PART ONEHow Can Revenues Derived from Domestic Extractive industry Oil and Gas Production be productively Utilized to Eradicate Poverty in East Africa. Conceptual Research Paper. By Eng.Gilay Shamika, (gcshamika@yahoo.com ) An Expert in Extractive Industry

AbstractThis research paper examines how revenues derived from domestic extractive industry oil and gas production can be productively utilized to eradicate poverty in East Africa. The paper describes the obstacles to using extractive industries as a vehicle for poverty reduction and sustainable development, and poses solutions based on two schools of thoughts which entails the two stories of extractive industry; mineral resources are a potentially great source of wealth for poor countries, and the same can be a curse to the developing countries - for policy makers to be aware with both stories and find a way to minimize the second story of negativities.The researcher has developed new conceptual framework showing relationship between economic growth and revenues generations. The concept cemented that revenue re-investment is a denominator of sustainable economic growth and not the function of revenues boom from extractive industry or any other economic sector. Other argument of Soft and physical Infrastructure has been introduced. The article concluded that; the revenues re-investment is the denominator of the sustainable economic growth when guided with comprehensive and transparent soft infrastructures.The research tells all about two stories of extractive industry; positivity and negativity side of it. There is a great danger of telling single story of positivity only, especially when the negativity surfaces the authorities use more efforts to explain and contain riots from the citizens. Let the truth be told and the citizen will be used to it when negativity emerges from extractive industry.

1.0 IntroductionThe expanded trade and investment among the East African Community (EAC) Partner States has increased economic growth and development prospects in the region, with regional GDP increasing from US$42.4 billion in 2006 to 74.5 billion in 2009 and reached $ 80 billion in 2012. Kenyas economy remains relatively large at about 35.7% compared to that of the other EAC partner states. The extractive industry in East Africa has experienced a boom that coincides with favorable enabling investments environment. The overall inflow of FDI to EAC increased from a total of US $1,323 million in 2006 to US $1,714 million in 2009. For the period from 1998 to 2012, the 7large scale gold extractive industry entities in Tanzania paid to the Government a total of TZS 2.86trillion (royalty amounting to TZS484.69billion and taxes amounting to TZS 2.38trillion). This is about 15.81% of total revenue generated (TZS 18.09 trillion or USD 12.06billion) by the entities during that period. Huge discoveries of offshore gas have been made in recent years in Tanzania, with estimated reserves currently at 53.2 trillion cubic feet (tcf) and rising, valued at USD 430 billion (TPDC Report, 2013) and expect to see an increase in revenue of up to $ 3billion a year.The ongoing laying out of Mtwara Dar gas pipe in Tanzania, will result in providing gas to produce electricity capable of generating over 2,000 megawatts of electricity and expect to reduce the cost of producing thermal electricity from the current USD 0.34 cents to USD 0.12 cents per megawatt. In Kenya, the discoveries of Oil by Tullow in Lokichar basin, promised to have a 600million barrels of oil reserves. Kenya is planning to build the pipeline like Tanzania, from Lokichar basin to a terminal on the coast Lamu. The Tullow operations have contributed KES 4.1billion in local content expenditure in 2013 and KES 1.9 Billion government payments.Uganda oil discoveries show the good sign of the government and the community to benefit. Ugandas energy ministry and Tullow Oil both estimates that the current reserves alone could generate over $ 2billion in annual revenue for more than 20years.The contract to build oil refinery has already endorsed which means East Africa has now entered into a new history of oil and gas producer.These discoveries have increased revenues in East African Partner states, the current situation of the region economically also shows the improvement of the economy. The GDP of total 5 countries grew from USD 30billion in 2002 to USD 75billion in 2009 with an average of GDP growth rate of 7 per cent and single digit of inflation rate of 5 per cent. The poverty continues to drop from 24.5 in 2009/10 to 22.2% in 2012/13 for Uganda, Kenya population below poverty line in rural is 49.10 and urban 33.7 while Tanzania rural 33.3 and urban 15.5 in 2013.Rwanda and Burundi are also showing improvements in explorations going on.

1.1 Poverty The definition of poverty according to the World Bank, considers poverty to be a multi-dimensional phenomenon, it is more than inadequate income or even low human development as perceived by many. Poverty comprises as well: material deprivation, low levels of education and health, vulnerability and exposure to risk, voicelessness and powerlessness.The benchmark of measuring poverty line using one dollar per day, while the currency strength/pegging are now manipulated, its authenticity becomes questionable. Purchasing power within local markets is different from international markets. There are most of countries in the suburb where people can live satisfactorily below one dollar per day by purchasing locally..why comparing someone in New York who cannot get daily bread below one dollar while there are someone in Kinshasa who can and you put them together into similar economic index computation?It is true that there are common human needs but no common human wants. The two result into total daily expenses and ultimately purchasing power. The definition above encompasses both common needs and wants, which is wrong to my view. Needs can always be met but wants can never be fulfilled.Is better to have a reference (below one dollar) but this reference should not be ultimatum in grading poor countries especially African countries and other developed countries. There are should be a comprehensive debate among economists on the way to re-define the computation of poverty lines generalizing the purchasing power, incomes and expenses (wants and needs) globally bring inconsistency. Better put in a certain geographical location which has economic similarities.

2.0 Poverty Eradication Measures2.1 Economic GrowthEconomic Growth and Revenues Generations are inseparable terms and they need careful definition to differentiate. You might have reliable sources of revenues generations which shows an increase annually, and it can be defined or interpreted as an economic growth.Additionally, the increase of foreign direct investment (FDI) in the country can be defined or interpreted as an economic growth since more capitals have been poured into the economy of a specific country. The question is, which one should start and is truly Economic Growth;(a)Does the revenues generation lead to the economic growth by re-investing those revenues to boost other economic projects and result into economic boom, or (b) Economic Growth (in the sense of FDI) leads to the reliable Revenues generations and re-invest those revenues to keep the economy escalating?Both are collect: The essence of economic growth is to get optimal revenues for the Government to fulfill its obligations of serving its people satisfactorily. Therefore economic growth and revenues generations is a complete closed circuit (cycle); there is no definitive starting point once both are rolling. You can have a single reliable source of revenues generations and use those revenues wisely to boost the economic growth, or prepare suitable environment for investments (FDI) and ultimately the economic growth takes its way by re-investing revenues.In light of the above, the common denominator is the utilization of revenues generated to keep the economic growth cycle existing and revolving, otherwise there will be a gap between revenues generations and sustainable economic growth. The figure below shows relationship between economic growth (EG) and revenues generation (RG).

The relationship between EG and RG shows four patterns in which the countries both resource-rich and non-resource rich countries can experience depending on the measures taken by the government and the private sector whether formal or informal.

Economic Growth (EG) Vs Revenues Generation (RG) Conceptual Framework

Quadrant I: Real Economic Growth. There is direct proportional between EG and RG due to;Proper mechanisms in supervising investments compliance, revenues collections and proper incentives and taxes;No single dependence on revenues generations, all sectors are strengthened including local projects within the communities (re-investing revenues).The economy is characterized by labor intensive industries and services sectors.

Quadrant II: Statistical Economic Growth. There is inverse proportional between EG and RG due to;Increase of Investments accompanied with over-incentives to the investors which delay the maturity of investments in terms of return to the countries of operationsInadequate institutions capacity (soft infrastructure) Mostly RG depends on the single sector especially extractive industry while there is relaxation in dealing with other traditional economic sectors Quadrant III: Zero Economic GrowthThis is the mirror image of quadrant I. Lack of the measures taken in quadrant I results into economic setbacks (austerity).Quadrant IV: State Economic Growth. This is a mirror image of quadrant II.There is inverse proportional between EG and RG;Statistically the EG show decrease while the Revenues generations (collection) increase. This is due to boom of informal sectors where there is no proper records from informal economic activities but the state collect taxes from local councils, municipals and local markets from those activities and the state economy goes on. Internationally the Economy Growth statistics wont be available for compilation while locally the state is gaining revenues from informal sectors (state economic growth) and the livelihood of citizens show improvements.The interpretations shows that you might have Economic Growth but with decimal revenues generations, and as well having revenues generations without statistical economic growth.

In light of the above, the real economic growth is reflected into how the revenues generated from that growth is re-invested to keep the growth escalating, otherwise the growth will be decimal. And that the denominator of economic growth is revenues generations and not the status of number of capital intensive investments.2.2 Economic Growth from Extractive Industry2.2.1 Positivity: It is true that, the resource extraction can contribute to poverty reduction by generating economic growth. The growth in GDP of resource-rich countries tends to reduce poverty as the country become able to fulfill its obligation of serving its people (Weber-Fahr, 2002). The rational for extractive industry to eradicate poverty is through enhancing economic growth, increase government revenues and in return finance the poverty reduction programs, create jobs directly or indirectly, transfer of technology through either learning by doing or colleges initiated by extractive industries, downstream industries related to extractive industries and also infrastructure advancement within or to the vicinity of extractive industries. All these in totality if managed responsibly, they would contribute to the vast poverty eradication in the East African community taking considerations of ongoing discoveries of Oil and gas. To get rid of resource dependence to effect economic growth negatively, the revenues boom and spill over from extractive industries have to be re-invested into traditional economic activities like agriculture and manufacturing industries. 2.2.3 Negativity: The negativities of Extractive Industry are not explicit told to the extent that most believes that there is no way the natural resources can bring negativity to the countrys wellbeing;

Decrease rate of GDP There are three types of resource-rich countries where extractive industry, oil and gas is dominant (50% of all exports), critical (15 to 50% of all exports) or relevant (6 to 15% of all exports).The empirical records demonstrates that from 199o to 1999 the GDP of all three types countries were decreasing compared to non resource rich countries (Scott,2005).Level of Illiteracy The dislocation of people, child labor and migrant workers cause comparatively high illiteracy in resource-rich areas. Thorvaldur Gylfason tests three different measures of education against natural resource abundance and finds that;1) An increase of 18 percentage points in the share of natural capital from one country to the next is associated with a decrease in public expenditure on education by 1% of GNP; 2) A five percentage point increase in the share of natural capital is correlated with a decrease by one year in the schooling that an average girl at the age of school entry can expect to receive; and 3) A five percentage point increase in the share of natural capital is associated with a 10 percentage point decrease in secondary-school enrollment from one country to another (Gylfason, 2001).

Social Tension The commissioning of extractive industry, oil and gas projects are capital intensive with a lot of exposure of the poor within those vicinities to social risks; displacements from their areas, influx of migrant workers and foreigners who disturb the cultural arrangements of the inhabitants. The World Bank demonstrates that, often at any extractive industry areas the influx of people lead to price inflation; higher income of mine workers lead to rising local prices for food, fuel, land, and housing.This cause more poverty on local community; mine workers enjoy the situation while the locals and newcomers who have missed the employment, turn the area into poverty hot bed and in return results into school absenteeism, child labor and prostitution.

2.2 Revenue Generation from Extractive IndustryThere are few areas of economic policy-making in which the returns to good decisions are of so high and the punishment of bad decisions so cruel as in the management of natural resource wealth. Rich endowments of oil, gas and minerals have set some countries on courses of sustainable and robust prosperity; but they have left others riddled with corruption and persistent poverty, with little of lasting value to show for squandered wealth. And amongst the most important of these decisions are those relating to the tax treatment of oil, gas and minerals.Positivity: The first and foremost intention of the developing countries to attract foreign direct investment is to get the reliable sources of revenue generation. The revenues accrued will be used in fulfilling poverty reduction programs. The capacity of East African countries to ensure appropriate mechanism to collect the net returns from extractive industries is of high importance. Though due to financial muscles of those multinational companies and sometime recommendations from the World Bank, the countries of origin tend to be challenged to reduce the royalties import duty, corporate income tax and customs duties (Campbell et. 2003)The East African community in its Article 114 of the Treaty for the Establishment of East African Community has emphasised efficiency management and utilization of natural resources to strengthen the development of East Africa. East African Development Strategies has again earmarking on how to govern, audit and monitor revenues from natural resources including the intention to have strong mechanism of revenues collection. Tanzania has gone extra mile by establishing Tanzania Minerals Audit Agency (TMAA) and Kenya is on move to establish Minerals Audit Unit.The establishment of stable fiscal regime with win-win situation between parties, appropriate mechanism for revenues collection, transparency, accountability and ultimately proper channel of revenues expenditures, will result into more revenues generation and hence fulfillment of poverty reduction programs.Negativity: The initial programs of having more revenues generation can either be a source of sustainable development or a cause of more poverty. Most of the African countries think mostly of Foreign Direct Investment (FDI) as a proper way to have more revenues generation. In making sure they entice more FDI, they give more incentives to those investors to the extent that; the expectations of having more revenues are not met, simply because the over- incentives given takes more time for those companies to give back to the countries in which they operate.These incentives sometimes cause setbacks of local industrialization schemes like free importations of consumables, spares and other supplies which are locally produced. Secondly, revenues collection from local economic activities does not consider the level of activities. While for FDIs there are incentives like tax holiday and free importation, there is no intentional plan to give grace period for locals who have just started their business. Ironically, the multinational companies get more incentives to the expense of local economic activities in the name of revenues generations to the Government. The World Bank structural adjustment has addressed this issue and most of the East African state partners have started implementing policies which favor internal communities (local content policy) in participating into extractive industry opportunities.2.3 Job Creation The Africans mindset of pre and post colonialism era, define job as employment in public sector. Those in private sector and self-employed were not considered as employees having real job.Fortunately the shift has happened since 1990s when the FDI started operating in most of African countries. Currently there is no demarcation among public sector, private sector and self employees. The mindset has changed and most of Africans, especially middle age generations have shown a way to initiate their companies and like to work into private sectors.Job Creation from Extractive IndustryThe extractive industry is an assembly where all careers of literates and illiterates convene to work together in producing a single line product.Positivity: The extractive industry is among the sector which creates a good number of jobs. The booming of extractive industries in East African Partner states expect to employ more people. The large scale mines in Tanzania have employed 8,803 workers in 2012, out of which 8,134 (equal to 92.4%) are Tanzanians.The World Bank recounts that, small-scale extractive industry provides employment for about 13 million workers worldwide, while large-scale extractive industry provides direct employment for about two to three million workers. The Bank estimates that each large-scale extractive industry job indirectly creates somewhere between 2 and 25 jobs with suppliers, vendors, contractors and others. Negativity: However, extractive industries apart from creating jobs, it is as well the cause of unemployment when local populations are forced out of traditional productive activities. When compared to other sectors, extractive industries employ less per unit of capital invested. The capital intensive project in textile, agriculture or tourist will employ many than the same capital invested in extractive industry. For instance 30billion USD in extractive industry project will employ less people compared to the same amount invested in let say Kapunga rice project or Kigoma Mawese project. But this logic is debatable because the ILO recounts that though extractive industry will employ less since most of the money goes into equipments but the multiplier effect of the high salary from miners will compensate many workers in agriculture with less salary compared to miners. Do African miners get higher salary like may be Latin America as price per ounce is the same everywhere and cost per ounce in Africa is likely low hence they should get higher or the same like their counterpart.Cultural disorientation is another source of unemployment caused by extractive industries in their operating areas. The indigenous tend to shy away from their cultural life before the newcomers and left the areas in search of other locations without being sure if they can still practice their daily activities like hunting, beehives keeping, cutting trees for charcoal vending. All these activities are against Safety, Health and Environmental compliances within extractive industry, oil and gas operating areas.

2.4 Technology TransferTechnology transfer has been named as one of the profound advantage of foreign direct investments in all sectors. Does the technology of those large scale extractive industry companies suffice the technology needed for our local miners? Or they dont match with the small scale and medium miners? If Yes or No who is supposed to twist the status quo?The Governments in east Africa through Ministry of Energy and Minerals are battling around the clock to build capacity of small scale miners financially and technically.In reality the technology used by large scale extractive industry companies is not compatible with either small scale or medium scale (VAT Leaching) operations. Therefore there is no technology transfer merits in this sense. But in terms of career development, yes there is. For instance since 1990s when the large scale extractive industry companies started operating in Tanzania, most of Tanzanians who were employed in large scale extractive industry companies in the country, are now experts in Congo, West Africa and Australia.Technology Transfer from Extractive Industry Positivity: The technology related to extractive industry is a must taking into account the booming of extractive industry in the region which has to match with the human resources. The technology can be impacted from the extractive industry through learning by doing or trainings in colleges. Negativity: Though findings show that knowledge and technology is not developed indigenously and there is little learning by doing. (Power, 2002).This is due to the fact that most of the technical jobs are done by foreigners. Few local graduates who know technical know-how and are in position to acquired technology by learning by doing.However, extractive industry was the national learning experience in the USA that let to building a strong technological system from which modern manufacturing developed (de Ferranti, 2002). The East African partner states can imitate this strategy by insisting implementation of succession programmes into extractive industry, oil and gas operations. And mandatory programs for extractive industry to impart technology to nationals, study tours to learn different processing and recovery operations, technology for small and medium scale miners to maximize the recovery in their operations.2.5 Infrastructure ImprovementsNew concept of infrastructure: We often tend to miss the correlation between physical and soft infrastructures. These two types of infrastructures relate to each other.Soft infrastructure is all about policies, regulations, visions, national programmes and ultimately democratic government. These intangible infrastructures are the ones needed to plan, design and foresee the physical infrastructures. That means soft infrastructures are supposed to be laid down first and then ground work for physical infrastructures follows. The soft infrastructures are immortal for the whole life of the country while physical can be done to completion. Thats why when you listen to the political campaigns in Africa, all politicians talk about physical infrastructures - roads, bridges, School and hospital buildings and the like.In developed countries, the story is different; they will be talking about soft infrastructures health care policies, international diplomacy, security arrangements, national social security schemes, bilateral economic relations. This is simply because; the softs will perfect the physicals. The rule of thumb is to start with soft which gives a roadmap to accomplish physicals. If you do the inverse, it takes ages of time to improve physical infrastructures. Thanks to Western for helping to improve softs and China for physicals.Infrastructure Improvements in Extractive Industry Operating Areas.In many developing countries, infrastructure improvements are needed where the extractive industry is commissioned. Roads, water and electricity within those vicinities have to be upgraded for the companys operations and surrounding communities. Since in most cases the companies are the ones to implement those infrastructures, the companies tend to by-pass local villages. (Frynas, 2001).However, other mines have distributed road, water and electricity to the surrounding communities and accelerated the economic growth. The improvements of resource-rich countries policies have included percentage of revenues to remain within the extractive industry, oil and gas areas for infrastructure improvement.There is ongoing debate between the extractive companies, World Bank and resource-rich countries to see the need of making corporate social responsibilities mandatory rather than voluntary. During contract sealing, the contract should address the needful infrastructure within the areas where the operations are going to take place. These costs can either be deducted during operations as part of the revenues to be accrued by the government or allowed to be accumulated in initial investment capital. 2.6 Downstream Industries and ServicesDownstream Industries are services, manufacturing or processing plants needed to complete chain value of all activities needed in extractive industry or other industrial processing from upstream, middle stream and downstream activities.For instance, at extractive industry sites the downstream for extractive industry engineering services, crushing services, smelting, laboratories and transportations make a complete cycle to perfect the extractive industry operations and end product (refined gold dore).The emphasis of having these downstream industries will speed up the contribution of extractive industry to the surrounding community by buying all supplies and consumables in the operating country rather than importing from overseas.The profit from extractive industries takes time to mature due to nature of the industry and when they reach closure period, they create revenues deficit. There is a need to create these industries to bridge the above deficit and balance the maturity time of extractive industry payback to the communities. The booming of extractive industry can be re-invested into industries that process and add value before exported and contribute to poverty reduction (Ross, 2001). The east African development strategies, has insisted to have value addition regulations of natural gas, oil and minerals in order to increase value and provide more jobs in the region. Extractive industry Act of Tanzania (2010), insisted Lapidary industries and gemstones business to be under indigenous control.The smelter Processing industries for value addition of resources extraction like gold, copper and nickel, LPG Plant and the like, will add the amount of revenues. Small industries for spare parties, Lubricants, Chemicals, by products from oil and gas such as plastics, fertilizers and gas cooker, are among the downstream industries needed within the region. The supply of food, Personal Protective gears, motor vehicles for transportation of goods and employees to extractive industries have been rejected in most developing countries because they lack required international standard. The revenue has to be used to construct modern industries and meet the required standards by extractive industries which have been the case for them to import those consumables and supplies as local countries have failed to meet those standards.

3.0 ConclusionHaving natural resources is not a guarantee for the country to have sustainable development but is a springboard for the country to stride towards having sustainable development. The natural resources are initial capitals to be utilised as an engine to drive other economic sectors. In 2001, Sub-Saharan Africa Extractive Industries accounts for 57 percent of total merchandise export. At that time, oil and diamonds account for 97 percent of Angolas export and approximately 65 percent of its GDP and Nigeria petroleum generated 85 percent of Nigerias foreign exchange earnings. Of all these records the region remains among the poor countries.The East Africa partner states will not be exceptional if good governance in natural resources and integration of other economic sectors are not considered. As of now, Sub-Saharan region is doing better having countries with fastest growing economy in the world and Nigeria has outweighed South Africa and become the leading economy in Africa. These new shifts of development were attained after considerations of good governance of revenues collection and re-investment from extractive industries.The program of sovereignty / wealth account helped to control the revenues from the extractive industries and the same were used to institute soft infrastructures and ultimately directed into other economic sectors. The utilization of revenues from extractive industries to boost and prepare conducive environment of other sectors, have changed the economic trend of Nigeria and most of Su-Saharan countries.The empirical studies entail the causes of resource curse and Dutch disease as a two much relaxation in dealing with other sectors and two much dependence on natural resources which at the end paralyses other sectors.Therefore, it is possible for East African Countries to eradicate poverty if and only if, revenues derived from Extractive Industry shall be re-invested to strengthen other sectors and improve both soft and physical infrastructures. Extractive Industries are not sustainable by themselves, therefore cannot bring sustainable development by themselves, unless the revenues derived are re-invested (integrated) into other traditional economic sector to make them robust. Thats the optimal contribution the extractive industry can do.This drives a point on board that; there is no need of waiting the facets of extractive industries discoveries for the country to develop. East Africa partner state can use traditional sectors properly to develop and supplement those discoveries to accelerate the traditional sectors.Agriculture, services, telecommunications, ports, railway and the like are there to remain forever and continue generating revenues while extractive industries are for a certain period of time accompanied with commodity price volatilities.Strengthen your traditional economic sector and when there is extractive industry discovery; use the revenues from extractive industry to keep strengthening your traditional economic sector. Extractive Industry is a temporary assembly where all careers convene to work together to produce single line product at a specific solid years. This temporary assembly needs to be properly organised so that everybody becomes beneficiary before the assembly disperses. The philosophy behind this is to make sure the win-win situation among the trio: country, investor and employees both locals and experts. The issue of local contents in policies and Acts, import and export procedures, price and capital transfer, permanent residence, experts permit, MDAs, PSA, sovereignty wealth fund and the like need national attention before sealing the contract for the region to reap from its resources. The danger of single story of extractive industry is obvious.Let the truth be told that, the extractive industries cause development and as well poverty to the countries of origin.The Governments everywhere like to talk about the positivity of extractive industry only. The danger of this is that, the people will get the other story from unreliable sources and bring chaos, looting or demonstration unnecessarily. To the extent that the authorities will be obliged to start denying the information surfaced from unreliable sources.Lets tell the people both sides of the story of extractive industry to make sure that whenever there will be negativity; people will be prepared to accept those predicaments because they have been told before about let say price volatility like currently where the barrel of crude oil is around 43 dollars. The cost of exploration and extractive industry which takes time for the country to get returns and the like.

APPENDECESReferences 1. Campbell, B., Hatcher, P., Lafortune, A., Sarrasin, B. (2003). Factoring in governance is not enough: extractive industry codes in Africa, policy reform and corporate responsibility. Document submitted to the Extractive Industries Review.

2. de Ferranti, D., Perry, GE. Lederman, D., Maloney, WF. (2002). From natural resources to the knowledge economy: trade and job quality. Washington, DC: The World Bank.

3. Frynas, JG. (2001). Corporate and state responses to anti-oil protests in the Niger Delta. African Affairs 100(398):27-54.

4. Onorato, WT., Fox, P., Strongman, JE. (1997). World Bank Group Assistance for minerals sector development and reform in member countries. Washington, DC: The World Bank Group.

5. Power, TM. (2002). Digging to development? A historical look at extractive industry and economic development. Washington, DC: Oxfam America.

6. Ross, ML. (2001). Extractive sectors and the poor. Washington, DC: Oxfam America.

7. Weber-Fahr, M. (2002). Treasure or trouble? Extractive industry in developing countries. Washington, DC: World Bank and International Finance Corporation.

8. TPDC Report (2013). The status of natural gas discoveries. Dar es Salaam. Tanzania Ministry of Energy and Minerals.9. World Bank Extractive Industries Review, (2003).Striking a better Balance.Vol.1.Washington, DC

10. Extractive industry, Minerals and Sustainable Development Project (2002).Breaking new ground: extractive industry, minerals and sustainable development; executive report, London.

PART TWOThe effect of Mineral Policy and Regulation on the Exports of Gemstones in Tanzania: Case Study Tanzanite Exports.

By Eng.Gilay Shamika, an expert in extractive industry

1.0 INTRODUCTION1.1 Policy Concept

Policy is like architectural drawing showing the whole structure of the house needed either by owner or tenant. If is for owners residence, the drawing will base on the wants and needs of the owner at a pace but for renting, the drawing may need some time to be adjusted to allure and encompass the renters needs and wants, which were not specifically according to the owner pre-requisites. The owner is compelled to change the drawing to satisfy the tenants otherwise the tenants will turn down the deal.Like architectural drawing, Mineral policy is the guidance showing the roadmap of the specific country towards the demand, supply and allocation of both minerals and the revenues collected from extractive industry. The extractive industry policies evolve in response to geological resources, politics circles, economics events and advancements in technology. All these in totality are dictated by the wants and needs of the investors. Like tenants, the investors wants and needs may compel the country to adjust the policy as a threshold action for the influx of investors in the country. Even if the country is endowed with abundant minerals, if is not internally industrial-consumer of its natural resources, it will be swayed by investors and therefore it will not withstand its resources expectations and intent, to the extent that, a stand-alone mineral police will not be possible rather it will confer its minerals policy based on FDI, investors-oriented documented policy.The solution to this is to be focused in changing our economy into industrialized economy; increase industries internally to use the available minerals. The United States, Canada and Australia are all major mineral-producing countries with good to excellent geological prospective. Their dream is to turn into net consumer and importer of minerals for their industries instead of exporters. China has already managed this, Brazil is on the track.

InvestmentThe investment issue has become a global central point of all mineral policies regardless of the level of the economy of the country developed, developing and transition economies. Investment and government extractive industry policy are closely linked. Even the most highly geologically prospective nations will have difficulty in attracting foreign investment without adequate national policy, regulatory and fiscal systems. Over the past few years the level of mineral sector investment has increased in real terms, and those nations that have put into place regulatory systems which reduce or allow a company to manage risks at an acceptable level have, for the most part, enjoyed increased levels of investor interest.The most difficult thing is to balance the will of the government vis--vis the common wananchi/citizens perceptions on the incentives given to investors. The governments call incentives while wananchi/citizens call it loopholes and become vocal and enraged with those incentives. To spur investments and at the same time having policy which pleasing wananchi, needs time as a bargaining tool. For instance Mtwara northern part of Tanzanias saga after educating them the situation is calm.

Academically, there are two schools of thought aired internationally. Which one should start in country policy, economic democracy (China model) or political democracy (Western model)? And who should decide the West or country itself? The masterminds of these thoughts among others from Africa are Ngozi Okonjo Iweala and Dambisa Moyo the author of DEAD AIDS TO AFRICA, WINNER TAKES ALL and HOW WEST LOST TO CHINA.

1.2 Extractive industry RegulationRegulations are like house decorations. The decorations are done to perfect the appearance of the house (policy). Some of the decorations are needed to widen the relaxation of the dwellers (like regulators- officials vested power) and make life worthwhile without confronting terms and conditions of the rent fees and also with no changes to the erected house (Extractive industry Act so to say). Decorations like painting can be done by tenants at any time whenever there is a need without prior consent of the owner or with just informing the owner. That means there is flexibility in doing decoration to easy and smoothing the recurring deeds.

In real sense basing on the above assimilation, extractive industry act is supplemented with extractive industry regulations, rules, administrative orders, administrative guidelines and other regulatory devices. Such regulations, rules and administrative orders normally derive directly from a power granted in the extractive industry act to a specific government officer. Typically, the Minister for Energy and Minerals and, or Commissioner for Minerals, is granted the authority to issue such regulations/rules/orders to easy and smoothing the responsibilities needed with limited time for decisions.

To replace or amend a extractive industry act is a politicized, complicated and time- consuming process. Typically, an amendment to a extractive industry act will take long time; more commonly it will take many years so to say. Regulations, on the other hand, can often be changed very quickly and with limited political input. Thats why, lawmakers are wise to consider which subject matter should be in the extractive industry act and which topics are better placed in regulations. Many extractive industry acts lay out only the fundamental framework of the mineral-sector regulatory system. The details are provided in the regulations. Now you can see the correlation of regulations logic with decorations logic above.

1.3 Extractive industry Development Agreement (MDA)Extractive industry Development Agreement (MDA) is like a single tenants special agreement with landlord in a house with other tenants. You might have a large house with different tenants in that house. But one tenant has some exceptions with regards to others. May be, he has rent three rooms and he promised to pay annually while the rest have single rooms and pay after six or three months. The one occupied three rooms, asks to be considered by landlord not to do general hygiene of the surroundings because of the afore mentioned reasons (occupied 3 rooms and pay annually), the agreement is reached with landlord and communicated to other tenantsthose who are vocal and objected this agreement are told to occupy three rooms and pay annually, like their fellow and they would be considered the same agreement. But coz they cant have such financial muscles to stretch, the agreement is not in their favour. The agreement or favoritism so to say is based on the financial capability of the tenant and the beneficiation of the landlord two ways traffic.

MDAs are of no exceptional compared to the above digestion, MDAs are part of extractive industry regulations of its own kind.MDAs are agreements reached between large projects investors and the government on specific areas particularly fiscal terms. The administrative officers granted power, discretionary upon their satisfaction, reach that agreement coupled with vast privileges to investor and the country. Sometime the officers may abuse the power conferred to them and reach unfavorable agreement to country. Thats why checks and balance had to be strengthened to thwart such faults or remove MDAs negotiations into regulations and make it a topical in enacted Extractive industry Act.

However, governments use agreements to help regulate large mines but handle smaller operations under specific provisions in the general extractive industry code. In many instances, even when an agreement is in place, some or all of the extractive industry code may still apply to the operation. In most cases what agreed are on the fiscal regime perspectives (like waive of taxes and exemptions on imports tariffs) but other operations still apply to the Extractive industry Act.

Extractive industry, oil and gas projects may be the subject of many types of agreement. At the upper tier is the agreement, or agreements, between the mine, oil or gas project and the government. A second tier of agreements may define the nature of the mine, oil or gas project vis--vis the owners or controlling interests, i.e., such as a joint venture or shareholder's agreement. On the third tier will be agreements between the mine, oil or gas project and its financiers, suppliers, contractors, labour and so forth. Additionally, there is trend in some jurisdictions for mine, oil or gas project to enter into agreements with local communities, landowners, land-users or indigenous people by the guidance of the authorities within the country.

1.4 Extractive industry ActExtractive industry Act is like a physical permanent erected house. The building passes different stages, from architectural and engineering drawing to setting, building foundation and walls, and ultimately finishing. Since this operations entails time and resources consuming, the needs and wants to build the house requires comprehensive and thoroughly considerations before starting that exercise. Similarly the intention has to be clear if the house is for owners residence or for renting. If the intention changes on the course or short time after building, the whole processes are futile and it will take time and cost to demolish the permanent structure and seek other building permit from relevant authorities of which the concrete reasons had to be scrutinized.

Extractive industry Act needs time and resources to be enacted and is permanent for a solid period of time. Like house, the needs and wants of the Act, have to be lectured, scrutinized, sensitized and ultimately well linked with policy and regulations for smooth implementation. Thus, as a general observation, important policy matters are addressed in the extractive industry Act while administrative details are embodied in regulations. Since laws are more difficult to change than are regulations, the subject matters addressed in the law are usually considered as more stable than those found in the regulations. There are some mineral sector regulatory topics where enhanced stability is perceived by most governments as useful. These are placed into the regulations but accompanied with balance and checks stipulated into the Act.

PRIMA COBWEB CONCEPT AS AN INTEGRAL OF FUNDAMENTAL DEVELOPMENT OF EXTRACTIVE INDUSTRY SECTOR CONTRACTUAL, FISCAL, LEGAL AND REGULATORY FRAMEWORKSIn light of the above concepts, you can see how potential each concept is to perfect the building. Likewise, in order to perfect the win-win situation in extractive industry, the linkage of police, regulation, investment, MDAs and Acts are the supreme ground work to be done. The PRIMA Conceptual frame work addresses this importance; PRIMA is the abbreviation of POLICY, REGULATION, INVESTMENT, MDAs and ACTS. Generally the Extractive industry sector is built on these I called PRIMA or Five Foundation Blocks of Extractive industry sector. Nothing can be said in extractive industry sector which is not inclusive in PRIMA.The experience shows that non-linkage of PRIMA is the source of resource curse or dutch disease. That means the Extractive industry sector need comprehensive approach which links all PRIMA and make it like cobweb where any loopholes whether deliberately or incidental created will be captured PRIMA COBWEB!!

PRIMA COBWEBPOLICYREGULATIONINVESTMENTMDAs/PSAsACTS Fig: 01. The Cobweb of Five Foundation Blocks of Extractive Industry

Like a cobweb, where is not easy to find the starting point to untie the cobweb, Prima cobweb concept address the same logic, that extractive industry sector is nothing rather than PRIMA comprehensive linkage(cobweb). PRIMA Cobweb do not provide contractual and fiscal regime loopholes either done by Government officials or colluding with investors. The linkage provides balance and checks. The policy and Act may be appropriate but if MDAs are inadequate, then the importance of good policy and Acts are irrelevant. Similarly, if MDAs are good but policy and Acts are not, non-MDAs operators, will relax. PRIMA COBWEBprovides to and fro! The end of one block is the starting point of another block. Likely, in order to laydown one block, you have to start from the beginning to see if other blocks are aligned with the one you want to fix. It provides a too way traffic and mirror image of each one.The decision-makers and other authorities need to make sure PRIMA blocks are inter-linked for the extractive industry to reap the intended expectations.

2.0 DATA ANALYSIS IN ESTABLISHING ADEQUATE DECISION MAKING ON TANZANITE EXPORTS POLICY.Data source: The data were accrued by the researcher from varies reliable sources. Data comprises exports of rough, standard cut and beads cut tanzanite but some of the records were missing to cover the whole particular year. The sum for each year is the average data.

Data authenticity: The data under review has some irregularities from its source. Some of the data for certain months were not complete, and the units of weigh used are either gram or kilogram and has denied conversion of carats into either gram or kilogram. Data assumption: Assuming these irregularities wont affect graph trend and interpretation.

2.1 Graphical Presentation of Given DataA: Volume of Tanzanite Exports

Graph interpretation: 01: The graph shows the export of rough depends on market trend and not the ban.The fluctuation is due to market needs and not ban because before total restriction(2010) the export was low compared to progressive years where the ban applied.

Graph interpretation: 02: The export of standard cut improves progressively.This signify that, the lapidary industry grows from its infancy level to maturity stage coupled with trust of overseas buyers.However, the iceberg of this implication is that, most are exported as pre-form and not real standard cut.The pre-form is done purposely to comply with the act but also there are orders which need the pre-form.Pre-form is regarded as Cut but can serve to purpose as beads cut docomply by just cut one side to have provision of cutting into other shapes after export.

Graph interpretation 03: Beads cut serve two purposes; it is the most simple cut and secondly can be re-shaped into other shape/cut/style( bead cut is sometime called interim cut).By applying drastic measures of ban, it is easy to switch on beads cut which are apparently made above one gram from low,meadium and rarely high quality rough.The cost of beads cut is less and most important can be re-shaped again into other cut.Therefore the trend of graph is due to market demand and shoot up on 2013 encompases both demand and business tricks (interim shape for compliance)

Graph interpretation 04: The graph includes the sum of standard cut and beads cut to analyse the total cut exports.The combination also fall into the trend of separates of the two; Improving demand of cut tanzanite and capacity building of the lapidary activities.Furthermore,beads cut is sometime used to circumvent the ban internationally.

Graph interpretation 05: The volume of rough exports is twice as much compared to Standard cut tanzanite.The Government anticipated the Cut to yield more earnings because is made from high quality gems but graphs on value analysis.below interpret the contrary.On other hand, the trend of cut volume increase progressively therefore much attention is needed for capacity building in Lapidary industry.The demand of rough is dictated by market demand and not a ban,thats why the fluctuations occur at any year while Cut is dictated by both ban compliance and demand, continuos increase.

Graph interpretation 06: The combination of Standard cut and beads cut, did well on 2013.This implies that the businesspersons conform to the ban but taking into consideration the two purposes of beads cut, the interpretation remains covertly since it serves as a cut and also as a implicit rough.

B: Value of Tanzanite Exports

Interpretation of graph 07: The trend shows, though the volume of sales of tanzanite is importance for increasing royalty but what matters most is the quality of the Tanzanite exported. On 2010 the weight exported was 146,236.97gm and resulted into royalty of 824,000.07USD, while the export of 2013 with weight of 458,447.71gm gave royalty of 785,114.44USD which is less than 2010 although the volume has doubled. Another implication is that, the ratio or correlation of weight of rough versus its royalty is like 1:2; One gram exported gives two USD of royalty if factors present during these exports, remain constant. This is due to royalty percentage taxed and the multiple effect of the gemstone pricing method i.e. whenever the weight of the single stone increases, its price multiplies. Two stones each with 2grams will be sold together with les price compared with one stone having 4grams if 4Cs are the same with those two separate stones. Thats why the price of gems is arranged according to the size (weight ranges) of a single stone. Thus, the graph tells us, most of the roughs sold are not under 1grams thats why they revealed this trend.

Interpretation of graph 08: The trend shows, the volume of sales/export is direct proportional to cut royalties accrued. This cements the trend of the logic of quality that is when the 4Cs are appropriately matched, the results are superb. For each cut gram exported gives one dollar of royalty if the factors governed the sales in those years under review remains constant. Similarly the graph tells us most of the Cut tanzanite exported has good quality but mostly in small size after cut and polish. Thats why even the multiple price effect is tarnished. Lastly the royalty percentage (1%) plays another role of the trend; one percentage is so small to couple with the high quality and high price of the export, to earn high royalties. The cost of cut and polish at Arusha varies between 1 to 2 dollars by carat. That is to say, the total accrued beneficiation; royalty, cut and polish cost and salary of cutters in totality outweighs the beneficiation of rough in reality? The trend denies even if you add those GDP beneficiations.

Interpretation of graph 09: The effect of high volume of rough exports, carat weight of rough per stone (price multiple effect) and royalty percentage charged on rough (5%), all together escalate the royalty of rough by far compared to Cut tanzanite royalties. The trend shows persistence of the rough exports before and after ban, and its privileges on the side of royalties accrued. The graph also interpret that, the royalty of rough though is higher than that of standard cut, the standard cut royalties increases by two times annually while for rough there is fluctuations. The general interpretation of the graph is that, there is competing trend between the two and for businesswise it means let the two naturally trade themselves. Dont drop any on the way.

Interpretation of graph 10: The trend of total cut (combination of standard and beads cut) has the same interpretations like graph 09 above.

3.0 Discussion of ResultsRough Tanzanite Exports:From the graphs, there is statistically and academically conflicting trend between rough and cut exports in terms of which one has to be given green light or statutory go ahead. Rough volume and value for the period under review, outweighs volume and value of Cut, both before and after ban follow up. Similarly, since 2010 through 2013, the implication shows the export of rough is not impeded by ban rather by market demand. This is proved by the surging of the volume on the due course. This is to say, rough tanzanite exports is substantially important since more order is being placed regardless of the ban. If you find the mean standard of the exports from 2010 through 2013, rough tanzanite shows maximum mean compared to Cut tanzanite. Mean standard is used to measure the stability of the market against any impediments.Again, the market demand coupled with 5% royalty compared to 1% royalty of cut, has much to do to the government in revenue collections and meeting the budget target of either zonal or ministry office. Basing on the above analysis, satisfying the customer demands that is business philosophy. The businesspersons will do everything to fulfill the demands available anywhere and whether lawfully or unlawfully (smuggling).The interpretations have also made unconfirmed call on beads cut, which might be used by some businessperson to circumvent a ban. To avoid this, the allowance of rough business has to be reviewed. Secondly, meeting the government target that is real good governance because the government will meet the needs of citizens and internationally hailed. High volume of rough coupled with 5%royalty earns more revenues by far compared to cut exports.

Cut Tanzanite ExportsThe volume and value of Cut export improves progressively which means the Lapidary industry is gaining the momentum from its infancy stage. Though the volume and value are far less compared to rough, the trend shows hope and resolute of the business. Therefore it needs shoulder-to-shoulder attention from the authorities in keeping building capacity.More important, Cut exports conform to ban restrictions. Since ban assertion, Cut export has been improving progressively regardless of the market demand (free of market speculation/niche market). Though the volume of cut tanzanite export is less and again considerably affected by 1% royalty, on the other side, the economic multiplier effect of the lapidary industry is of great importance. At Arusha the cost of cut and polish is estimated to be around 1 to 2 dollars per carat, although mostly, the business is done by bargaining the lump sum for the whole lot to be cut and polished. People have invested in lapidary facilities and employed workers. This implies, emphasis on Cut exports needs much momentum to encourage those who have shown initiatives and support the growing market of cut and polished tanzanite.In a broad note: The graphs interpretations cement that; it will be academically dishonest to stop any among the two exports rough and cut tanzanite.The aforementioned interpretations declare that, both rough and cut exports have comparative and competitive advantage in improving gem industry in our country. Each one bridges the gap left by the other.Additionally; The gem business is very delicate and is the mixture of traditional and professional skills and knowledge. There are traditional or customary and contemporary gems customers. The traditional customers are the ones who never have alternatives/substitutes, if they want tanzanite, they will always look for it. But these customers are minority; The contemporary customers are many and they dont bother swaying from one kind of gem to another. What they need is the durability and colour. If they miss tanzanite (blue), they opt other blue gems like Sapphire, Kyanite or Iolite; The bad thing also of contemporary customers is that, they choose who to cut, design, polish, and set their jewelries. That means they want rough stones and choose cut styles.This business is very delicate and always EVOLVE and NOT PLANNED. Its booming and fade up is not professionally forecasted in most instances.Thats why many countries have decided only to prepare places and people who what to do this business and let them regulate the trend of business without the government intervention. The government should only research, which ways are appropriate to collect the revenues but not how to control the business.The countries which opted to control the business, they started building capacity in lapidary, jewelries setting and decorations industries. After that they waived import tariffs and some countries chosen people to run the business without paying taxes. The taxes will be deducted from errands rendered due to those activities related to gem business and other more programs .

CONCLUSION AND RECOMMENDATIONGenerally my conclusion is to maintain status quo, for the aim of having freewill export in future after both trades reaches maturity stage. Progressive intensification of ban on rough with specific timeframe and guidance to develop lapidary capacity is a right decision so as to keep encouraging lapidary activities and growth of Cut exports, subsequently regulating timeframe and relaxation for rough export to meet demands available. The existing situation has encompassing both rough and cut export in a competitive way coupled with business tricks. Better rely on the current status quo. Keep insisting a ban but provide the current allowance for rough and cut while building capacity for lapidaries. With time both businesses will regulate themselves. Future Plan for Tanzanite One Stop Centre For Gemstones Business: the need to have gemstones bourse at Arusha where selling and buying will be effected under the guidance of Government officials. TANSORT and TMAA have to oversee and regulate the prices and permits.Treasury Reserve: Since tanzanite is only found in Tanzania, there is a need to reserve tanzanite as a government treasury but also keep some of Tanzanite in a museum so that when the deposits perished, the future generation will have something to see and become tourists attraction and researchers attention.