AFRICAN DEVELOPMENT FUND INSTITUTIONAL SUPPORT PROJECT FOR DOMESTIC RESOURCES MOBILIZATION AND NATURAL RESOURCES GOVERNANCE

Transcription

1 AFRICAN DEVELOPMENT FUND Public Disclosure Authorirzed Public Disclosure Authorirzed INSTITUTIONAL SUPPORT PROJECT FOR DOMESTIC RESOURCES MOBILIZATION AND NATURAL RESOURCES GOVERNANCE UNITED REPUBLIC OF TANZANIA ECGF/ECNR DEPARTMENTS March 2017

2 TABLE OF CONTENTS Acronyms and Abbreviations Currency Equivalents, Fiscal Year, Weights and Measures Loan Information Project Executive Summary Results-based Logical Framework Project Time-frame I - PROJECT STRATEGIC THRUST AND RATIONALE 1.1 Project Linkages with Country Strategy and Objectives 1.2 Rationale for Bank s Involvement 1.3 Development Partners Coordination II PROJECT DESCRIPTION 2.1 Project Components 2.2 Technical Solution retained and other alternatives explored 2.3 Project Type 2.4 Project Cost and Financing Arrangements 2.5 Project s Target Area and Population: Beneficiaries 2.6 Participatory Process for Project Identification, Design and Implementation 2.7 Bank Group Experience and Lessons reflected in Project Design 2.8 Project s Key Performance Indicators III PROJECT FEASIBILITY AND IMPACTS 3.1 Economic and Financial Performance 3.2 Environmental and Social Impacts IV IMPLEMENTATION 4.1 Implementation Arrangements 4.2 Financial Management, Disbursement and Audit 4.3 Procurement Arrangement 4.4 Monitoring and Evaluation 4.5 Governance 4.6 Sustainability 4.7 Risk Management 4.8 Knowledge- building V LEGAL INSTRUMENTS AND AUTHORITY 5.1 Legal Instruments 5.2. Conditions Associated with Bank s Intervention 5.3 Compliance with Bank Policies VI RECOMMENDATION i-viii

3 LIST OF TABLES Table 2.1 Project Components Table 2.2 Project alternatives considered and reasons for rejection Table 2.3 Project Cost Estimates by Component Table 2.4 Sources of Financing Table 2.5 Project Cost by Category of Expenditure Table 2.6 Expenditure Schedule by year Table 2.7 Lessons learned from Previous Operations and Other Analytical Reports Table 4.1 Project Implementation Schedule Table 4.2 Risks and Mitigation Measures Appendices Appendix I. Tanzania Selected Socio-Economic Indicators Appendix II. Bank Group Portfolio in Tanzania Appendix III. Donor Coordination Matrix for Tanzania Appendix IV. ANRC s Baseline study on local content in Tanzania Appendix V. Tanzania Revenue Authority - DPs Technical Assistances and Target Areas Appendix VI. Analytical Work Underpinnings Appendix VII. Developments in the gas sector in Tanzania Appendix VIII. Map of Tanzania

4 Acronyms and Abbreviations AfDB African Development Bank Group MEM Ministry of Energy and Minerals ADF African Development Fund MoF Ministry of Finance and Planning ANRC African Natural Resources Centre MoU Memorandum of Understanding BRN Big Results Now CAG Controller & Auditor General MTFF Medium-term Fiscal Framework CCM Chama Cha Mapidunzi MTR Mid-Term Review CIDA Canadian International Development Agency NDP National Development Plan CPI Corruption Perception Index NPS National Panel Survey CPIA Country Policy and Institutional Assessment CPPR Country Portfolio Performance Review PA&OB Public Authorities and Other Bodies CSP Country Strategy Paper PAF Performance Assessment Framework DfID Department for International Development PBA Performance Based Allocation DPs Development Partners PBO Program Based Operation EARC East Africa Regional Resource Centre PE Public enterprises EIPC Energy Infrastructure Procurement Coordinator PCR Project Completion Report EPP Emergency Power Plants PEFA Public Expenditure and Financial Accountability esws Electronic Single Window System PFM Public Financial Management EU European Union EWURA Energy and Water Utilities Regulatory Authority PFMRP Public Financial Management Reform programme FDI Foreign Direct Investment PPP Public private Partnerships FM Financial Management PPRA Public Procurement Regulatory Authority FYDP Five Year Development Plan PRSP Poverty Reduction Strategy Paper GBS General Budget Support PSP Private Sector Participation GCI Global Competitiveness Index REA Rural Energy Agency GDP Gross Domestic Product RMC Regional Member Countries GECSP Governance and Economic Competitiveness Support Programme SIDA Swedish International Development Cooperation Agency GOT Government of Tanzania SOE State-Owned Enterprises IFMIS Integrated Public Financial Management STAMICO State Mining Corporation Information System IPP Independent Power Producers TANCIS Tanzania Customs Integrated System TANESCO IPTL Independent Power Tanzania Limited TPDC Tanzania National Electric supply Company Tanzania Petroleum Development Corporation Tanzania Revenue Authirity TRA IPSAS International Public Sector Accounting Standards TYS Ten-Year Strategy (AfDB) ISPGG Institutional Support Project for Good Governance JAST Joint Assistance Strategy of Tanzania TZFO Tanzania Field Office TZS Tanzania Shilling JICA Japan International Cooperation Agency UA Units of Account KPIs Key Performance Indicators USAID United States Agency for International Development LGA Local Government Authorities USD United States Dollars MDA Ministries, Departments & Agencies VAT Value Added Tax MDG Millennium Development Goals WB World Bank ZURA Zanzibar Utility Regulatory Authority i

5 Currency Equivalents As of February UA = TZS 3, USD = TZS 2,222 1 UA = USD Fiscal Year 1 st July 30 th June Weights and Measures 1 metric tonne = 2204 pounds (lbs) 1 kilogramme (kg) = lbs 1 metre (m) = 3.28 feet (ft) 1 millimetre (mm) = inch ( ) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = acres Loan Information Client s information RECIPIENT: EXECUTING AGENCY: United Republic of Tanzania Ministry of Finance and Planning Financing plan Source Amount (UA) Instrument ADF million Loan GOT 2.17 million Counterpart Funds TOTAL COST million Timeframe - Main Milestones (expected) Concept Note approval September 2016 Preparation Appraisal July, 2016 October, 2016 Project approval March, 2017 Effectiveness April, 2017 Mid-term Review June 2018 Completion December 2018 Last Disbursement December 2019 ii

6 Paragraph Project Overview Needs Assessment Bank s Added Value Knowledge Management PROJECT EXECUTIVE SUMMARY Topics covered Project name: Institutional Support Project for Domestic Resources Mobilization and Natural Resources Governance. Geographic scope: Entire country Implementation timeframe: Project cost: UA million Expected Outcomes and Outputs: The expected outcomes are (i) Effectiveness of tax revenue collection, as measured by PEFA PI-15 and (ii) improvement in the Resource Governance Index; and (iii) Number of contract negotiated by the Government Negotiation Team (GNT) within the new framework. This will be achieved through the following output level results: (i)enhanced legal and institutional framework;; (ii)strengthening of negotiation capacity ; (iii) support to the development of a local content plicy in the mining and gas sectors; (iv) support to gas domestication strategy; (v) strengthened capacity for tax and non-tax revenue collection and management Project direct beneficiaries: The direct project beneficiaries are: on the mainland side, the Ministry of Energy and Minerals (MEM), the Tanzania Petroleum and Development Corporation (TPDC), the Petroleum Upstream Regulatory Agency (PURA), the Energy and Water Utilities Regulatory Authority (EWURA), the National Economic and Empowerment Council (NEEC) and Tanzania Revenue Authority (TRA). On the Zanzibar side the project will support the Ministry of Energy and Minerals as well as the Zanzibar Utility Regulatory Agency. For Zanzibar: the Ministry of Energy and Minerals the Zanzibar Utility Regulatory Agency (ZURA), and the Tanzania Revenue Authority (TRA). The indirect beneficiaries are the general population of Tanzania, who will benefit from the development of a sector that will provide increased revenues, private sector development and jobs, as well as better access to energy. Benefits will also accrue to women as a result of the project s support to gender-sensitive local content policy and regulatory framework. The private sector will also benefit from the development of the sector and particularly the local content policy developed under the project. In the area of natural resources, the Government needs to develop capacity to fully exploit the large discoveries of natural gas in Tanzania s offshore waters, which make the country a potential global player/producer in the natural gas sector. Proven natural gas resources in the country stand at trillion cubic feet, as at May Based on these resources, the Government of Tanzania (GoT) has continued promoting a mega Liquefied Natural Gas (LNG) project, to be jointly implemented by a consortium comprising the 6 major oil companies active in deep-waters gas exploration. The discussions around this major project entail negotiations of complex agreements between GoT and the consortium on, among other matters, the implementation of a domestic supply obligation under the Tanzania Petroleum Act The Government has recently developed key policy documents that define important orientations in the natural gas sector. Those are considered relatively sound by the international community and private investors, while their implementation still requires significant regulatory and institutional upgrade. Thus, the major gas discoveries represent a great opportunity for promoting economic development, but they also come with capacity challenges for the authorities: challenges related to effectively negotiating the various projects and delivering on the expectations they have raised. Areas where urgent capacity needs have been identified include (i) setting up the regulatory and institutional framework, (ii) negotiations and deal-making skills development; (iii) local content policies formulation, and (iv) skills for designing strategies for domestication of natural gas. Marketing the gas will also come with skills requirements: owing to the envisaged sizable gas volumes, and expected robust production capacity, there is an opportunity for Tanzania to supply local and regional markets, as the global gas demand is expected to remain weak in the foreseeable future. This will enhance intra- regional trade in gas. Tanzania Revenue Authority also require a boost in both human and systems capacity to effectivement forecast and manage increased revenues, in particular those linked to the natural resources sector. The project builds upon Bank s track record of capacity building programs in Tanzania. The Bank has the potential to become a strategic development partner for Tanzania in the natural resources sector, given the strong collaboration and constructive dialogue with GoT. Contract negotiations, in large natural resources development scenarios, is a particularly complex and sensitive issue that requires the establishment of a trust relationship. The Goevrnment has indicated that it would favour working with the Bank because it is perceived as a neutral and technically sound development partner for the sector.. The Bank has been advising the Government in the local content sector and conducted a baseline analysis that provides a diagnostics and road map for support. In addition, the Bank has provided through the African Legal Support Facility (ALSF), capacity building and advisory support to the Government focused on negotiation of gas production-sharing agreements and other related gas contracts. The proposed project will represent a scaling up of support in this area. In addition in the context of the High 5 and the New Deal on Energy the Bank has developed a sound framework to support the development of the energy sector on the continent, to which that project will be an important contributor by improving access to energy and developing a gas market at national and regional level. The proposed project will build knowledge, develop skills in regulating, overseeing and monitoring the natural resources sector together with accounting and financial management, various forms of audit and public procurement. The implementation of the project will strengthen governance in the natural resources sector by (i) training staff in regulatory issues; (ii) enhancing knowledge of the industry to promote knowledge based policy decisions; and (iii) developing various important regulations, guidelines and manuals to guide and inform the work of public officials. Knowledge will also be acquired through skill transfer by external experts, and study tours to appropriate institutions in other countries. In addition, sensitisation and public awareness workshops will be undertaken on issues relating to the development of the gas sector with specific emphasis on local content policies and domestication of the resources. The Bank will disseminate knowledge through sharing findings of supervision missions, progress reports, and the Project Completion Report. Lessons learned will inform future operations. iii

7 Results-based Logical Framework Country and project name: Tanzania: Institutional Support Project for Domestic Resources Mobilization and Natural Resources Governance Purpose of the project: To promote inclusive growth by enhancing economic and financial governance through improved domestic resources mobilization and effective natural resources governance. IMPACT OUTCOMES OUTPUTS RESULTS CHAIN Improved economic performance through enhanced public finance management and natural resources governance Increased domestic resources mobilization Improved natural resources governance sector PERFORMANCE INDICATORS Indicator (including CSI) FDI in the Natural Resources sector Baseline 38% of total FDI (2015) Tax to GDP Ratio 13 (2015) Effectiveness of tax collection PEFA P.I 15 Resource governance index (composite score) Number of contract negotiated by Government Negotiation Team (GNT) within the new framework Component 1: Support to development of the natural resources sector 1.1 Enhancement of the legal and institutional framework 1.2 Capacity building for negotiations in the natural gas sector 1.3 Support to the development and implementation of a local content policy in the mining and gas sectors 1.4 Support to domestication strategy Establishment of the Petroleum Upstream Regulatory Agency (PURA) Development of implementing Regulations, Model Agreements and Guidelines for the gas sector GNT fully operationalised Training needs assessments for MEM, PURA and GNT and development of tailored training programs Training in prepararion for negotiations, conducting negotiations, knowledge of the industry and contractual arranagements Roadmap for development and implementation of a local content policy Study of the supply chain in the mining and gas sectors Monitoring system to track progress by local SMEs in the extractive sector. B+(2013) 50/100 (2015) None (2015) PURA Created by law but not operational Regulations not existing or needing amendment No GNT (2015) Target 48% of total FDI (2019) 14,9 (2019) A(2019) 60/100 (2019) 7 contracts negotiated (2020) PURA established functional Regulations developed and GNT fully operataionlised (2019) (2015) (2019) No training Training plan in place needs assessment report and training plan finalised 0 (2015) 40 staff trained - at least 30% female (2019) (2015) No roadmap Gas domestication strategy developed (2015) No strategy in place Knowledge sharing & studies on best practices for gas domestication (2019) Policy guidelines developed (2015) None (2018) Study completed and validated (2015) None (2018) System developed and operationalized (2018) Strategy developed 0 (2015) 20 Government officials at least 30% female (2019) MEANS OF VERIFICATI ON Bank of Tanzania and & IMF MEM reports MoFP & IMF Natural Resource Governance Institute Report MEM progress reports Project progress reports Availability of Regulations, Model Agreements and Guidelines MEM progress report MEM and PURA reports PURA report PURA report NEEC progress report MEM progress report MEM progress report RISKS/MITIGATION MEASURES Risk 1: Implementation capacity constraints both on the side of GoT and the Bank: Lack of requisite skills for the natural resource sector could slow down the pace of implementation. Mitigation 1: GoT is giving a priority to the natural resources sector and has an experienced team in MEM dedicated to this sector. Mitigation 2: The Bank will set up a multi-disciplinary team to supervise project implementation. Risk 2: Fiduciary risk. Although Tanzania has made good progress in strengthening institutions and addressing corruption, weaknesses still remain, and these will continue to pose a risk. Mitigation 2: The ISP project will improve the fiduciary environment with its compliance with the Bank s procurement regulations and annual audit reports. Risk 3: Lack of commitments to reforms: Sustained support at the highest level of Government is required for the success of reforms in the domestic resources mobilization and natural resource sector. Meanwhile, GoT long processes may impact on the implementation process. Technical assistance to key institutions in charge of gas domestication (2015) None (2019) 50 PURA, MEM and TPDC staff trained MEM progress report iv

8 KEY ACTIVITIES S Component 2: Enhancing Domestic Resources Mobilization 2.1 Strengthening capacity for Tax Revenue collection and management 2.2 Strengthening capacity for non-tax revenue collection and management Component 3: Project management 3.1 PIU strengthened and production of project reports 3.2 Project evaluation and monitoring reports COMPONENTS Training in tax policy, taxation of extractive industry, transfer pricing, tax treaty and negotiations (at least 30% female) ZRB s Revenue forecasting model enhanced Upgrade Tanzania Customs Integrated Systems (TANCIS) to fully-fledged electronic Single Window System (esws) No training (2015) Basic forecasting model in place (2015) TANCIS in place (2015) Procurement of two (2) mobile Scanners No mobile scanner (2015) Enhancement of Revenue Gateway System for tax and non-tax revenue collection Functionality of system limited to tax revenue collection Training in Programme Based Budgeting No training (2015) 150 TRA,TR, ZRB, staff trained(2019) Forecasting model enhanced (2018) Fully fledged esws operationalized (2018) Mobile Scanners operational (2018) Functionality enhanced for both tax and nontax revenue collection (2018) 100 TRA,TR, ZRB, staff trained(2019) TRA and ZRB progress reports Mitigation 3: Constant TRA progress reports TRA progress reports TRA progress reports TRA progress reports TRA and ZRB progress reports Number of reports produced (quarterly) None reports PIU progress reports Steering committee meetings & reports None reports PIU progress reports Component 1: Support to development of the natural resources sector Component 2 Enhancing Domestic Resources Mobilization Component 3 : Project management INPUTS dialogue between GoT and the Bank and Development Partners, should ensure continued commitment to these important reforms in this sector. Inputs : - Funding in million UA ADF : UA million GoT : UA 2.17 million Total project cost: UA million v

9 Table 1: Project Implementation Schedule Years Quarter Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Action By Activities Project life cycle Loan approval Fulfilment of conditions for disbursement Start of the project and launch Supervision and Monitoring Mid-term review Disbursement of Funds Aubmission of annual audit reports Government completion report AfDB Project Completion Report AfDB GoT AfDB & GoT AfDB AfDB/ GoT AfDB GoT GoT AfDB All Components General Procurement Notice published Recruitment of contractors Contract local partner training institute Procurement of IT equipment and software Submission of progress reports from contractors Training and workshops GoT GoT GoT GoT GoT GoT vi

10 REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF TANZANIA TO FINANCE THE INSTITUTIONAL SUPPORT PROJECT FOR DOMESTIC RESOURCES MOBILIZATION AND NATURAL RESOURCES GOVERNANCE Management submits the following Report and Recommendation on a proposed ADF Loan of UA million to the United Republic of Tanzania to finance the Institutional Support Project for Domestic Resource Mobilization and Natural Resources Governance. I. STRATEGIC THRUST AND RATIONALE 1.1 Project Linkages with Country and Bank Strategies and Objectives The proposed operation is aligned with Tanzania s Development Vision 2025, the National Strategy for Growth and Reduction of Poverty II (NSGRP II),, the Zanzibar Strategy for Growth and Reduction of Poverty (ZSGRP II) and the Second Five-Year Development Plan II (FYDP II, 2016/ /21). The project will support GoT s policy objectives in domestic resources mobilization and in developing the natural resources sector, through well-targeted capacity building activities and long term technical assistance. The Government has recently developed key policy documents that define important orientations in the natural gas sector. Those are considered relatively sound by international standards, while their implementation still requires significant regulatory and institutional upgrade. These initiatives indicate GoT s commitments to strengthening the oil and gas sector. The new legislation aims to ensure that there is transparency and accountability in the extractive industry, and seeks to establish an effective framework for fiscal rules and management of oil and gas. Particular emphasis is put on local content policy in the gas sector, which has also been developed. The overall coordination of local content policy has been vested in a dedicated directorate at the Prime Minister s office. Overall, the Government of Tanzania has prioritized the utilization of natural gas to satisfy the domestic market needs for energy, and to feed petro-chemical industries. This vision is articulated in the National Energy Policy 2015 and enshrined in the Petroleum Act It is a priority, and a vision, that could be supported by targeted intervention under the proposed operation. TPDC, the national oil company, manages the Government shares in developing the gas projects with the objective of maxisimising benefits, influencing project development as well as building national expertise in the sector. The exisiting legal and institutional framework has to be strengthened with implementating regulations and strategies-tailored to the country vision but aslo meeting the best international standards in order to attract and retain foreign direct investments in the natural resources sector Alignment with the Bank s Strategy: The proposed project is also firmly anchored on the objectives and priorities of the Bank s Tanzania Country Strategy Paper (CSP) The CSP places emphasis on strengthening governance and accountability (Pillar II), 1 Box 1:.Key new provisions in recent policy documents in the gas sector Below are some of the key policy orientations contained in the 2015 Petroleum Act, the 2013 Natural Gas Policy, the draft Natural Gas Utilisation Master Plan and the 2015 Oil and Gas Revenue Management Act: Clarification of the policy objectives and institutional roles at the upstream, midstream and downstream levels; Creation of a Petroleum Upstream Regulatory Agency and a National Oil Company (the Tanzania Petroleum Development Corporation, TPDC ) with clearly separated roles.the two roles were hitherto carried out by TPDC with perceived conflicts of interests. New provisions for the Model Production Sharing Agreement (PSA); Confirmation of the conditions for onshore LNG plants. Domestic market to be given priority over exports To establish a fund to manage gas revenues

11 including in sectors such as energy, oil and gas, as well as in PFM, where domestic resources mobilization is of critical importance. The proposed project is also aligned with the Bank s Ten- Year Strategy (TYS), which has Governance and Accountability as a core operational priorityand puts specific emphasis on the need for RMCs to enhance domestic resources mobilization to support their development efforts, in the new global aid architecture characterized by diminishing Official Development Assistance (ODA). It is also aligned to the High 5s, particularly the Light up and Power Africa objectives that support Transformative Partnership for Energy in Africa.It will notably support the implementation of the New Deal on Energy by developing the country s gas resources with priority given to domestic and regional markets. Developing these ressources will provide significantly increased access to energy for public consumption and private sector development at national and regional levels. Furthermore, the project will support the High5s objective to Industrialize Africa, since natural gas will supply domestic markets, providing sustainable affordable energy source for industrial development. The proposed operation is also in line with the Governance and Strategic Framework and Action Plan (GAP II), which supports, among others, institutional capacity development in the public sector, domestic resources mobilization, sector governance and enhancing accountability and transparency in the use of public resources Complementarity and synergy with past and ongoing Bank operations: This proposed project will complement and enhance the effectiveness of ongoing Bank operations by addressing capacity gaps, in the public sector, in domestic resources mobilization and natural resources governance. It is complementary, and in synergy, with the ongoing ISPGG III in a number of ways, including: (i) ISPGG III, through improving PFM, will contribute to further strengthening public sector capacity to generate and manage increased resources from enhanced domestic resources mobilization; and (ii) ISPGG III, through improving the business enabling environment, will also render the oil and gas sector more attractive for striking the required mega deals and attracting private sector investments Complementarity and synergy with development partners operations: The proposed operation will also complement the interventions of other development partners. In the natural resources sector, under the ongoing multi-donor PFMRP IV, 2014/18, oil and gas is recognized as an important sub-sector fraught with emerging public financial management issues 1 ; but the sub-sector is not being supported by PFMRP IV. There has, however, been support from GiZ, NORAD, JICA, the World Bank and the EU focusing on targeted technical assistance in specific areas of the sector. Consultations were held with concerned parties during preparation and appraisal missions to avoid duplication, build synergies and enhance collaboration. An overview of other DPs operations is presented in Appendix 3. In the area of domestic resources mobilization, the following DPs are supporting TRA: DfID, Denmark, Norway, the US Treasury, IMF, World Bank and JICA (see Appendix 4 2 ). While this list amounts to a multiplicity of DPs, the assistance envisaged from AfDB under the proposed project will complement, and not duplicate, the support of the other DPs. The proposed project will be complementary by focusing on the following identified areas: (i) Domestic Taxes (large taxpayers); (ii) Domestic Taxes (medium and small taxpayers); (iii) Customs and Excise and (iv) Research and Planning. 1.2 Rationale for Bank s Involvement The socio-economic challenges facing Tanzania in the context of a huge natural resource base require continued pursuit of institutional capacity building development 1 See Mid-Term Review for the Public Finance Management Reform Program Phase Four, Tanzania, Draft Final Report, Innovex, July Annex 4 indicates the DPs supporting TRA and their areas of focus. 2

12 of a sound regulatory framework, and enhancement of transparency and accountability in the management and utilisation of public resources. The country recently developed key policy documents that define important orientations in the natural gas sector. While these are considered relatively sound by international standards, their implementation still requires significant regulatory and institutional upgrade. Addressing governance challenges by strengthening the policy, legal, regulatory and institutional frameworks in the oil and gas sector is timely, given that GoT strategic policy orientations in the sector are currently being formulated, and long-term contract negotiations are contemplated with the private sector. The quantum of financial and non-financial resources GoT will be able to extract from natural resources will depend very much on its ability to create the enabling environment and negotiate favorable deals with investors. The Bank should intervene now, when there is still an opportunity to make an impact in natural resource governance in Tanzania While support to Tanzania s oil and gas sector is critical and timely, it is also important to further strengthen the country s broader revenue mobilization efforts through institution strengthening. The Government has faced challenges in financing its fiscal gap, due to low levels of domestic revenue in a context of increasingly unpredictable external assistance. With tax/gdp ratio of 13%, Tanzania falls behind its peers such as Rwanda (15,5%), Kenya (18%) and Uganda (14,3%). This poor performance is explained by low VAT collection, administrative inefficiency and low tax payer compliance. Addressing this requires a combination of policy and tax administration reforms. These have been identified as a challenge in the Five Year Development Plan (FYDP II) and steps being taken to address it include (i) fighting tax evasion; (ii) streamlining exemptions, (iii) widening the revenue base; and (iv) strengthening the capacity of revenue collecting agencies. More needs to be done to increase both tax and non-tax revenue collection, including in the areas of upgrading the IT system, enhancing forecasting capacities, strengthening compliance risk management, and building capacity for taxation of the extractive industry. Through the proposed project, targeted support will be provided to Tanzania Revenue Authority, and Zanzibar Revenue Board to deal with the challenges and weaknesses identified through (i) provision of training and other forms of capacity-building to the designated beneficiaries; (ii) procurement of ICT and other equipment and supplies; (iii) review of key policy documents; (iv) financing key studies to pave the way for further reforms and appropriate policy implementation; and (v) provision of technical assistance An added value of this operation lies in the fact that the Bank is seen by GOT as a reliable and trusted partner. Hence, the strong basis for policy dialogue built over the years makes it easy to engage with the government on critical and sensitive issues such as natural resources management. The Bank s vast experience in implementing similar projects, across the continent, is also a source of value addition Analytical Works Underpinning: The design of this project is guided by various analytical and diagnostic reports as well as broad consultations during the preparation and appraisal missions. A high level mission was undertaken by the Bank in April 2016 to engage the Minister of Energy and Minerals and other senior officials in discussions on the sector challenges. The mission was the opportunity to confirm key policy orientations, delineate the needs in terms of capacity building and identify main areas of support. In addition, the Bank conducted a study to provide an overview of the main developments, key orientations, challenges and opportunities in the natural resources sector in Tanzania, and this was notably used to produce an annex to the Tanzania CSP. The Bank also conducted a baseline study of the local content sector in order to provide a diagnostic of the sector,provide the Government with a roadmap and inform the Bank support. Furthermore, the Bank recently developed 3

13 knowledge tools on local content policy formulation and capacity building for negotiations. These knowledge tools provide a conceptual approach based on knowledge building and tailored to country needs to providing support in these two key areas of the project. Furthermore, the AfDB is conducting a study of the Gas Domestication strategy developed and implemented in South Korea over the last 30 years in order to delineate lessons learnt that could be used for RMCs. Finally, the Bank developed Guidelines for Women s Economic Empowerment in Oil and Gas Industries in Africa that are used to inform the activities to support the elaboration of the local content policy as well as the regulatory framework. These studies and knowledge tools have constituted valuable inputs to the design of the key activities of the project. Those were also discussed in details with relevant stakeholders during the prepararation and appraisal missions. Other documents underpinning the design of the operation include the Tanzania Revenue Authority Fourth Corporate Plan 2013/ /18; Fourth Review of the IMF Policy Support Instrument and IMF Article IV Consultation Report, July 2016; Tax Administration Diagnostic Tools Assessment; March Box 2:.Key Challenges for local procurement in the extractives sector in Tanzania The report conducted by the ANRC indentifies six key issues: 1) gaps in the legal framework for regulation, 2) the issue of a supplier database, 3) SME development and enterprise centres, 4) addressing the lack of capital for Tanzanian entrepreneurs, 5) support and prioritization for larger industries, and 6) soft vs hard local content regulations. Key findings include a general weakness in PA2015 and even more so in the Mining Act 2010 in terms of promoting local content. There is confusion about who is responsible for monitoring and enforcing local content in the minerals sector and a lack of information about any enforcement actions taken to date. Unlike in many other countries, there are no clauses giving companies value-added activities in-country preference if they are within a certain margin of the lowest bid for a tender in either petroleum or mining. Finally, there are multiple definitions of a local company in Tanzania. 1.3 Development Partners Coordination Development partners support to Tanzania is coordinated by the Ministry of Finance and Planning, responsible for aid mobilisation, coordination and reporting. Development partners collaboration is generally good, but there is room for improvement of the aid coordination mechanism particularly in budget support. At the moment there is no sectoral working group in the gas sector, though there is one in the energy sector. The Bank mission team has been able to meet relevant development partners during preparation and appraisal and was able to ensure that the proposed project does not entail duplication of activities and provides the opportunity for building synergies and collaborations. PFM reform dialogue is conducted through the PFMRP IV framework, in which the Bank participates through the Field Office, TZFO, which has been active in institutional capacity and PFM dialogue between GOT and development partners. II. PROJECT DESCRIPTION 2.1 Project Components Project Objectives: The overall development objective of the proposed project is to promote inclusive growth by contributing to supporting the development of the natural resources sector and enhancing domestic resources mobilization. The two central pillars/components of the proposed operation are inextricably linked: sound development of the natural resources sector will make significant contribution to providing Tanzania with domestically-generated resources to finance its development programme. The enhanced policy and regulatory framework and related improvements in natural resource governance is expected to attract large investments to develop the country s gas resources, while the development of the local SMEs, boosted by the local content policy, will generate additional tax revenues. Operationalization of the Government Negotiations Team (GNT) will also boost negotiation 4

14 capacity and ensure good deals for the Government. Thus, development of the gas sector is an important initiative in domestic resource mobilization, for which the Tanzania Revenue Authority is expected by Government to develop the requisite capacity to respond to this challenge. In adition to this, capacity development of Tanzania Revenue Authority, through enhancement of the revenue gateway system, better forecasting and capacity building of staff, will enhance its capacity to raise and manage tax and non-tax revenues Project Components: The project has three components: (i) enhancing governance in the natural resources sector (ii) enhancing domestic resources mobilization and (iii) Project Management. Component 1: Enhancing governance in the natural resources sector The interventions in this component will focus on building capacity of the government to develop the country s natural gas resources and maximize economic development outcomes. It will include support to the development of legal and institutional frameworks,building capacity for negotiations, and support to the formulation and implementation of local content and gas domestication strategies. These activities are essential as the sector is being developed to ensure that the country maximizes development benefits from its large gas reserves and avoids the curses associated with natural resources. It should be underlined that these activities are preparatory and it is expected that the gas production, and associated fiscal revenues, will take place after the project implementation phase. The main beneficiaries are, on the mainland side, the Ministry of Energy and Minerals, the Tanzania Petroleum and Development Corporation, the Petroleum Upstream Regulatory Agency, the Energy and Water Utilities Regulatory Authority, and the National Economic and Empowerment Council. On the Zanzibar side the project will support the Ministry of Energy and Minerals as well as the Zanzibar Utility Regulatory Agency. The following activities have been discussed and agreed with the respective institutions; Support to the legal and institutional framework The support will aim at developing and reinforcing the institutions in charge of regulating and monitoring the sector as detailed in the Petroleum Act of The support will also aim at developing the necessary regulations under the act to facilitate implementation and provide a clear legal framework for the sector for both public and private entities.a key institution in that context is PURA, whose role and mandate are particularly important. However, as a newly established agency, the capacity building needs are significant. Currently PURA has staff allocated mainly drawn from MEM and TPDC as well as building allocated. However the staff needs training in regulatory functions and the ICT based management system is required among others. NORAD has just conducted a detailed needs analysis for a comprehensive ICT system for PURA, following consultations with NORAd and the Government it is suggested that the AfDB will provide the key elements required under the study. The AfDB support will include design, procurement and installation of ICT infrastructure, technical Assistant in development of various regulations and operational documents as well as essential trainings. Particular attention will be given to gender equality in that sector. The tool developed by the ANRC Guidelines for Women s Economic Empowerment in Oil and Gas Industries in Africa will be used as it provides a checklist to identify and promote women economic empowerement. This will be useful when developing the regulatory framework. 5

15 Capacity building and support to negotiations The proposed project will support the capacity enhancement of the Government Negotiations Team (GNT) to effectively represent the interests of GoT in negotiations with private investors and regional partners involved in various gas development projects. The GNT is coordinated by MEM, and its membershipincludes key agencies such as PURA and TPDC, which play an important role in supporting and advising the team. The proposed project will support the establishment of the negotiation framework and defining the operating environment (structure of the GNT, strategy for future negotiations, mandate, roles, strategic direction, service delivery model, scope of interventions, etc.). It will also include studies and benchmarks to inform the negotiation strategies and build knowledge of the industry. The support will benefit from the recently developed ANRC s Negotiations Capacity Building Support Training Program. It is a specific response to the need to strengthen the ability of negotiators. The framework was developed in collaboration with the ALSF. The desired outcomes are a clear mandate, an empowered team of negotiators, clear lines of authority and policy, legal and institutional parameters to stabilize the environment for negotiating and implementing agreements. Support to the implementation of a local content policy Tanzania has developed a local content policy for mining and gas, aimed at ensuring that a high proportion of project inputs are sourced locally without compromising the economic benefits of the project. The proposed project will support the implementation of the policy to capture the value of natural resources wealth as quickly and as early in the project life cycle as possible. The NEEC, PURA, and EWURA are key institutions in the sector. The AfDB support will include the development of a detailed roadmap for the local content policy, economic analysis to inform the policy options. The badeline study of the local content sector, currently underdaken by ANRC, will provide a diagnostic of the situation that will inform the Bank support. The AfDB support will also rely on the ANRC s local content roadmap which assists policymakers in formulating and implementing effective local content policies by outlining a step-by-step process to guide key considerations and weigh trade-offs. It is generic in that it can be used in various contexts to enable governments to optimize the economic value derived from developing natural resources. The assumption is that in so doing there is an economic multiplier effect that results in greater value extraction by host countries. Support for the development and implementation of a Gas domestication strategy The proposed project will help build the capacity of relevant institutions, particularly MEM, EWURA and TPDC, to enable them evaluate various alternatives for gas utilization, with particular focus on the economics of LNG development, based on previous experiences and best practices. ANRC has conducted a case study on gas domestication in South Korea, from which key lessons can be drawn for African gas producing countries like Tanzania.The aim is also to gain negotiation skills in administering and monitoring LNG contract compliance and performance. The finalisation of the Gas Utilisation Master Plan (NGUMP) is an important milestone in that regard. The Bank s support will include technical and market analysis for domestic and regional markets, studies including on pricing models, technical assistance in formulating the gas domestication and distribution plan, as well as support to draft regulatory tools and standards to develop gas transport, storage and distribution. 6

16 Component 2: Strengthening domestic resources mobilization. Under this component, the proposed project will provide targeted support to key revenue collection agencies to complement the natural resources governance intervention. It will focus on building capacity for both tax and non-tax revenue collection, to complement support already being provided by other Development partners to the TRA on the Mainland. Beneficiaries on the Zanzibar side are the Zanzibar Revenue Board, and the Tanzania Revenue Authority. TRA is the main revenue collection body in Tanzania. Some of the recent achievements include the implementation of e-filing of VAT; introduction of computerised drivers licence system; customs modernization through the implementation of import and export commodity database system; electronic cargo tracking and the implementation of computer forensic laboratories for tax investigations. It has also succeeded in promoting violuntary compliance by increasing taxpayer registration through the introduction of electronic fiscal devices; establishment of an internationaltaxation unit; and the introduction of an enterprise-wide risk management system. TRA also instituted the Tax Modernization Programme to help implement various initiatives that were earmarked in the 3 rd Corporate Plan, with support from development Partners, such the World Bank, DFID, Denmark, Norway, IMF, Korea, and Japan. TRA s operations are guided by the fourth Corporate Plan 2013/ /18, focusing on three strategic themes: convenience, compliance and continous improvement. Support to tax revenue enhancement The project will also finance the acquisition of two mobile X-ray scanners, for containerized cargo. They wil be used for inspection of medium risk goods as per computerized risk management (CRMS) selectivity. Since 2008, the volume of importation at Port of Dar es salaam increased significantly resulting in congestion of the port. To address this challenge the government introduced Inland Container Deport (ICD). With this arrangement most of containers were delivered to ICD immediately after discharge from vessel. Since 2005, the TRA has been using the Tax Revenue Forecasting Model (TRFM) to carry out its revenue forecasts and establish annual revenue targets for each tax item collected at all levels and monitor revenue performance. The effectiveness of the model depends on the reliability of data, which is usually weak and of insufficient quality. This situation has compromised the quality of revenue forecasting at TRA. The proposed project will provide technical assistance in reviewing and enhancing the existing revenue forecasting model. The output will be an upgraded tax revenue forecasting model integrated with the database for data storage and model performance indicators; enhance the model s capacity to produce at least five year forecasts with reasonable level of accuracy; development of a technical and instructional manual for operating and finetuning the model; and related training in revenue forecasting. A package of capacity building support geared towards boosting tax revenue collection will also be provided to beneficiary institutions. Support to non-tax revenue enhancement As part of efforts to boost revenue collection, Government has tasked TRA to take steps to facilitate electronic payment of non-tax revenues across Government institutions. A thorough evlaution carried out by a team of experts concluded that the existing Revenue Gateway System should be enhanced to handle the additional capability, instead of establishing a new system solely focused on non-tax revenues. It will require adding functionalities that will facilitate, among others, a visibility of reports on revenue collection for both tax and non-tax revenues to 7

17 the ministry, as well as a customization of the functions of the Revenue Gateway System to extend their usage to other stakeholders. The proposed project will support this effort. To achieve this, the project will support TRA s efforts to enhance voluntary tax compliance with a view to increasing domestic revenue from 61% of total revenue in 2015 to 70% by This is partly necessitated by the declining international trade taxes resulting from regional integration. The proposed operation wil help to enhance Tanzania Customs Integrated Systems (TANCIS) to a fully-fledged electronic Single Window System (esws). This will improve competitiveness of Tanzania in cross borders trading environment in the region. The aim is to gradually have an integrated solution, which will facilitate application and submission of relevant documents and single point of getting all information on imports, exports and transit clearance processes while ensuring the safety and security interests of the country. The single window environment aims to expedite and simplify information flows between businesses and the Government. It is a system that allows traders to lodge information to a single platform to fulfil all import- or export related regulatory requirements. Component 3: Project Implementation Unit This component will finance the cost of running the Project Implementation Unit (PIU). It will also cover the cost of annual audits as well as training of PIU staff.. Table 2.1: Project Components and Estimated Cost Components Component description Estimated Cost (UA 000) Component 1: Enhancing governance in the natural resources sector Sub-component 1.1: Support to the legal and institutional framework Under this component, activities will cover the elaboration of the necessary regulations, rules and guidelines and capacity building for the establishement of PURA, with the following activities: Design, procurement and installation of ICT infrastructure, Technical Assistant in development of various regulations operational documents including upstream regulations, Model Plan for Development and Operation Document, data management and fiscal metering manuals, Facilitate the benchmark study and development of guidelines for contractual arrangements with investors including the alignment of the Model Production Sharing Agreement (MPSA) with the Petroleum Act, Training on Petroleum resources evaluation. 2,737.2 Sub-component 1.2: Capacity building and support for natural resource management Sub-component 1.3: Support to the Through the sub-component, the project will support the government to negotiate agreements in the gas sector with the following activities: Support to the establishment of the negotiation framework and defining the operating environment (structure of the GNT, strategy for future negotiations, mandate, roles, strategic direction, service delivery model, scope of interventions, etc.) Studies and benchmarks to inform the negotiation strategies, Long course training on the Oil and Gas (Eight (8) geoscientists and engineers will be trained in oil and gas courses at the Masters Level. The course will include Petroleum Geoscience, petroleum Engineering, reservoir evaluation, Development Geology, Oil and Gas economics, subsurface and LNG Technology) Capacity building on processing and interpretation of 3D seismic data (Capacitate Four (4) geoscientists in 3D seismic data processing and interpretation. Expected output will be processed (SEGY DATA) 3D seismic data and interpretation). Through the sub-component, the project will support implementation of the following activities: 8 4,749.7

18 Components Component description Estimated Cost (UA 000) elaboration and implementation of a local content policy Sub-component 1.4: Support to the elaboration of a gas domestication strategy Develop a detailed implementation plan that can be developed using the ANRC s toolkit for local content policy formulation, Develop, install and operationalize monitoring and evaluation system for Local Content (IT system to register and evaluate local SMEs in the extractive sector, in collaboration with private sector), Analysis of the supply chains in the mining and gas sectors, Analysis of capacity of local SMEs in relation to demand and capacity gap analysis, Under this sub-component, the Bank support will include: Conducting the commercial, technical and market analysis for domestic and regional market to inform policy orientations and the negotiation process Studies including on pricing models, Technical assistance in formulating the gas domestication and distribution plan, Support to draft regulatory tools and standards to develop gas transport, storage and distribution, Development of a detailed study on structuring the midstream and downstream gas market, Component 1 Sub-total 8,031.5 Component 2: Enhancing Domestic Resources Mobilization Sub-component 2.1 Enhancing Tax revenue Collection 2.2 Enhancing non-tax revenue collection This component will help to modernise the tax administration both at Mainland and Zanzibar level. Under this sub-component, the Project will support: Procurement of two (2) mobile Scanners a) Facilitate speedy clearance while supporting optimal revenue collection and security across sea ports, airports and border stations. b) Extend the scanning operations across major seaport, airports and land border stations. Improve ZRB s working environment and enforcement functions. Enhance ZRB s revenue forecasting model Activities under the second sub-component will focus on: Enhancement of TRA s Revenue Gateway System for non-tax revenue collection; Training of TRA staff on the non tax functionality of the Revenue Gateway System; Upgrade Tanzania Customs Integrated Systems (TANCIS) to fully-fledged electronic Single Window System (esws), During project preparation and appraisal, a number of options were explored regarding the areas of intervention, the scope of the activities, the number of institutions to support modality of delivering the capacity building support and implementation arrangements. Based on these considerations, the recommendations from analytical works, as well as lessons from the Bank s and other DPs capacity-building operations, it was agreed with GOT to provide , ,576.0 Component 2 Sub-total 12,118.9 Component III: Project Management The PIU team will be handling and coordinating all activities for the beneficiaries both in Mainland and Zanzibar. Under this component, the project will support: Project operating and audits costs Training activities for the PIU teams Contingency (5%) 1,036.0 TOTAL 21, Technical Solution Retained and Other Alternatives Explored

19 balanced intervention targeting both natural resources governance, and domestic revenue mobilization. The possibility of focusing the project entirely on capacity building for natural resources was considered, in view of the huge capacity issues in the sector and the challenge of managing natural resource revenues. However, it was agreed to extend some support to other agencies such as TRA. The objective is to maximise the impact on the most important government agencies, as well as facilitate coordination, which can sometimes be a challenge. It was decided to set up a PIU at TPDC, given the natural resource focus of the project and TPDC s capacity to handle reporting and procurement activities, while the Zanzibar side will use the exisiting PIU set up for ISPGG III. In the past, the use of two PIUs, one for the Mainland and one for Zanzibar, has ensured that delays in one part of the country do not affect the other part, while at the same time provding opportunities for experience-sharing. Following consultations with government agencies and experience from DPs, it was decided to have the PIU for mainland beneficiaries located at TPDC. Table 2.2: Project Alternatives Considered and Reasons for Rejection Alternative Brief Description Reasons for Rejection Focus entirely on natural resource management Channel the resources through TRA s Tax Modernization programme, supported by a number of Development Partners. The possibility of focusing the project entirely on capacity building for natural resources was considered, in view of the huge capacity issues in the sector and the challenge of managing natural resource revenues. The possibility of channeling the project resources through TRA s Tax Modernization programme was considered. This has the advantage of maximising harmonization with other Development Parrners supporting tax policy and tax revenue administration reforms in Tanzania. While it is important to give particular attention to the natural resources sector, its links with the Government s wider domestic revenue mobilization efforts is critical. It is on this basis that the bulk of the funding is allocated to component 1, and a smaller amount allocated to domestic revenue mobilization (both tax and non tax revenues). Given that a large part of the resources provided by the project is in the area of natural resource governance, the team found it inappropriate to channel the resources through TRA. Instead, TPDC is designated as the PIU for more effective coordination. However, steps are being taken to ensure that the limited support to TRA is coordinated with the Tax Modernization programme. 2.3 Project Type The proposed project is an institutional support project designed to complement ISPGG III, and developcapacityto maximise benefits from the gas sector. It aims at contributing to building the capacity of GoT to develop its large gas resources to promote inclusive economic gowth. 2.4 Project Cost and Financing Arrangements The estimated total cost of the project, net of taxes and duties, is UA21,75 million (including 10% GoT contribution). A contingency of 5%, has been factored in the project cost. Tables (2.3) and (2.4) present the estimated project cost by component and sources of finance, whereas Tables (2.5) and (2.6) present the estimated project costs by Category of Expenditure. Details of the project cost by component and expenditure category are also presented in Technical Annex B2. The Bank will finance UA million while the GOT contribution is UA 2.17 million. 10

20 Table 2.3: Project Cost Estimate by Component Component Total Cost, '000 US Total Cost '000 UA % Total Total Foreign Component I : Enhancing governance in the natural resources sector 10, , % Component II: Enhancing Domestic Resources Mobilization 16, , % Component III: Project Management % TOTAL BASE COST 28, , % Contingency (5%) 1, ,036.0 TOTAL PROJECT COST 29, , % Table 2.4: Sources of Financing Source of funding Costs in Thousands UA Foreign Local Total % of total amount ADF Loan 18, , % GoT Counterpart funding - 2, , % TOTAL PROJECT COST 18, , , % Table 2.5: Project Cost by Category of Expenditure ADF (in thousand UA) Expenditure Account Foreign Local Total Goods 10, , ,404.9 Services 6, ,242.8 Operating Costs TOTAL BASE COST 17, , ,647.7 Contingency (5%) TOTAL PROJECT COST 18, , ,580.0 Table 2.6: Project Cost by Category of Expenditure GoT (in thousand UA) GoT Goods - - Services - 2,029.7 Operating Costs TOTAL BASE COST - 2,072.0 Contingency (5%) TOTAL PROJECT COST - 2,175.5 Table 2.7: Expenditure Schedule by year (in thousand UA) COMPONENT Total Enhancing governance in the natural resources sector Enhancing Domestic Resources Mobilization 2, , , , , , , ,118.9 Project Management TOTAL BASE COST 6, , , ,719.5 Contingency (5%) ,036.0 Total Project Cost (incl. contingency) 6, , , ,

21 2.5 Project s Target Area, Population and Beneficiaries The direct project beneficiaries are: on the mainland side, the Ministry of Finance and Planning, the Ministry of Energy and Minerals (MEM), the Tanzania Petroleum and Development Corporation (TPDC), the Petroleum Upstream Regulatory Agency (PURA), the Zanzibar Utilities Regulatory Authority (ZURA), the Energy and Water Utilities Regulatory Authority (EWURA), the National Economic and Empowerment Council (NEEC), Tanzania Revenue Authority (TRA). On the Zanzibar side the project will support Tanzania Revenue Authority Zanzibar, Zanzibar Revenue Board. The indirect beneficiaries are the general population of Tanzania, who will benefit from the development of the gas sector, that will provide increased revenues, employment oppotunities, private sector developmentand better access to energy. Benefits will also accrue to women as a result of the project s support to gender-sensitive local content policy and regulatory framework. The private sector will also benefit from the development of the sector and particularly the local content policy developed under the project. 2.6 Participatory Process for Project Identification, Design and Implementation Wide stakeholder consultation was carried out with Ministries, Departments & Agencies (MDAs), development partners, the private sector, NGOs and civil society during project preparation and appraisal. The preparation mission was preceded by two high level missions led by the ANRC director that met the Minister of Energy and Minerals and the Chief Secretary to discuss policy objectives and the key support areas of the project. The private sector, both local and the international investors, was adequately consulted, mainly through umbrella bodies, and views expressed guided the selection of several key activities, notably with regards to the development tof the regulatory framework, support to negotiations and the elaboration of a local content roadmap. The appraisal mission held discussions with the key beneficiaries both bilaterally and as a group to ensure that needs were fully identified. The Bank mission team also met with other DPs involved in the sector to exchange views on key challenges work towards harmonization and avoidance of duplication. The important observations highlighted during these consultations include the need for: country ownership, gender mainstreaming, sustainability, alignment with the country s development priority and harmonization with other DP interventions. These observations and suggestions informed the design of the proposed project.thus, the Project is prepared taking into account the various potential beneficiaries strategic/corporate plans, and the Bank s CSP, which are products of consultative processes. During the implementation stage, regular consultations will continue, particularly with private sector bodies and civil society organisations to ensure that their concerns are addressed. The half yearly supervision missions, and the mid-term review of project implementation, will ensure continued engagement with all stakeholders, including nonstate actors. 2.7 Bank Group Experience and Lessons Reflected in Project Design In designing the proposed project, the experience and lessons from previous Bank interventions in Tanzania were exploited. These sources of experience and lessons include the Project Completion Reports (PCRs) for ISPGG I and II, and the GECSP budget support operation; the implementation of the CSP ; the findings of the CSP Mid-Term Review; and of the Country Portfolio Performance Review Report. The PCRs, in particular, made a number of recommendations, from lessons learned, which have influenced the design 12

22 of this operation. These recommendations and lessons include (i) care should be taken in the choice of initiatives/beneficiaries to support, so that the scope, complexity and ambition of the project or programme is managed to ensure adequate attention to GOT priorities; (ii) in order to facilitate the measurement of the impact of training programmes, benchmark measurements, where feasible, should be undertaken to understand the level of staff competences prior to provision of training; (iii) coordintation among government agencies can also be challenging and need to be carefully taken into consideration. Those lessons learnt have guided the elaboration of the proposed project As at September 2016, the Bank s active portfolio in Tanzania amounted to UA 1,361.0 million, comprising 12 national public sector operations of UA million and 8 multinational operations of UA million and 4 private sector operations of UA million (see Appendix 2. for a comprehensive list of ongoing operations). The average cumulative disbursement rate for the overall portfolio was 21.7% at 30 September, 2016 and the average age of the portfolio stood at 3.2 years. The portfolio is rated as satisfactory with a score of 3.2 (on a 0-4 scale) according to the 2016 CPPR. The portfolio has no problem project or potentially problem project. Key challenges facing the portfolio include the need to improve performance in areas such as quality at entry, capacity constraints of implementing agencies, contract management, and slow disbursement. These challenges are being addressed by GOT and the Bank through the implementation of the Country Portfolio Improvement Plan 2.8 Project Performance Indicators The key performance indicators identified, and the expected outcomes on project completion, are set out in the Logical Framework. The expected outcomes from the first Component Support to the development of the Gas sector are (i) Improved resource governance index score (ii) Increase in the number of contracts negotiated by the Government Negotiations Team (GNT) under the new framework.. The expected outcome under Component 2, Enhancing Domestic Resource Mobilization are (i) Efectiveness of tax collection, as measured by PEFA PI PROJECT FEASIBILITY 3.1 Economic and Financial Performance The economic and financial benefits from the project will be both direct and indirect. In the long term, assuming the necessary investments are made in the production phase, natural gas could help provide the fiscal space for investments in infrastructure and other areas to facilitate fast-tracking social and economic development to transform the living standards of Tanzanians. However, it should be noted that oil and gas resources are finite, and, therefore, require the country to build human and institutional capacity to prudently manage both the resources and the revenue flows in order to maximise impact on economic development. The benefits of the project will derive from (i) improved regulatory framework of the natural gas sector, (ii) better capacity to negotiate large and complex investments, (iii) the development of a local content policy that will provide opportunity for local (includingwomen) entrepreneurs and (iv) the elaboration of a domestication strategy that will enhance access to energy at the national and regional level. The project will support the establishment of a key regulatory body in Tanzania to oversee the development of the gas sector, create significant job opportunities for local workers and women and facilitate access to energy for the population of the country and the region. It will also contribute to enhancing the performance of key revenue collecting agencies through capacity building. In economic and financial terms, the project has the potential to help increase private investments in the natural 13

23 resources sector from 38% of total FDI in 2015 to 48% in Furthermore, it will contribute to increasing GDP growth rate from 6.9% in 2015 to 7.2% in Environmental and Social Impact Environment and Climate Change: The proposed project is classified as Category 3 in the Bank s environmental categorization system. The project will not have a negative impact on the environment, as its activities are limited to training, technical assistance, studies, office automation and computer hardware. Project activities that are focused on such human and institutional capacity building have no negative impact on climate change. The project s support to the institutional and regulatory framework has the potential to positively impact on the environment by increasing the capacity to oversee and monitor developments in a potentially environmentally sensitive sector such as the natural gas Social Impact: The Project will contribute to strengthening governance institutions and improving the regulatory framework and the business climate. This will eventually result in a more effective public sector administration, reduction in corruption and an increase in private investments. This will enhance attractiveness for investments in the natural resources sector and further unlock the country s economic growth potential. The impact on poverty reduction will be indirect, but significant. In addition to promoting women empowerment, the youth will also benefit indirectly through increased employment and entrepreneurial opportunities created by an increased FDI flow in the natural resources sector. The increased revenue collection as a result of the intervention will also help create fiscal space and hence facilitate investments in critical areas with significant socioeconomic impact The proposed project, by supporting the elaboration of a local content policy in a sector that attracts large FDI inflows, has the potential to boost private sector development over the medium-term. The support in the elaboration of a roadmap for local content policy formulation, based on a detailed economic analysis of the supply chain in the extractives sector, can help the Government to establish guidelines and regulations that will provide opportunities for the local private sector. In direct support of the industrialisation strategy of the Bank in the context of the High 5s, the objective is to gradually build capacity of local SMEs and entrepeneurs to take advantage of the supply chain in the gas servicing industry, both at construction and operation phases The project is expected to contribute to increasing access to energy both at the national and regional levels in the medium to long term. It will contribute to developing a domestication strategy for natural gas resources that will inform the drafting of the regulatory framework and the ongoing negotiations with international investors. In direct support of the Bank s New Deal on Energy in the context of the High 5s, the objective is to develop a national and regional gas market that will attract investors, develop a regional distribution network and improve access to energy for domestic consumption and private sector development Gender Impact: The project is expected to benefit women by improving access to a safe and clean source of energy for cooking and promoting women entrepeneurship in the Gas servicing industry. The tool developed by the ANRC Guidelines for Women s Economic Empowerment in Oil and Gas Industries in Africa will be used as it provides a checklist to identify and promote women economic empowerement. This will be useful when developing the regulatory framework and in particular developing a local content policy that will specifically provide opportunities for women entrepeneurs in the sector. In addition the development of a natural gas domestication strategy will improve access to energy and in particular for women provide a safe and clean source of energy for cooking. In the context of 14

24 supporting the development of local content policies, particular attention will be paid to the promotion of gender Local content policies provide an important entry point for promoting women s economic empowerment in oil and gas industry, for example through (a) Ensuring that women benefit equally from compensation and community programmes and royalties (social investments) from these industries; (b) Promotion of women s direct, waged employment in the oil and gas sector; (c) Encouraging or mandating suppliers and subcontractors to the sector to employ women (indirect employment); (d) Enabling also women entrepreneurs to gain access to oil and gas industries as suppliers. 4. IMPLEMENTATION 4.1 Implementation Arrangements Project Coordination Unit: As for similar past and ongoing Bank projects, 2 PIUs, one for Zanzibar beneficiaries and the other for the Mainland beneficiaries, will be used. Experience suggests that the use of two PIUs, will ensure that delays in one part of the country do not affect the other part, while at the same time providing opportunities for experience-sharing between the two PIUs. Following consultations with government agencies and DPs, it was decided to have the PIU for mainland beneficiaries located at TPDC, mainly because of their capacity to handle reporting and procurement procedures. The objective is to maximise the impact on the most important government agencies as well as facilitate coordination, which can sometimes be a challenge Project Steering Committees: For the Tanzania Mainland Component, the overall implementation of the project will be the responsibility of a Project Steering Committee (PSC) chaired by the Deputy Permanent Secretary at the Ministry of Energy and Minerals. The members of the steering committee will include representatives of each beneficiary agency, i.e. MEM, TPDC, PURA, ZURA, EWURA and the NEED, TRA, and ZRB. The PSC will meet at least once every quarter to review overall progress in implementation and take action when necessary to resolve emerging or outstanding issues. A Project Implementation Unit (PIU) will be set up within TPDC. The PIU will be headed by an experienced Project Manager, assisted by a Project Accountant, Administrative Assistant/Clerk and a Secretary. The PIU will coordinate and manage the day-to-day project tasks for each beneficiary agency, particularly in respect of matters relating to procurement, contract supervision, monitoring and reporting on project implementation For the Zanzibar Component, a similar institutional arrangement will be deployed for the implementation of the project. The PIU set up for the Institutional Support project for Good Governance (ISPGG III) will be used for the project. A Project Steering Committee, under the chairmanship of the MoF Principal Secretary, is in place. Membership of the PSC will be expanded to include new beneficiaries such as TRA-Zanzibar and Zanzibar Revenue Board. 4.2 Financial Management, Disbursement and Audit Arrangements The Bank has conducted an assessment of the adequacy of the financial management system of the proposed project covering Tanzania Mainland and Zanzibar. The assessment based on the Bank s FM Implementation Guidelines-2014 concluded that the overall residual risk is Moderate. The proposed mitigation measures, as per the risk table, Annex 1, when implemented, will enhance the Project ability to (i) use the funds for the intended purposes in an efficient and economical way; (ii) prepare accurate, reliable and timely periodic financial reports, and (iii) safeguard the entities assets. 15

25 4.2.2 In line with the Paris Declaration on Aid Effectiveness and Accra Agenda for Action, the project will substantially make use of the Country s financial management systems. The day to day management will be as per the rules and procedures as stipulated in the Tanzania (Tanzania mainland) Tanzania Petroleum Development Corporation (TPDC) and the Zanzibar Ministry of Finance (MoF)) Financial policies and procedures. The Director of Finance of TPDC and the Accountant General for Zanzibar will be the overall responsible Officers for the financial management of the Project in their respective organizations/ Ministry. The Internal Audit Departments (TPDC and Zanzibar) will audit the project financial transactions regularly. The internal audit reports will be shared with the Bank as needed. Both institutions are committed to configuring their SAGE Evolution Pastel and Epicor Version 10 respectively to accommodate the Project accounting and reporting requirements. In addition TPDC will put in place Projects Implementation Manual (including Financial Management) to guide operations of projects. TPDC will assign Project Accountant while MoF will assign an Assistant Project Accountant to coordinate or assist the day to day financial management requirements of the Project Disbursement Arrangements: Disbursement will be in accordance with the Bank Group s Rules of Procedure for Disbursement, as stipulated in the Disbursement Handbook (2012 Version). The Executing Agencies will each open two special accounts (one denominated in US Dollars and the other in Tanzanian Shillings) for the purpose of this project, at a bank acceptable to ADF. The loan resources will be deposited in the special accounts and will be operated as a revolving fund. The ADF will replenish the special accounts at the request of the Executing Agencies, after justifications for the use of at least 50% of the most recent deposits and 100% of all the other older advances have been provided. The four disbursement methods will be available for use during project implementation. The Bank will issue a disbursement letter, which will provide specific guidelines on key disbursement procedures and practices Financial Reporting and Auditing: The Project will follow the Tanzania Mainland and Zanzibar financial year of 1st July to June 30 th. The financial statements will be audited by the Controller and Auditor Generals (CAG) in Tanzania Mainland) and Zanzibar in accordance to area of their jurisdiction. The audit will be conducted in accordance to the terms of reference for Audit of Bank financed projects. Two Separate audit reports for TPDC and MoF, complete with Management letters, will be submitted to the Bank within six months of the end of the financial year 4.3 Procurement Arrangements Procurement of goods (including non-consultancy services) and the acquisition of consulting services, financed by the Bank under the project, will be carried out in accordance with the Bank s Procurement Policy and Methodology for Bank Group Funded Operations (BPM), dated October 2015 and following the provisions stated in the Financing Agreement. Specifically, Procurement will be carried out as follows: Bank Procurement Policy and Methodology (BPM): Bank Standard Procurement Methods and Procedures (PMPs), using the relevant Bank Standard or Model Solicitation Documents (SSDs) for contracts that are above certain financial thresholds detailed in the Procurement Technical Annex. Borrower Procurement System (BPS): Specific Procurement Methods and Procedures (PMPs) under BPS comprising its Laws and Regulations, Public Procurement Act,

26 revised 2016 and its Directives, or any acceptable revision made thereto and acceptable to the Bank, using the national Standard Bidding Documents (SSDs) or other Solicitation Documents agreed during project negotiations for various group of transactions to be entailed under the project Procurement Risks and Capacity Assessment (PRCA): the assessment of procurement risks at the Country, Sector, and Project levels and of procurement capacity at the Executing Agencies (EAs) (i.e. Tanzania Petroleum Development Corporation (TPDC) for the main land and Ministry of Finance and Planning for Zanzibar), were undertaken for the project and the findings have informed the decisions on the procurement regimes, Borrower Procurement System (BPS) and Bank Procurement Methods and Procedures (BPP), be used for specific transactions or groups of similar transactions under the project. The details of risks, mitigation measures have been included in the Procurement Technical Annex B Monitoring and Evaluation The project is scheduled for implementation over a 36-month period, from January 2017 to December This schedule is reasonable, given the scope of activities to be implemented and project implementation capacity in Tanzania. The project task team on the Bank side and the 2 PIUs will be responsible for project monitoring and evaluation, using the Result Monitoring Framework (Technical Annex B7) and the project log frame. The periodic performance assessment and result reporting will be carried out by the task team in collaboration with the project Coordinators and the beneficiary institutions. Quarterly and annual activity reports will also be prepared and submitted to the Bank. The Bank will undertake monitoring of project implementation, and the use of project resources, through regular contact with the PIUs, half yearly supervision missions and the mid-term review mission. The Bank will also sustain regular consultations with DPs supporting GOT capacity-building under the ongoing PFMRP IV. The Field Office, TZFO, being on the ground, will play an active role in the coordination, country dialogue, and project supervision and monitoring. A Project Completion Report will be prepared to evaluate progress against outputs and outcomes and draw lessons for possible follow-up operations. Table 4.2 presents the Project Implementation and Monitoring Schedule. Table 4.1: Project Implementation Schedule Task Responsible Party Start Date Loan Approval ADF March 2017 Loan Effectiveness ADF/GOT April2017 Project Launching ADF/GOT May 2017 Procurement of goods and services GOT June2017 Technical assistance and training program GOT July2017 Annual Audit Report GOT March 2018 Supervision Mission ADFGOT September 2017 Mid-term Review ADF/GOT June, 2018 Project Completion Report ADF/GOT June, Governance Financial management of the proposed project will be carried out by the PIU under the supervision of the Chief Executive Officer TPDC for the Mainland Component. For the Zanzibar Component, this task will be carried out by the PIU under the supervision of the MoF Principal Secretary. A Steering Committee for the Mainland Component will be established under Deputy Permanent Secretary of MEM, comprising representatives of the beneficiaries. Anexisting Steering Committee on the Zanzibar side under the Principal 17

27 Secretary, Ministry of Finance, will be used. The 2 PIUs will prepare their respective manuals of administrative, financial and accounting procedures. Accounting records will be kept, presenting project expenditure by component, category and source of finance. The project accounts will be audited annually by the Controller and Auditor Generals (CAG). 4.6 Sustainability The sustainability of the proposed project will, first and foremost, be anchored on GOT s strong commitment to developing a stable legal, regulatory and institutional framework, as well negotiating balanced constracts while undertaking consultations with private stakeholders as well as civil society. A key element of the project design is a strong capacity building and knowledge transfer dimension. This will help ensure that adequate capacity is built across Government during the project s implementation phase. In addition, the proposed project will finance certain activities, such as the development of regulations, guidelines and reference manuals, which will guide and inform the day-to-day work of public officials. The regulatory body for the petroleum sector (PURA) will also be established in the context of this project. In addition, achieving a sound and balanced negotiation process will lead to balanced agreements with international investors that will help sustain the development of the sector. Finally, the project envisages regular consultations with the private sector and civil society in order to take their views into account and promote an inclusive decision making process. 4.7 Risk Management The potential risks and mitigation measures for the project are summarized in Table 4.2. below: Table 4.2: Risks and Mitigation Measures Risks Risk 1: Implementation capacity constraints: Lack of requisite skills in the natural resources sector could slow down the pace of implementation. Risk 2: Fiduciary risk. Although Tanzania has made good progress in strengthening institutions and addressing corruption, weaknesses still remain, which may pose a risk. Risk 3: Lack of commitments to reforms: Sustained support at the highest level of Government is required for the success of reforms in the domestic resources mobilization and natural resource sector. Meanwhile, GoT long processes may impact on the implementation process. 4.8 Knowledge Management Probability/ Impact Medium/high Low/medium Low/medium Mitigation Measures GoT is giving priority to the natural resources sector and has an experienced team in MEM dedicated to this sector. The Bank s on-going ISPGG III, and the PFMRP IV will improve the fiduciary environment, assist in addressing institutional weaknesses and contribute to the fight against corruption. Continuous dialogue between GoT, the Bank and Development Partners, would help to ensure sustained commitment to these important reforms The proposed project will build knowledge, and develop skills, in regulating, overseeing and monitoring the natural resources sector. The implementation of the project will strengthen governance in the natural resources sector by (i) training staff in regulatory issues; (ii) enhancing knowledge of the industry to promote knowledge based policy making; and (iii) developing various important regulations, guidelines and manuals to guide and inform the work of public officials. Knowledge will also be acquired through skill transfer by external experts, and study tours to appropriate institutions in other countries. In addition, sensitisation and public awareness workshops will be undertaken on issues relating to the development of the gas sector with specific emphasis on local content policies and domestication of the 18

28 resources. As a consequence the knowledge base on the sector will increase, not only among public servants but also the private sector and civil society at large. This is particularly important in the natural resources sector that creates important expectations which are sometimes not realistic due to lack of reliable information on the sector. V LEGAL INSTRUMENTS AND AUTHORITY 5.1 Legal Instrument An ADF Loan will be used to finance this proposed project, governed by a Loan Agreement between the United Republic of Tanzania and the African Development Fund. 5.2 A. Conditions Associated with Bank s Intervention Prior Action to be fulfilled before submission of the the Financing Proposal to the Board: Designation of two Project Coordination Units, one for Tanzania Mainland and the other for Zanzibar (evidenced by a letter sent to the Bank by the Government) Conditions Precedent to Entry into Force: The entry into force of the Loan Agreement shall be subject to the fulfilment by the Borrower of the applicable provisions of section of the General Conditions Applicable to Loan Agreements and Guarantee Agreements of the African Development Fund B. Conditions Precedent to First Disbursement: The first disbursement of the loan shall be conditional upon the entry into force of the Loan Agreement, and the Borrower providing evidence of the fulfilment of the following condition, in form and substance satisfactory to the Fund: Opening by each Executing Agency at a bank or banks acceptable to the Fund of two Special Accounts (one denominated in USD and the other in Tanzania Shillings). The opening of such accounts will be evidenced by letters from the bank(s) in which the accounts have been opened, confirming that the said accounts have been opened, and providing the account numbers. 5.3 Undertakings of the Borrower The Borrower undertakes tocarry out and cause its contractors to carry out the Project in accordance with: (i) the Fund s rules and procedures; and (ii) national legislation; and (iii) submit on a quarterly basis a progress report acceptable to the Fund, on the status of implementation of the Project 5.4 Compliance with Bank Policies This project complies with all applicable Bank policies. VI. RECOMMENDATION Management recommends that the Board of Directors approve an ADF Loan not exceeding UA million to the United Republic of Tanzania for the purposes of, and subject to, the conditions stipulated in this report. 19

29 % APPENDIX 1: Tanzania: Selected Macroeconomic Indicators Indicators Unit (e) 2016 (p) National Accounts GNI at Current Prices Million US $ 10,537 33,929 36,971 42,179 48, GNI per Capita US$ GDP at Current Prices Million US $ 10,186 33,562 38,809 44,333 48,030 47,382 51,410 GDP at 2000 Constant prices Million US $ 10,186 21,163 22,251 23,868 25,530 27,329 29,295 Real GDP Growth Rate % Real per Capita GDP Growth Rate % Gross Domestic Investment % GDP Public Investment % GDP Private Investment % GDP Gross National Savings % GDP Prices and Money Inflation (CPI) % Exchange Rate (Annual Average) local currency/us$ , , , , , ,091.2 Monetary Growth (M2) % Money and Quasi Money as % of GDP % Government Finance Total Revenue and Grants % GDP Total Expenditure and Net Lending % GDP Overall Deficit (-) / Surplus (+) % GDP External Sector Exports Volume Growth (Goods) % Imports Volume Growth (Goods) % Terms of Trade Growth % Current Account Balance Million US $ ,871-2,396-4,566-4,947-4,453-4,206 Current Account Balance % GDP External Reserves months of imports Debt and Financial Flows Debt Service % exports External Debt % GDP Net Total Financial Flows Million US $ 1,229 2,437 2,848 3,641 3, Net Official Development Assistance Million US $ 1,064 2,440 2,823 3,431 2, Net Foreign Direct Investment Million US $ 282 1,229 1,800 2,131 2, Real GDP Growth Rate, Inflation (CPI), ,004 Current Account Balance as % of GDP, ,005 2,006 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 Source : AfDB Statistics Department; IMF: World Economic Outlook, October 2015 and International Financial Statistics, October 2015; AfDB Statistics Department: Development Data Portal Database, March United Nations: OECD, Reporting System Division. Notes: Data Not Available ( e ) Estimations ( p ) Projections Last Update: April

30 APPENDIX 2: Bank Group Current Portfolio in Tanzania Nov A. NATIONAL OPERATIONS: AGRICULTURE SOURCE OF FINANCE APPROVAL DATE CLOSING DATE APPROVED AMOUNT (UA million) TOTAL DISBURSED DISB RATE (Am t Dis b /T o ta l Lo a n ) Marketing Infrastructure, Value Addition and Rural Finance Program ADF Loan 29-Jun Dec (MIVARFP) SUB-TOTAL (AGRICULTURE) TRANSPORT Tanzania Road Sector Support Programme I ADF Loan 2-Dec Dec Tanzania Road Sector Support Programme II ADF Loan 5-Apr Dec Dar es Salaam Bus Rapid Transport Infrastructure Project ADB Loan 30-Sep Dec AGTF 30-Sep Dec Transport Sector Support Program ADF Loan 26-Nov Oct ADB Loan 26-Nov Oct SUB-TOTAL (TRANSPORT) WATER SUPPLY/SANITATION Zanzibar Urban Water & Sanitation Project ADF Loan 19-Dec Dec Arusha Sustainable Water & Sanitation Delivery Project ADB Loan 16-Sep Jun ADF Loan 16-Sep Jun AGTF 16-Sep Jun SUB-TOTAL (WATER SUP/SANIT) ENERGY Iringa-Shinyanga Transmission Line ADF Loan 26-Oct Oct Scaling-Up Renewable Energy Program SCF Grant 20-Dec Sep SUB-TOTAL (ENERGY) SOCIAL Alternative Learning and Skills Development (ALSD) II ADF Loan 29-Jun Dec Support to Technical Vocational Education and Training & Teacher ADF Loan 2-Apr Dec Education SUB-TOTAL (SOCIAL) FINANCE TZS Line of Credit to First National Bank Subsidiary in Tanzania (FRB ADB Loan 12-Dec Dec Subsidiary in TA) CRDB Bank Ltd Line of Credit 2015 ADB Loan SUB-TOTAL (FINANCE) MULTI-SECTOR ISP for Good Governance III ADF Loan 3-Feb Jun SUB-TOTAL (MULTI SECTOR) TOTAL (NATIONAL) B. MULTINATIONAL OPERATIONS: East Africa Transport and Trade Facilitation (EAC) ADF Grant 29 Nov Dec Arusha-Holili/Taveta-Voi Road Project ADF Loan 16-Apr Dec Lake Victoria Water Supply & Sanitation Programme Phase II (LVWSSP) ADF Grant 17-Dec Dec The EAC Payments & Settlement Systems Integration Project (EAC - PSSIP) ADF Grant 5-Dec Jan Regional Rusumo Hydropower ADF Loan 27-Nov Aug EAC Railway Sector Enhancement Project NEPAD IPPF 29-Jun Dec Grant EAC Centres of Excellence Skills Technology ADF Loan 3-Oct Dec Kenya -Tanzania Interconnection ADF Loan 18-Feb Dec SUB TOTAL (MULTINATIONAL) GRAND TOTAL (NATIONAL/MULTINATIONAL)

31 APPENDIX 3: Donor Coordination Matrix for Tanzania Focus area Phasing IN Focus area and Current Chair/co Chair Phasing OUT Some support Future Chair Current Sector/thematic working group DPG FYDP II Sub sectors Lead Ministry AfDB Belgium Canada Denmark EU Finland France (AFD) Germany Ireland Italy Japan Korea Netherlands Norway Sweden Switzerland UK (DFID) UN USA World Bank (pending CAS approval) Agriculture Industry and Trade (PSD) Environment, natural ressources and Climate Change Infrastructure Education Water Health Social Protection Governance Innovation and Technology Agriculture Food and nutrition Manufacturing Mining Construction Tourism Business environment Environmental and Natural Resources Urban Planning, Housing and Human Settlement Energy Transport Education Skills development Water and sanitation Health Poverty Reduction and Social protection Good Governance Science Technology and Innovation Ministry for Agriculture, Livestock and Fisheries Ministry for Industry, Trade and Investment Ministry in the Vice President's Office - Union Affairs and Environment Ministry for Works, Transport, and Communication Ministry for Energy and Minerals Ministry for Education, Science, Technology, and Vocational Training Ministry for Water and Irrigation Ministry for Health, Community Development, Gender, the Aged, and Children Ministry in the President's Office - Regional Administration and Local Government, Public Service Management, and Good Governance Ministry for Education, Science, Technology, and Vocational Training Culture Creative industry Ministry for Information, Culture, Artists, and Sports - 3 -

32 Appendix IV : ANRC s Baseline study on local content in Tanzania In Tanzania, the ANRC is conducting a baseline study of the local content in at the request of the the National Economic Empowerment Council (NEEC) at the Prime Minister s office, with the role to be responsible for local content development and management covering key sectors of the economy. This will help the Government to identify key gaps and opportunities as well as inform future activities including the AfDB support in the sector. The Local Content Situation Analysis is focused on Tanzania s oil, gas and mining sectors in order to support NEEC. There are three phases to the situational analysis: Phase 1 Gather information available both publicly and privately about legislation, policies, and key stakeholders and their roles and initiatives to promote local content. Identify gaps and inconsistencies, drawing examples from successful initiatives that can be replicated; Phase 2 - Examine previous public and private work on skills gaps and supply chains. Make key recommendations based on the gaps identified; Phase 3 - A validation workshop will be held to confirm key findings and recommendations and share them with relevant stakeholders. The information found in the Phase 1 report for the local content situational analysis sets the ground work for the more detailed Phase 2 report, which will capture more of the available knowledge regarding local content in Tanzania s extractive industries identify gaps in legislation and information, and provide key recommendations to the government of Tanzania. NEEC will play an important role in verifying the information in this report and providing feedback. After Phase 2, wider consultation and verification will be conducted to produce the final situational analysis. Phass 1 has just been completed and provides an overview of the sector and current challenges. While the Mining Act of 2010 is the more out of date legislation, neither the Mining Act nor the Petroleum Act contain hard local content policies other than PA2015 Section 219. While local content regulations for the petroleum sector are now being developed, it is unclear whether regulations will be forthcoming for mining as well. Additionally, both policies seem to preference Tanzanian ownership as opposed to in-country value addition by both foreign and domestic firms. Mining Act, 2010 Petroleum 2015 Table 1. Key Legislation for Local Content in the Extractive Industries Act, Requires that applications for a Special Mining Licence or Mining Licence contain a procurement plan of goods and services available in the United Republic, a plan with respect to the employment and training of citizens of Tanzania, and a succession plan for expatriate employees Mandates a preference for goods and services available in Tanzania. When those are not available, they should be delivered by a company that is in joint venture with a local company whose participating share is not less than 15%. Further requires a recruitment and training plan and procurement plan be submitted to a newly created Petroleum Upstream Regulatory Authority (PURA) and updated on a regular basis after the granting of a licence and Act prescribes a new role to the Energy and Water Utilities Regulatory Authority (EWURA) in respect to midstream and downstream petroleum and natural gas activities. In terms of key actors for local content policy formulation and implementation, Section E breaks these down into government, international institutions and governments, the private sector, and civil society (including the media and trade unions, as seen in Table

33 Table 2. Key Actors for Local Content in the Extractive Industries in Tanzania Government NEEC LCD set up in Sept 2015 to promote and coordinate local content across the MEM TMAA EWURA PURA TPDC national economy. Coordinates the development of energy and minerals resources in Tanzania, setting policies, strategies and laws Monitors and audits mining operations Monitors and regulates the downstream and midstream petroleum sectors Monitors and regulates the upstream petroleum industry and advise o=the Minister on local content policy Implements petroleum exploration and development policies and participates in exploration, development, production and distribution of oil and gas and related services in partnership with IOCs STAMICO Vehicle through which the government participates in mining TNBC Facilitates dialogue between the government and private sector VETA Coordinates, regulates, finances, promotes and provides vocational education and training in Tanzania International World Conducts studies on local content in Tanzania Institutions and Governments Bank European Funding support to NEEC for local content in non-extractive sectors Union UNDP Has several projects related to education and training in Tanzania UNIDO Works with technical institutes to support education and training programmes; has done work on building linkages through SMEs Norway/ Norad Involved in several education and training initiatives; implements Oil for Development programme in Tanzania and sponsors CMI s Tanzania as a Future Petro-State project Private Sector OGAT Industry association for IOCs in Tanzania. Involved in several local content studies, lobbies for softer local content regulations BG and Partners in the proposed Tanzania LNG plant. Together, they have been Statoil conducting other studies of skills gaps, labour needs, and the supply chain for the LNG plant Achilles Provides procurement services in the form of an online cloud-based portal that buyers and suppliers can use for managing tenders TPSF Umbrella body of private sector in Tanzania Civil Society VSO Involved in education, training, and skills gap analyses in Tanzania Oxfam Advocates for transparency of contracts and supports local partners to advocate for social and environmental safeguards and fair distribution of natural gas revenues AKF Operates Coastal Rural Support Programme (CRSP) in Lindi and Mtwara Regions ESRF Tanzanian policy research think tank that produced a baseline study in 2016 called Effective Management of the Tanzanian Natural Gas Industry for an Inclusive and Sustainable Socio-Economic Impact REPOA Policy Forum Tanzanian research institution with the mandate to contribute to the alleviation of poverty in its multiple dimensions through research and capacity building Network of 74 Tanzanian civil society organizations doing advocacy on oil and gas as well as other questions of development The report makes some preliminary conclusioorganized according to four themes: local employment, education and training, local procurement and governance. In terms of local employment, the report collects baseline data for petroleum and mining. The section therefore highlights the lack of clarity about how NEEC would be able to participate in the monitoring of expatriate labour to ensure that skills are being transferred to Tanzanians and suggests that there may be a need for NEEC to have a formal role in the approvals process. Although there are still gaps and inconsistencies in the way data is collected, the data already demonstrates how significant it could be to reduce Tanzania s reliance on foreign skilled labour in the extractive industries both for reducing costs and encouraging greater local participation in the sector over time

34 For local procurement, the report discusses six key issues: 1) gaps in the legal framework for regulation, 2) the issue of a supplier database, 3) SME development and enterprise centres, 4) addressing the lack of capital for Tanzanian entrepreneurs, 5) support and prioritization for larger industries, and 6) soft vs hard local content regulations. Key findings are that there is a general weakness in PA2015 and even more so in the Mining Act 2010 in terms of promoting local content. There is confusion about who is responsible for monitoring and enforcing local content in the minerals sector and a lack of information about any enforcement actions taken to date. Unlike in many other countries, there are no clauses giving Tanzanian companies or companies that domicile value-added activities in-country preference if they are within a certain margin of the lowest bid for a tender in either petroleum or mining. Finally, there are multiple definitions of a local company in Tanzania. Table 3: Key Issues in Local Content in Tanzania Information and data required Sectors of economic activity Involvement stakeholders of Capacity building of local companies Regional local content NEEC and the other ministries and agencies responsible for local content in the extractive industries lack the necessary research and data to properly design and implement local content policies. NEEC in particular lacks a department tasked with research, data and statistics. The local capacity in various service sectors is not well-known, nor has comparative work and engagement been done with a view toward prioritizing which sectors to focus on in local content development. This issue affects questions about to what extent regulations will involve hard targets, in which areas project sponsors will focus their local content initiatives, and how to align local content policy with national development objectives. Currently there is a lack of coordination of stakeholders from the private sector and international donors, as well as very little involvement of local and international civil society in the issue of local content in oil, gas and mining. This issue affects both design and implementation of local content, particularly on the question of monitoring. Local small and medium-sized enterprises lack the capacity, training, internal processes and capital to participate in tenders from larger oil, gas and mining companies. On their own, the reserves of hydrocarbon resources in Tanzania and other countries in East Africa lack the scale to justify the development of certain supporting service sectors that are particularly specialized or capital intensive. There is a little coordination among governments and agencies responsible for local content. Regional local content offers the possibility of better economies of scale for larger Tanzanian companies offering certain kinds of services

35 Appendix 5: Tanzania Revenue Authority - DPs Technical Assistances and Target Areas S/N AREA DPS AREA OF ASSISTANCE 1 Domestic Revenue (Large Taxpayers) 2 Domestic Revenue (Medium and Small Taxpayers US Treasury DfID/HMRC* US Treasury IMF AFRITAC a) Transfer Pricing b) Audit of Multinational Companies c) Audit of specialized sectors (tourism Financial institutions, and telecommunication) d) Development of specialized Audit Guide. Development of Interstate Automatic information exchange system for tax purpose a) Review tax returns and filing procedures to simplify self-assessment b) Audit of construction sector a) Development of a Compliance Management Strategy b) Development of a National Audit Plan 3 Tax Investigation US Treasury US Treasury Develop Investigation Guide/Manual and Case Inventory Management Information System (CIMIS) Transitioning of TID form audit work to criminal investigation 4 Internal Affairs DfID/HMRC External Review of TRA Integrity and Transparency HMRC Modernize TRA physical and digital Security 5 Internal Audit DfID/HMRC Implement Internal Audit Strategy 6 Information Technology DANIDA/SKAT** Design and implement integrated Enterprise Application Architecture Key: *HMRC Her Majesty Revenue & Customs UK **SKAT Danish Tax Authority - Denmark Source: Tanzania Revenue Authority, June

36 APPENDIX 6: Analytical Work Underpinnings Component/Reform Areas Overall Strategic Context Public Service Management Analytical Work Tanzania Development Vision 2025; and National and Zanzibar strategies for growth and poverty reduction BRN Strategic Documents Country Strategy Paper ( ) The Reforming Tanzania Public Sector Report: An Assessment of Future Direction (November, 2013) MoFP Institution AfDB and GoT GOT Governance Governance and Corruption Survey (2014) GOT PFMRP IV and Action Plan (2011) MoF PFMRP IV Mid-Term Draft Final Report, July, 2015 GOT and PFMRP Secretariat 2014 General Budget Support Annual GOT Review: Final Report, September, 2015 PEFA Assessments, 2010 and 2013 MoF Public Finance Management OPEV Joint PFM Evaluation Public Finance Management Reform??? (2011) AfDB Development Policy Operation for Tanzania World Bank Tanzania Revenue Authority Fourth TRA Corporate Plan 2013/ /18 Fourth & Fifth Review of the IMF Policy Support Instrument and IMF Article IV Consultation Report, July & Oct IMF Tax Administration Diagnostic Tools World Bank Assessment; March ANRC s Baseline study on local content in AfDB Natural Resources Management Tanzania Guidelines for Women s Economic AfDB Empowerment in Oil and Gas Industries in Africa ANRC knowledge tool on local content AfDB policy formulation ANRC knowledge tool capacity building for AfDB negotiations

37 APPENDIX 7: Main projects of other Development Partners in the natural resources sector NORAD JICA World Bank EU Under the Oil for Development Program, NORAD has supported Tanzania to develop the Petroleum Act 2015 and build capacity for economic modelling in the sector. The program is currently in a new programming phase which has enabled to exchange with AfDB to build synergies and avoid duplications. The role of the AfDB to develop the regulatory framework is much welcome given that Statoil is a key investor in Tanzania which creates perceived conflicts of interest for NORAD. JICA has support GoT to develop the Natural Gas Utilization Master Plan which is currently in finalization phase for approval. and approval phase. JICA has also received request form the GoT to assist in formulating the domestication of gas and distribution plan. JICA is considering short-term training sessions for different stakeholders (mainly government officials) in Japan and Tanzania also under the implementation of the master plan. Several exchanges between the Bank team and JICA enabled to avoid duplications and build synergies. The Energy Sector Capacity Building Project for Tanzania is to strengthen the capacity of the Government of Tanzania (GoT) to develop its natural gas subsector, and Public Private Partnerships (PPP) for the power generation sector. The project has five components. Component A is petroleum policy and legal framework. Component B is strengthening institutional sector management, coordination and governance. Component C is education and skills development. Component D is power generation and natural gas PPP projects capacity building. Regular consultation has been ongoing with the Bank team over the last few years given the Bank has also been a key DP in the energy sector. The EU supports the GoT to undertake a baseline study of the local content situation is economic sectors other than extractives, e.g. the agriculture and tourism sector. Early coordination with the Bank team enabled to build synergies with the ANRC preparatory study on local content in the mining and gas sectors

38 APPENDIX 8: MAP OF TANZANIA