individuals and their businesses. SCBT is also expanding the rangeofproductsandservicesincludingImportandExportFinance,StructuredTradesolutions,and management of foreign exchange risk. Some examples of the innovative products and services that SCBT has launched in Tanzania recently include:

Tanzania’sfirstVisaDebitCard•

A revamped SME Banking Business•

A sophisticated Excel Banking Centre•

In termsofmakingavailable resources for thecountry’sdevelopment, thebank is the largestlender to the corporate sector,with loans and advances of overTshs 200 billion. Its lendingpoliciessupportinwardinvestment,developmentofdomesticindustriesandmakingfulluseofTanzania’s abundant natural resources. Examples of this include:

Providingpre-exportfinancetotheagriculturalsectortoimprovecashflowtofarmers,•

Supporting investment in processing operations to raise the quality and value of export •cropsandimprovefarmers’earnings,and

Making available term funding for large-scale rehabilitation of recently privatised public •enterprises.

Intermsofskills transfer, trainingisprovidedtoall200plusemployees.TheTrainingaimsatensuring high levels of service to customers through quality career planning and skills enhancement ofnationalstaff.Trainingisbothin-houseandexternal,particularlyincountriessuchasGambia,Kenya, Ghana, Botswana and the Great Britain. Apart from training, employees are wellremunerated. The bank aims at fostering good performance by providing staff with performance


related bonuses as well as other incentives such as subsidised schemes to purchase cars as well as to provide educational expenses. Salary levels are reviewed regularly to ensure competitive remuneration packages.Withregardtocommunitycontribution,thebankrecognisesthatithaswiderresponsibilitiestothecountry.Thus,foranumberofyearsithasparticipatedinanumberofcommunityprojects,including:

DonationofUS$42,000(Tshs48million)in2002fortherehabilitationofChildren’sHomes•in different areas. The Kurasini Children’s Home in Dar es Salaam received Tshs 27.5 million while the remaining amount was shared between the Arusha Children for Children’s Future homeandtheMagudistrictChildren’sHomeinMwanzaregion,

ContributionofUS$90,000(Tshs103million)in2003towaterprojectsintheDaresSalaam•Bunjuarea,Arusha,KageraMorogoroandSumbawanga.SomefundsalsowenttoaFishFarming project inMereraniArusha.This project, to be completed in 2005,will offer analternative income-generating source for the commercial sex workers in that region thus reducingthespreadofHIV/AIDS,

DonationofUS$60,000(Tshs69million)in2004toassistinirrigationprojectsintheMombo•andSanyaregionswhichareinTangaandKilimanjaroregions,respectively,and

DonationofUS$140,000(Tshs160million) in2005toconstructanOrphanedChildren’s•Home in the Kibaha area.

Apart fromcommunitycontributions, thebank isamong the largeorcorporate taxpayers thatcontributeconsiderablerevenuetothegovernmentcoffers.In2004,forexample,thebankpaidto government the following taxes and other charges:

Table 5.16: Tax paid during the year ending December 31 2004

Category Amount (TShs Millions)

Corporate Income tax 6,257

P A Y E-Local Staffs 679

P A Y E-Expatriates Staffs 383

VAT 135

Skills Levy 263

Withholding tax on goods and services 301

Withholdingtax(intermediatecommodities) 212

Total 8,233

Source:SCBT,September2005.


Thus,indischargingitscorporateresponsibility,in2004theStandardCharteredBankTanzaniacontributed over Tshs 8.2 billion in taxes and other charges – revenue resources that are much neededforacceleratingTanzania’sdevelopmentprospects.Inadditiontotheabove,Table5.17listsadditionalfirms(otherthanthoselistedinTable5.9)thatcouldalsobeconsideredassomeof the best performing investment enterprises.

Table 5.17: Additional list of some of best performing enterprises

S.No.Name of the Enterprise

Location Sector Description of strong case

1 Tanzania Breweries Ltd.

3 Regions of Dar,Mwanza,and Arusha

Manufacturing Useslocallysourcerawmaterials,listedforpublicshares(leadingindividenddistribution),significanttaxrevenueand a modal of investment in R&D and technologytransfertolocalfirm(KiooLtd.)

2 Songas Coast Energy Example of energy development from own Natural resources

3 Vodacom(T)Ltd. All over the country

Communication Largest mobile phone company with massiveinvestment(overUS$142million)andnumberofsubscribers.Cellphonecompanieshavesignificantlyreduced transaction costs emanating frompoorcommunication,andgenerateincome to many retailers country-wide.

4 St Mary’s Schools Ltd

Dar es Salaam Education Expanded fast to other regions and with alotofbranches,increasingsignificantnumber of intakes for all levels of educationladder(nurserytocollege)

5 Simba Plastics Dar es Salaam Manufacturing Localsourceofrawmaterials,withstrong back and forward linkages (buildingmaterials)

6 Athi River Mining Tanga Mining Strongforwardlinkage,producinglimestone for almost all cement manufacturing plants in the country

7 Kunduchi Beach Hotel

Dar es Salaam Tourism Investment that reclaimed over 10 hectorsofland,andamodelofrenovated hotel to a 5 star standards

8 Mining companies Arusha,Mara,Shinyanga and Mwanza

Mining Significanttaxrevenueandnotableimpact on growth of exports and positive balance of payments effects; setting example for others to invest in the sector.

Source:InterviewwithTICofficials.


5.12 Cross-cutting Issues

5.12.1 The Environment

Another measure of impact relates to the effects of investments on the environment. The extent towhich investments have facilitated environmental sustainability is difficult to discern at themoment due to lack of adequate information.

Theobservationabovenotwithstanding,Tanzania’sexperienceshows that there isagrowingawareness on the environmental impact of unplanned and unregulated economic and commercial developments, especially in sensitive coastal and rural areas of the country important toTanzania’sgrowingtourismeconomy(UNCTAD2002).Thecurrentregulationforenvironmentalprotectionrequiresall investors toundertakeEnvironmental ImpactAssessment (EIA)studiesin advance of their construction, and these are a precondition for construction and planningpermits.FDIprojectsguaranteedbytheMultilateralInvestmentGuaranteeAgency(MIGA)mustundertakeEIAstodemonstratethattheydonotdamagetheenvironmentandaresustainable,especiallyformining,oilandnaturalgas,andtourismprojectsinthewildlifeparksandcoastalareas.BothTICandZIPAseektoassessFDIprojectsagainstenvironmentalbenefitandimpactcriteria;andcanrequireEIAswheresignificantcapitalprojectsareinvolved(UNCTADop cit).ThefieldstudiesconductedforthisassignmentrevealedthatallFDIinvestorsconductedEIAsand are making good progress in preserving and conserving the environment. Both domestic and foreign investors are aware of environmental concerns and are taking mitigation measures as appropriate(seeBox5.4).

Various initiatives for ensuring environmental sustainability are being implemented by the government in collaboration with various stakeholders in the country. There are also currently initiatives to extend impact assessments to domestic SMEs once the necessary resources and skills are available. For a start in 2003 the government conducted sensitisation training to local governments on implementation of the national environmental policy. The National Environmental Management Council also continues to implement various environmental conservation and managementprogrammesincludingthepreparationofstrategiesforenvironmentalconservation,education and sensitisation in the country.

Therefore,despiteinadequateinformation,experienceinthefieldshowsthatbothdomesticandforeign investors are aware of environmental concerns and are taking appropriate mitigation measures. The Government should continue enforcing its environmental policy to ensure compliance by all investors – domestic and foreign.


Box 5.4 TIC is fostering environmentally friendly investments in Tanzania

KilomberoSugarCompany–a1998privatisedcompanyunderthreeshareholders:Illovo(55%),ED&FMan(20%)andGovernmentofTanzania(25%) ismakingcommendableprogress inenvironmentalprotection.Thecompany that produces over 430,000 tons of sugar per annum, immediately after being privatised, reducedpollution of Kilombero river water by stopping discharge of raw sewage of molasses into the river. The company refurbishedasewagetreatmentplant,installedmolassesbindingequipmentandsecuredamarketformolasses.Thecompanyalsorecyclesthemudfromthefactorybacktothesugarcanefields.

KahamaMiningCorporation,anFDIthatstartedgoldminingoperationsin1999,providesanothergoodexampleof environmental protection. The company’s policy requires zero discharge that is aimed at minimising its impact ontheair,water,floraandfaunaaroundthemine.Wastesarerecycledatthemineandwaterconserved.Auniquepaste tailing process is being implemented that uses 50% less water than traditional methods. Over 25% of the tailingsproducedaremixedwithwasterockanddirectedundergroundtofillandsealminedareas.Thecompanytrains its workers on environmental issues and has established a nursery to propagate native trees for landscaping andre-vegetationpurposes.Thecompanyhasalsocreatedawildliferefugeformonkeys,mangooses,Nilemonitorlizards and small antelopes. These efforts are exemplary in Tanzania’s quest for sustainable development.

Africa Mashariki Gold Mine, an FDI that started gold mining operations in 2002, has shown concern onenvironmental issues. The company’s use of explosives during blasting causes cracks in nearby houses and airpollution.Asamitigationmeasure,thecompanycompensatedpeoplearoundthemineandmovedthem100metres from the mine. New methods are being practised to contain cyanide and mercy that are used in the mining process.TheNationalEnvironmentalManagementCouncil(NEMC)hasbeeninvitedtoteamupwithmineoffersto conduct periodic environmental audits.

WazoHill, a company that produces cement, stopped the dust that for several years has been polluting theenvironment.

DIMONMorogoroTobaccoProcessors,anFDIthatstartedoperationsin1997processingtobaccofortheexportmarket,providesanotherexamplewhereenvironmentalconservation isofprimeconcern.Thecompany’sfluecuredtobaccouseswoodforcuring.Afterassessment,thecompanyfoundoutthatdeforestationwastakingplaceinsomevillages.Immediateactionwastakentomitigatethisproblembysupportingtreeplanting.Todate,forevery50tonsoftobaccogrown,100treesareplantedunderthesupportofthecompany.Inadditionthecompanysupports Morogoro Prison Tree Planting Project.


5.12.2 The Gender Dimension

Another measure is the extent to which gender is mainstreamed in all investment plans and strategies. Gender refers to the social relationship between men and women that provides women and men with different roles and access and control of resources in society. This in turn results in different needs and opportunities of the two groups.

Tanzania’s experience shows that gender relations in Tanzania are characterised by a patriarchal system that gives men power and ownership over things of value and over decision-making. To theextentthatthisistheobservedphenomenon,genderissuesininvestments,bothdomesticand foreign, requires gender mainstreaming. Gender mainstreaming relates to the process


of integrating gender and equality concerns in all investment policies, programme (project)objectives,activities,andimplementationprocess.Theobjectiveistoensurethat investmentsundertaken in Tanzania take on board concerns and needs of men and women.

This study revealed that there is no discrimination between men and women in terms of employment(Table5.10and5.11).Investorstendtoemploymorewomen(e.g.DIMON,Sunflag,UnileverTea)ormoremen(e.g.SaoHill,TPM)dependingonthenatureandstructureoftheirproductionprocesses.However, the studynoticeda lackof guidelineswith regard togenderissues.TICisurgedtoworkwiththerelevantstakeholderstodevelopgender-specificinvestmentguidelines that will take into consideration the following processes:

Empowering all employees and especially women to fully and effectively participate in ♦investmentdecisions, so that thewhole investment systembecomes trulyparticipatoryandsustainable,

Understanding the needs and concerns of men and women and plan for investment ♦development accordingly. The needs of men and women differ as a result of the different rolesthatthesocietyhasplaceduponthem,and

Promoting women in enterprise leadership and management in an attempt to achieve ♦gender equality.

Addressing gender in all investment aspects provides an opportunity to enhance overall investment performance by:

Improving investment productivity, accountability and customer service by delivering♦productsandservicesaccordingtotheneedsofmaleandfemaleclients,

Making investment policy and strategy more inclusive and representative of the client ♦base,halfofwhichisfemale,

Increasing individual motivation by understanding why differentials exist in career ♦advancementbetweenmenandwomen,and

Increasing effectiveness of employees by providing an equitable working environment.♦

Within this framework, it is important to note thatTanzania hasmade significant progress infostering gender equality. In particular, Tanzania is signatory to a number of declarationsconcerninggenderequality,includingthefollowing:

Ratified the convention on elimination of all forms of discrimination against women♦(CEDAW),


SignatorytotheBeijingPlatformforAction,♦

SignatorytotheSADCdeclarationofgenderandequality,and♦

Unveiling the “Women and Gender Development Policy” that stresses enhancing women’s ♦legalrights,economicandpoliticalempowermentofwomen,andimprovingwomenaccesstoeducation,trainingandemployment.

Inconclusion,itisimportantthatgenderbemainstreamedinallcomponentsofbothlocalandforeign investment. Gender mainstreaming is a strategy and a method for achieving equality objectives. Essentially it entails:

Identifyingthedifferentconditionsandrequirementsformenandwomen,♦

Examiningeveryquestionwhichconcernsindividualsfromagenderperspective,and♦

Analysing the expected consequences of changes for women and men respectively.♦

Toachievetheaboveends,TanzaniaInvestmentCentremayhavetoestablishagenderunitatits headquarters to provide gender guidance to local and foreign investors.

5.12.3 HIV/AIDSAnother impact related to the spread of HIV/AIDS due in part to the indirect effects associated with the investment – especially where market towns have developed to supply socio-economic services.InTanzania,theeffectofHIV/AIDSisincreasinglybecomingabigproblemduetohighdeath rates of the skilled and educated manpower. HIV infection in Tanzania already ranks at the top of the country’s health problems. Estimates show that by 2004 the country had over 1.5 million productive adults infected with deadly virus. In urban centres the rate of infection exceeds 24percent,andupto10percentinruralareas(wecouldgetupdatesfromtherecentDHSandTHIS).Atthisrate,theimpactofHIV/AIDSepidemicisdevastating.Itstrikesadultsintheirprimeyears, includingtheeliteandprofessionals,whichimpliesthat itkillsworkersofmuchgreaterthan average productivity.

Tanzania’sexperienceobtainedfromfieldsurveyduringthisstudyshowsthatover67percentof the investors regard HIV/AIDS as a major labour-force problem. Loss of experienced workers due to the HIV/AIDS epidemic implies replacing them with younger less experienced workers. This has resulted in decline in labour productivity and at times reduced output. According to Cuddington (1993), unlessadecisiveaction is taken to combat the spreadof thepandemic,Tanzania’s GDP in 2010 could be reduced by 15-25 percent compared with a no-HIV/AIDS scenario. These estimates do not augur well for the country’s quest for higher investments to enhance growth and development of the country.

The conclusion we make is that HIV/AIDS is becoming a serious labour-force problem that is


likely to affect productivity of investments as experienced workers die and have to be replaced with younger less experienced workers. Therefore, Tanzania needs to take more decisiveaction to combat the spread of HIV/AIDS. The National AIDS Control Programme has to be intensifiedandactivitiesspreadinbothurbanandruralareas.InvestorshavetodevelopHIV/AIDS workforce guidelines and conduct sensitisation seminars in an effort to reduce the spread of the pandemic.

5.12.4 Regional Integration Initiatives

Regional integration is expected to facilitate formation of a larger market through trade liberalisation and harmonisation of policies. The increase in the scale of business operation can also enlarge profitableinvestmentopportunitiesandattractmoreforeigninvestorsintotheregion.However,realising an effective and stable regional integration is challenging. The main challenges are related tosocio-political instability, inadequateadherence to the ruleof lawandcumbersomeandinefficientlegislation–allofwhichincreaseinvestmentuncertaintyandlimitprivateinitiative.Inaddition,investmentcodeshavetobeharmonisedwithinaframeworkwherememberstatesbelong to several other regional groupings.

AccordingtoKwekaandMboya(2004),regionalintegrationhasincreasedintra-regionaltradebuthasnotledtosignificantintra-regionalFDIinTanzania.However,severalprocessesareatvariousstagestopromoteintra-regionalflowofinvestmentatregionalandextra-regionallevel.Forinstance,theEAChasprovidedforcooperationanddevelopmentofcapitalmarketsofthethreemember countries with the objective that capital market can be one of the important strategies for achieving higher rates of investment and for attracting FDI. Another important investment provision under the EAC is the model investment code that is being developed for the EAC as described inBox5.5.InSADC,thebodyurgesthememberstatestoimplementmacroeconomicpoliciesthatencouragesoundinvestmentflows,enhancesavings,andstimulatetechnologytransferintheregion.TheRegionalInvestmentFacilitationForum(RIFF)–whichwasformerlyknownasCross-BorderInitiativesisaprogramme(establishedin1999)forstimulatingcross-bordertradeandinvestmentamongstcountriesoftheEastern,CentralandSouthernAfricanregions,withtheobjectiveofacceleratingtheprocessoftradeliberalizationandcurbingfoodinsecurity.However,the program does no longer exist due to lack of resources for its proper functioning.

At themultilateral level, thetraditional focusof themultilateral tradingsystem(MTS)ontradeissueshasalteredtoincludetraderelatedinvestmentmeasures(TRIMs),whichareimportantfor LDCs to increase inward FDI expected to augment their trade competitiveness in the global setting. The new EU-ACP partnership under the familiar Cotonou Agreement entails much longer-term cooperation between the ACP and EU countries through the required Economic Partnership Agreement(EPA).TheEPAshavebothtradeandinvestmentprovisionsinadditiontodevelopmentassistance,whichareyettobeforthcomingforTanzaniaasithasnotyetconcludedanyEPA.


Since member countries are at different stages of development, development of regionalinvestment policy should be reassuring creation of a “win-win” situation (attracting greaterinvestmentsandfosteringbeneficialintegration)forallmembers.Exampleofsuchinitiativesinthe case of the EAC include creation of several instruments to promote private investment and increase the pace of regional integration including:

Acommoncompetitionpolicyandlawtoprotectandpromotefreetradeandfaircompetition,and permit harmonisation of trade and investment laws and regulations throughout the region;

TheEastAfricanBusinessCouncil,aregionalbodyforallofthenationalprivatesectorapexorganisations in thethreememberstates, topromotecross-border tradeand investmentand to influencepoliciesat thenational level, toensure that theyarebusiness friendly;and

TheEastAfricanDevelopmentBank,whichisbeingrestructuredtostrengthenitsroleasaresourcemobilisationorganisation,especiallyforinvestmentprojects,byallowingbroaderpurchasing of shares within East Africa and enhancing its capacity to issue international bonds.

Generally,Tanzania stands to gain from theEAC integration if it becomesbetter prepared –especially in the area of human resource development and making further institutional reforms to make the economic environment more competitive.

5.13 Policy ImplicationsThere is a need to develop further policies and incentives to encourage investments in the domestic production of complementary goods and services with a view to developing a more integrated economy. Policies should be reviewed to also encourage more exports of manufactured goods; especially those that Tanzania has a comparative advantage like garments and processed agro-products.Thefirstsetofmeasurestoimprovethecountry’sbalanceofpaymentsrequiresgettingtradepolicyright.Thismeanscreatingamorefavourableenvironmentforinvestors(bothdomesticandforeign);promotingthecontributionsofcatalyticexport-orientedentrepreneursandinvestors; and creating those linkages necessary tomaximise the benefits of export-orientedinvestments.

The Government can encourage networking and linkages by improving the capabilities of local suppliersthroughsupply-sidepoliciessuchascost-sharinggrants,establishmentof“incubation”grantsandloanstoSmallandMediumEnterprises(SMEs).TheassistanceisessentialtoenableSMEs purchase equipment and acquire training necessary to meet requirements for foreign and domesticinvestors.Inaddition,assistancetoSMEsisneededtoupgradelocaltechnology.


Encouraging domestic investment should be accompanied by promotion of domestic savings throughimprovedfinancialintermediationthatshouldbeprogressivelydeepenedanddiversifiedto develop flexiblemoney and capitalmarkets. Equally important is the need to raise publicsavingsbyreducingbudgetdeficits,raisingtaxrevenueandcontrollingpublicexpenditure.

Although it was noted that as domestic and foreign investment increases, tax revenue alsoshowsatendencytorise,itwasalsoobservedthattheprevalenceoftaxexemptionsthroughthe investment “Certificate of Incentives” has eroded revenue sources, suggesting that thegovernment should revisit the current regime of investment incentives with a view to removing excessive concessions and minimizing abuse.

Investments are generating employment as well as developing skills and technology transfer. Policies to enhance further and more deliberately investments in human skill development and technologytransferareimportant.Forinstance,matchinggrantsfortrainingcouldbeconsidered,technological networking with local R&D institutions could be encouraged and subcontracting arrangements between FDI and domestic investors could be encouraged.

FDIhasworkedwellwithsomecommunitiesbutthereareFDIs,whichhavecomeintoconflictswith localcommunities.For instance, inminingconflictswithsmallminers, localcommunitiesand other stakeholders have brought an outcry leading to the formation of a special Committee investigate thematter.TheCommitteehas revealed that,amongother things,someof thesecomplaints arise from shortcomings in the implementation of the mining policy while other complaints arise from poor communication of provisions in the policy and code governing mining. This suggests that greater effort is needed to improve the implementation of policies.

It is within this framework that TIC’s resolve to establish zonal centres should be commended. The centres should be expected to become the springboard for information and facilitation support for small and micro entrepreneurs.

ForInvestmentPolicytobemoreeffective(inenhancingfurthergrowthandimpactofinvestment),policy reviewsshould takeexplicitconsiderationofsuchcrosscutting issuesasenvironment,gender,HIV-AIDSandregionalintegrationinitiatives.Inparticular,itisimportantthatgenderbemainstreamed in all components of both local and foreign investment as a strategy for ensuring notonlyhighereconomicgrowth,butalsoequalityobjectiveofdevelopmentpolicy.


Box 5.5: The EAC Model of investment Code (2002)

TheEACModelofinvestmentCode-2002(hereafter“thecode”)isinadvancedstageofpreparationaftertheconsultant(seeRuhindi,F2002)completedthedraftingandworkshoptodiscussitin2002.Thecodeisnowgoingthroughtheusualprocessofadoptionandratificationwithintheregionalandnationalbureaucracy.Thecodeiscomposedoffiveparts.Thefirstisthepreliminaryparthighlightingonthetitle,interpretationandscopeofthecode.Thesecondpartismoresubstantivesectionofthecode,anditdealswiththerightstoestablishandbenefitanenterprisefromthecodeandotheroperationalinvestmentincentivesprocedures.Partthreedescribesthe rationale and objectives for establishing a regional investment promotion agency. Part four covers the establishment,operationandincentivesforthespecialeconomiczones.Finally,partfivecontainsmiscellaneousclauses/issues and regulation of the code. From a region trying to hasten its integration process for growth and povertyreduction,thecodeisaverywelcomeidea,althoughitscontentdoesnotdiffersubstantivelywiththatofTanzania/(Tanzaniainvestmentpolicy).

The code outlines some key benefits of establishing the investment code/agency as being: improving theinvestment climate in the region by advocating policies and regulations that are favourable to foreign investment; harmonizingnationalinvestmentpolicies/agenciesinordertoachievetheregionaldevelopmentgoals;andfinally,the code is envisaged to provide the international best practices in investment promotion and practices that will enhanceincreasedflowandimpactofforeigninvestmentintheregion.Establishmentoftheregionalinvestmentagency and code do not replace but rather complements the respective national code/agency. It should also be notedthattheinvestmentcodeisintendedtobealegalinstrument,ratheraguidingdocumentforaparticularmemberstatethat,inturn,maywanttoincorporateintotheirnationalinvestmentpoliciesandlaws.Intheinterimbefore harmonisation of investment policies and lawsmade, investors are obliged to access their respectiveincentive packages from national investment agencies.

Thecodeprovidesfornationaltreatmentandnon-discrimination,andavailthefacilitativeservicesofinvestmentagencyofapartnerstatetoanyeligibleinvestors.Eligibleinvestorsfortheinvestmentincentivecertificatesareonly thosemeeting theminimumthreshold;and those intending to invest in theallowableareas /sectors (seesection5(5)andsection8ofthecode.Theinvestmentlawsoftherespectivepartnerstatescovertheminimumthresholds for portfolio investment for foreign and local investment.

Furthermore, the code includes several investment provisions relating to eligibility and granting of incentivecertificates,incorporationandregistrationofinvestment,transferandretentionoffunds,compensationincaseofexpropriation and settlement of disputes etc. The investment allowed to employ only four or less foreigners but can employ more if deemed necessary and approved by the immigration department. Other incentives for investors includeauniformcorporation taxof30%,exemptionon importduty forallmachineryandrawmaterials,dutydrawbackforallexporters,100%deductionallowanceontraining,researchandmineralexplorationexpendituresandlosscarriedforwardtobeoffsetagainstfuturetaxableprofits.Thecodealsoprovidesforestablishmentof(andconditionsthereof)specialeconomiczonesincludingexportprocessingzones,freetradezones,technologyparksandtourismcentresandvirtualzones.Thespecialeconomiczonesaregivenspecificfiscalandnon-fiscalincentivesaccordingtospecificinvestmentactivities.TheseareshowninAnnexIofthecode.

Source:AdaptedfromKwekaandMboya(2004)


6.0 ConClusions and reCommendaTions

6.1 Key Conclusions

TIC is a truly “one stop” centre that can greatly benefit foreign as well as domesticinvestors.

TheoverarchinggoalofTanzaniaInvestmentCentre(TIC)istofacilitateandpromoteinvestmentinTanzania–thusfacilitatingeconomicgrowthandpovertyalleviation.Toalargeextent,findingsof this study show that TIC is making commendable progress. Stakeholders interviewed applaud TIC as a truly “one-stop” centre for investment facilitation and promotion. TIC, apart frompromoting investment, is also offering investor-friendly post-investment services.Despite thisfinding,thereisageneralfeelingamongmanydomesticentrepreneursthatTIC,andinparticularinvestmentpromotionserviceshavenotbeenextendedequallytothelocal(comparedtoforeign)entrepreneurs. While this is often pointed out as criticism against TIC and the Government in general,itisapublicperceptionthatisbasedonmisinformedopinion.TICmandateandvariouspolicy documents contain provisions for promoting both types of investment. In fact the domestic entrepreneursfacesofterconditions(e.g.lowercapitalthreshold)foraccessingTICinvestmentincentives.Clearly, this perception points to the need for public awareness campaign on theprovisions and role of TIC for domestic as well as foreign investors.

Nevertheless,oneoftheGovernment’sobjectivesinreviewingimplementationofinvestmentpolicyistoincreasesupportfordomesticinvestment(especiallySMEs).Thatis,donebyformulatingdeliberatepolicies(orspecialpackage)forpromotingSMEsandbyreviewingthefiscalpoliciesthat are currently unfavourable to the growth of domestic investors. An investment policy could also make explicit to the public its aim to recognise investors who have grown to the threshold requiringTICcertificateofincentives.Forthatreason,extendingTICservicesnearertothelocalareas(suchastheestablishedTICzonaloffices) is imperative. Inaddition, theachievementsmade by TIC so far should motivate the government and other stakeholders to step up resources to deliver even more and effectively.

Achievements made in attracting investments are encouraging

Between1995and2007TIC registeredover 2,076 investments, ofwhich55.3percentwereforeign.Duringthisperiod,thecountryreceivedhighFDIinflowsthatexceededUS$2.4billioncomparedwithonlyUS$90millionduringtheprecedingsixyears.ThehigherresourcesreversedthedecliningtrendinGrossFixedCapitalFormation(GFCF),whichrosefrom12percentofGDPin1997 tonearly16percent in2003.Sectors thatbenefitedmost from the increased inflowsare:manufacturing,mining,servicesandtourism.Agriculturereceivedlessthan10percentofthe investments – in part due to unfavourable infrastructure that continues to retard this sector. However,theexistingFDI intheagriculturesectorhasmadeasignificanttransformationboth


intermsoftheperformanceoftheparticularcommodity/subsector(suchasFloriculture)andineconomic impact of the neighbouring community.

…but more investment is required as well as increased productivity

Is the current level of investment adequate in realising Tanzania’s Development Vision 2025 goal of reducing poverty and promoting sustained development through GDP growth of over 8 percent? Thestudy,usinghistoricaldata,notesainsignificantrelationshipbetweeninvestmentandgrowth.The weak link is associated with low productivity of investment and inadequate complementary factors particularly lack of skilled human resources and poor infrastructure. Studies from other countriessuchasChina,Japan,SouthKoreaandTaiwanreportthatinvestmentsaveragingover20 percent of GDP have been pivotal in their country’s fast economic growth. If Tanzania is to achieveitsdevelopmentgoals,recent(2000-2003)investmenttoGDPratioof17.6percenthasto be increased to between 20-25 percent to achieve a growth rate of 8 percent or more. This entailsmakingfurthereconomy-wideimprovements(e.g.inpolicyandinstitutionaleffectiveness)thatwillattractfurtherinvestmentsbothlocalandforeign.Forinstance,furtherliberalisationofforeign account may raise funds for investors to invest outside the country.

Robustcriteriaarerequiredtoevaluateimpactofinvestment

However, an important issue is not only the achievements in attracting a desirable level ofinvestment, but whether such investment unleashes the desirable impact. In evaluating theimpactofinvestmentontheeconomy,differentcriteriashouldbeemployedsoastoknowthecostsandbenefitsof investment. Inaddition to theconventionalcriteriasuchasemploymentandtaxrevenuegeneration,itisimportanttoemphasisethattheoverallobjectiveofpromotinginvestment is to improve productivity and competitiveness of the Tanzanian economy. To achieve this,oneoftheimportantcriteriaforevaluatingtheimpactofforeigninvestmentistheextentoflinkagesgeneratedtotherestoftheeconomy,andtothedomesticinvestmentsinparticular.Thereporthashighlightedthecurrentstatus,gapsandareasforimprovementintherangeofcriteria’sused and applied some to analyse the impact of investment in Tanzania. The study proposes use ofsocialcostbenefitratherthanorinadditiontothestatutorycriteriacurrentlybeingusedbyTICin evaluating the impact of investment.

Investments are having desirable impact …Generally, investment policies being implemented in the country are laying solid foundationsnotonlyforattractinghigher levelsof foreignanddomestic investment,butalsoforsustainedgrowthinthefuture.Domesticsavingsarerising,jobsarebeingcreatedandnewskillsarebeinglearnt.Thereisalsoevidenceontransferoftechnologyandinnovation,albeitslowly.Investmentsare also fostering entrepreneurial growth through forward andbackward linkages, revampingexports and contributing towards community development and government tax revenue. Together withthesolidachievementsbeingmadeinfiscalandmonetarymanagement,investmentsarecontributingtowards(atleast1%of)thecountry’seconomicgrowth-whichispoisedtogrowby


over 6 percent per annum in the foreseeable future. An impressive impact has been apparent in certainareasandweakinothers.Forinstance,whilemanyoftheFDIsandprivatisedfirmshavegeneratedsignificanttaxrevenuestothegovernmentandmodestemploymentopportunities,buttheimpactonaddingvalue,technologytransfer(includingR&D)andenvironmentalconservationarerelativelyweak.MoreoverdespitethesignificantinflowofFDIandimprovementinbusinessoperatingenvironment,themanufacturingsectorisstillstrugglingtoimproveproductivity.

6.2 Recommendations

In order to amplify both the magnitude and impact of investment in Tanzania, a number ofimprovements are recommended.

MakefurtherimprovementintheinvestmentclimateImprove taxation system by eliminating multiplicity of taxes and reducing investor’s transaction costs and cost of doing business. Review business licensing to eliminate unnecessary licenses foronelineofbusiness.Reviewlabourlawstoattractandretainskilledlabour,bothimportedand local. Make further efforts to improve access to long-tem credit. The government should emphasise continuous improvement of physical infrastructure. Investment productivity is higher where a country has skilled workforce and well-developed physical infrastructure. Improve availabilityandaccesstovitalutilities,especiallywaterandelectricity.Improvefurthertheroads,harbours,transportandcommunication.

Foster macroeconomic and political stabilityMacroeconomicandpoliticalstabilityisoneofthemosteffectivefactorsinattractingFDI,thus,a need to emphasise the government’s commitment to maintaining favourable level of budget deficitandmoneysupplyandensuringsocio-politicalharmony.Makefurther improvements infiscalandmonetarymanagementinordertomaintainlowlevelofinflation.Hastenreformsthatwillinstilconfidenceininvestorsthatcontractswillbeenforcedandpropertyrightshonoured,andprioritise good governance by reducing corruption and improving the quality of bureaucracy at all levels of government.

TargetPromotionofInvestmentinvalue-addingandkeysectorsforgrowthOne major way in which to realise full impact of investment on fastening growth is to stimulate linkages between different sectors of the economy by ensuring existence of backward and forward stimuli of the new investment to the rest of the economy. Experience with the promotion ofminingsector reveal that targetingsectors ispossibleandcanbeeffective.Therefore, thegovernmentshouldidentifyandtargetidentifiedsectorswhoselinkageandvalueaddingpotentialis substantial in investment promotion activities.

PromoteexcellingdomesticinvestmentDomesticinvestmentformsabout70%ofthetotalinvestmentinTanzania,thusbearingnotable


impactontheeconomy.However,thisinvestmentisyettobeharnessedinastrategicmanner.First,themultitudeofdomesticinvestmentissubsistenceSMEthatcanhardlybetransformedintogrowthpillars.Second,therelativelylargerdomesticinvestmentshavelowlevelofproductivitydue tostructuralweaknessesof theeconomyand low levelof technologicalcapacity.Finally,the synergybetween largeand small investments, or foreignand local is toomodest for thelatertobenefit.Nevertheless,theimpactofeconomicreformshasproducedafewsuccessfuldomestic enterprises. These can be encouraged to excel as demonstration cases of success to be emulated by others.

Undertaketargetedpromotionofinvestmentsinternallyandabroad

The targeting should be based on thorough research. Market research-driven investment promotiontendstobemoreefficientincuttingcostsofpromotionandachievingmoredesirableinvestment outcomes. Makeregularpost-approvalfollow-upofinvestors

This will help in understanding whether the actual investments being undertaken in the country are in linewiththoseapprovedand/orbenefitedfromTICincentive(certificate). Inthisway, itwillbeconvenienttoassessthebeneficialimpactinvestorsbringtothenationasawholeandtoascertain whether or not the are in accordance with plans and objectives of TIC.

Improveinvestmentafter-careservicesthroughTICzonaloffices

To date TIC has been performing a well job in the area of investment after care services through itsheadquartersinDaresSalaam.Theseafter-careservicesarebeneficialbothtotheinvestorand TIC in realising customer-oriented investment promotion and support. It is urged that the servicesalsobeprovidedthroughTICzonalofficesinordertocutcostsandincreaseefficiencyin service provision. ImproveHumancapabilitiesandencouragetechnologytransfer

This will entail making large improvements in all levels of the Tanzanian education system from primarytohigherlearninginstitutions.Knewskillsarerequired,especiallythoseneededtotakeadvantageofglobalisation,comprehendcomplextechnicalknow-how,andfosterbetterattitudestowards work.

Institute Presidential Investor Awards

Someinvestmentsmakelargecontributionstothesocio-economicdevelopmentofthecountry,notonlybycreatingmuch-neededjobsbutalsobyhavingnetresourceinflowswhilefosteringhigh linkages with the rest of the economy. It is urged that outstanding investment performers be publicly recognised through bi-annual Presidential Awards managed by TIC.


Strengthenbalancebetweensocialandprivategoalsofinvestors

This is essential because the public and private interests can diverse and the society may suffer. One way of balancing is to encourage public-private partnership where each has a vital role to play in improving the quality of investment and fostering faster socio-economic development. For instance,itisimperativetoensurethatallinvestorsaddressenvironmentalconcerns.Sustainabledevelopment requires concerted efforts directed at protecting the environment. Thus ensure that environmental regulations are met and all investors adhere to acceptable standards.


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appendiCes

Appendix A2.1: FDI by Country/Region of Origin, 1998 – 2004 (US$ Mill.)Notes:1998representFDIstock,andthesubsequentyearsareflows.Percentagetotaldoesnotaddto100%becauseofrounding-offerrorsandthefactthatourcalculationomittedcountrieswithinsignificantvalue.Empty

cellsshownoFDIreported,whilezeroimpliesverysmallvalue.Source:CollatedfromTanzaniaInvestmentReportsanddatabase,2001and2005.


Flow of FDI by Source Country for Tanzania, 1999 – 2005

Values in USDMillion

Country 1999 2000 2001 2002 2003 2004 2005p

Australia 48.5 6.7 3.7 1.5 2.6 0.1 0.1

Austria 0.0 -0.1 0.4 2.1 10.4 5.8 1.8

Bahamas 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Bangledesh 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Barbados 0.3 0.0 0.0 0.0 0.0 0.0 0.0

Belgium 2.5 0.0 -0.1 0.1 0.5 0.0 0.0

Bermuda 5.2 0.0 61.8 0.2 0.7 0.5 0.3

Bosnia 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Botswana 0.0 0.0 0.0 2.0 0.8 2.7 0.0

British Indian Ocean Territory

0.0 0.0 0.0 0.0 4.5 16.0 15.7

British Virgin Island 0.0 0.0 0.0 0.0 0.4 14.8 19.8

Croatia 0.0 0.0 0.1 0.1 0.0 0.0 0.0

Canada 80.9 0.0 21.5 230.2 59.0 41.0 54.5

Cayman Islands 0.0 0.0 0.0 0.0 44.3 14.2 3.3

Channel Islands 0.0 0.0 0.0 2.5 0.1 0.2 0.2

China 0.0 2.6 1.9 11.4 10.7 10.0 7.9

Cote D’Ivoire 1.3 0.0 0.1 0.0 0.2 0.2 0.0

Cyprus 0.0 0.1 0.5 0.0 0.0 0.0 0.0

Denmark 3.9 0.5 0.2 0.0 11.6 1.4 0.4

Dominica 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EU 0.0 0.0 2.4 0.2 0.3 0.2 0.4

Egypt 1.4 0.0 0.0 0.0 0.0 6.1 0.0

Ethiopia 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Finland 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Foreign-NotSpecified 4.0 3.5 0.6 0.3 -0.3 25.1 79.3

France 12.7 3.0 2.2 0.3 2.3 -0.5 0.1


Country 1999 2000 2001 2002 2003 2004 2005p

Ghana 134.2 0.0 1.5 0.8 2.7 0.0 0.0

Germany 8.5 15.1 1.2 2.8 4.5 5.3 19.3

Gibraltar 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Greece 0.4 0.0 0.0 -0.2 0.4 0.1 0.1

Guinea 0.2 0.0 0.0 0.0 0.0 0.0 0.0

Hong Kong 0.1 0.0 0.0 0.0 0.0 0.0 0.0

IFC 1.3 0.0 1.9 -0.4 0.2 0.0 0.0

India 0.6 1.5 1.9 0.0 0.2 6.7 5.3

Indonesia 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Iran 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Ireland 0.1 0.0 0.0 0.0 0.0 0.0 0.0

Isle of Man 0.1 3.2 1.6 0.0 0.0 0.0 0.0

Israel 0.0 0.1 0.6 0.0 0.0 0.0 0.0

Italy 4.1 4.7 2.3 5.7 9.1 9.9 5.4

Japan 0.4 16.8 0.0 0.6 2.6 1.5 3.8

Kenya 20.1 6.0 13.1 6.7 18.5 11.8 10.5

Korea 0.0 0.0 -0.1 0.0 0.0 0.5 0.0

Kuwait 0.0 0.0 0.0 0.0 4.3 0.6 1.3

Lebanon 6.4 0.0 1.0 0.0 0.0 0.0 0.0

Libya 0.0 0.0 0.0 0.0 0.0 0.0 0.5

Liechtenstein 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Luxembourg 0.2 -0.1 2.3 0.0 1.1 0.7 0.1

Macedonia 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Malawi 1.3 0.0 0.0 0.0 0.0 0.0 0.0

Malaysia 3.7 0.1 3.9 -0.2 -0.1 0.5 -0.2

Mauritius 16.5 4.6 3.7 0.8 18.2 3.9 5.8

Nertherlands Antilles 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Netherlands 4.6 1.6 -8.1 1.4 0.8 8.2 0.8

Nigeria 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Norway 5.5 0.0 4.7 3.0 1.2 0.5 0.4


Country 1999 2000 2001 2002 2003 2004 2005p

Oman 0.0 0.0 1.3 0.0 0.5 0.0 0.0

PTA Bank 0.0 0.0 0.0 0.0 10.4 0.0 0.0

Pakistan 3.1 0.0 0.1 0.1 0.2 0.4 0.1

Palestine 0.0 0.0 0.0 0.0 0.0 0.0 0.4

Panama -1.9 -0.1 0.4 1.9 0.1 0.0 0.0

Quatar 0.1 0.0 0.0 0.0 0.0 0.0 0.0

Russia 0.6 -0.1 -0.1 -0.1 0.4 0.0 0.0

Rwanda 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Saudi Arabia 6.1 0.0 0.0 0.0 0.1 0.1 0.0

Sierra Leone 0.1 0.0 0.0 0.0 0.0 0.0 0.0

Singapore 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Somalia 0.0 0.0 0.0 0.0 0.0 0.0 0.0

South Africa 37.9 95.3 141.8 34.9 7.1 91.9 100.4

Spain 0.0 0.0 0.0 6.3 7.3 8.0 10.3

Sri Lanka 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Sudan 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Swaziland 8.0 1.2 2.8 0.0 0.0 0.0 0.0

Sweden 1.8 3.0 5.4 0.8 1.6 1.5 0.0

Switzerland 9.0 29.8 19.5 1.9 7.9 1.6 5.3

Taiwan 0.0 0.0 1.4 0.0 0.0 0.0 0.0

Thailand 0.0 0.0 0.0 0.0 0.0 0.0 0.0

USA 23.5 27.7 32.2 29.9 2.8 1.0 5.0

Uganda 0.0 0.3 0.0 0.2 0.0 0.6 0.5

United Arab Emirate 0.5 2.2 15.1 2.1 14.0 0.7 0.7

United Kingdom 35.0 32.5 42.9 38.3 47.0 36.3 86.8

VirginIslands(U.S) 0.1 0.0 0.0 0.0 0.0 0.0 0.0

Yemen 0.0 0.2 0.6 0.0 0.0 0.1 0.0

Zambia 0.0 0.0 0.0 0.3 0.0 0.0 0.0

Zimbabwe 0.0 0.0 -0.1 0.0 0.0 0.5 0.0

Total 493.0 261.9 390.0 388.6 311.2 330.8 446.6


Appendix A2.2: Inward Foreign Direct Investment and Domestic Capital Formation: the Theory

Impact on Domestic Investment

Mechanism Source(s)

(+)IncreaseProfitabilitybuildinfrastructure(roads,o telecommunicationsetc.)

Cardoso & Dornbusch 1988

supply scarce inputso Helleiner 1988

demandcreation(localinputsuppliers,o labourincome,complements

Cardoso & Dornbusch 1988

positiveexternalities(training,managerialo skills,technology,accesstooverseasmarkets,marketinformation)

Blomstrom 1989

addition tax revenue invested in public o goods

Cordoso & Dornbusch 1988

(-)ReduceProfitabilityincrease wages and/or cost of other locally o supplied inputs

Lall & Streeten 1977

worsen terms of tradeo BhagwatiBrecher,Findlay1981,1983

stifledomesticcompetitiono Helleiner 1988

negativeexternalities(tariff-jumpingFDI,o corruption)

Brecher & Diaz-Alejandro 1977

(0)NewFinancingnewprojectsfinancedbyFDIhavenoo impact on existing domestic

Fry 1993

(-)ReplacementFinancing

privatization and/or buyouts replace o domestic with foreign

Fry 1993

Source: Adopted from Phillips et al.2000:23(Table2.1),fromwhichdetailsofthecited bibliography can be obtained.


Appendix A2.3: Inward Foreign Director Investment and Domestic Capital Formation: Empirical Evidence (1975 – 2000) 1

Date Author(s) Data Methodology Results

2000 Phillips et al 59 Developing

Countries(withcasestudiesofMauritius,UgandaandKenya)

Panel econometrics and 3 Case studies

+

1997 K.K. Mbekeani South AfricaMacro

2SLSError Corr. Model

+

1997 Brian AitkenAnn Harrison

VenezuelaFirm levelData

Time SeriesPanel & FixedEffects

+JointVenture- No localpartner

1997 Maxwell Fry 46 countrypanel

Time SeriesStructure Model3SLS

+

1993 Louis T. Wells East Asia Case Studies +

1993 Wells & Warren Indonesia Case Study +

1993/94 Maxwell Fry Macro16 countries1966-88

Time SeriesStructural Model3 SLS

+/-dependson policiesin place2

1992 Katikati Ghana Time SeriesGranger Causality

-

1992 Faroque &Bougrine

Morocco Structural Model Time Series

-

1989 Rhee & Belot Asia & AfricaLatin America

11 countrycase studies

+

1986 Encarnation &Wells

Asia Case Studies +/-dependson policiesin place2

1977 Matos Venezuela Case Study -

Notes:(1)Foragoodsurveyofotherstudiesandpriorto1975,see(Grieco,1986).Source: Adopted from Phillips et al.2000:23(Table2.2),fromwhichdetailsofthecitedbibliographycan

be obtained.

tic 2008. report on the study of growth and impact of investment in tanzania

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