US embassy cable - 05DARESSALAAM77

UNCLAS SECTION 01 OF 08 DAR ES SALAAM 000077 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND AF/EPS 
PLEASE PASS USTR 
 
E.O. 12958:N/A 
TAGS: ECON, EINV, KTDB, OPIC, USTR, TZ 
SUBJECT: TANZANIA: 2005 Investment Climate Statement 
 
REF: 04 STATE 250356 
 
1. Per reftel, post submits the 2005 Investment Climate 
Statement below. 
 
------------------------------ 
Openness to Foreign Investment 
------------------------------ 
 
2. The Government of Tanzania has taken significant steps to 
encourage foreign investment by creating an attractive 
package of incentives for investors and easing bureaucratic 
requirements.  As a result, FDI in Tanzania has increased 
steadily in the last five years.  Tanzania is formally open 
to foreign investment in all sectors, although a successful 
investor must overcome many procedural barriers. The 
Tanzania Investment Center (TIC), established by the 
Tanzania Investment Act of 1997, is a focal point for all 
investors and performs all liaison work such as answering 
inquiries and facilitating project start-up. Tanzania was 
named Africa's best investment promoter at the Africa 
Investment Promotion Agencies 2004 competition, where the 
TIC received the first prize among 48 African countries that 
took part.  The TIC provides certificates of incentives on 
approved projects that have a minimum investment of US 
$300,000 if foreign owned and US $100,000 if locally owned. 
 
3. The priority sectors for investment, as identified by 
TIC, are: mining, petroleum and gas, tourism, infrastructure 
development, aviation, agriculture, construction, financial 
services, and manufacturing.  Investment in other sectors is 
not restricted.  Foreign firms can participate in 
privatization programs without restriction.  There is no 
limit on foreign ownership or control, though land ownership 
remains restricted. TIC services are provided to local and 
foreign investors without discrimination, though a variety 
of regulatory fees are higher for foreign firms than for 
local firms.  Remaining obstacles to foreign investment 
include bureaucratic intransigence, corruption and poor 
infrastructure. 
 
4. Zanzibar, consisting of two islands off the coast of 
Tanzania with a semi-autonomous government, controls its own 
investment policies and maintains the Zanzibar Investment 
Promotion Agency (ZIPA).  Like the mainland, Zanzibar aims 
to create a welcoming environment for foreign investors and 
provides similar incentives. 
 
-------------------------------- 
Conversion and Transfer Policies 
-------------------------------- 
 
5. Regulations continue to permit the unconditional transfer 
through any authorized bank in freely convertible currency 
of net profits, repayment of foreign loans, royalties, fees, 
charges in respect of foreign technology, and remittance of 
proceeds.  The only official ceiling on transfers of foreign 
currency apply to cash carried by individuals traveling 
abroad, which should not exceed US$ 10,000 over a period of 
forty days.  Tanzania occasionally experiences shortages of 
foreign exchange, but this problem has been eased 
considerably by the growth of Bureau de change returns. 
Bureaucratic hurdles continue to impact the length of time 
it takes to process and effect a transfer, which can range 
from days to weeks. 
 
------------------------------ 
Expropriation and Compensation 
------------------------------ 
 
6. Since 1985, the government of Tanzania has not 
expropriated any foreign investments. 
 
------------------- 
Disputes Settlement 
------------------- 
 
7. Tanzania is a member of both the International Center for 
the Settlement of Investment Disputes (ICSID) and the 
Multilateral Investment Guarantee Agency (MIGA).  About five 
years ago the Tanzania Institute of Arbitrators (TIA) was 
established in accordance with the Tanzania arbitration law. 
This domestic arbitration body has proven to be inefficient, 
and most disputes end up at the ICSID.  The Government of 
Tanzania established a Commercial Court in September 1999. 
The Commercial Court is a division of the High Court of 
Tanzania and, in principle, provides a place for speedy, 
efficient and commercially aware litigation of commercial 
disputes.  While the Commercial Court has helped to speed up 
some commercial cases, the court system continues to be 
plagued by inefficiency and corruption.  The few recent 
disputes involving U.S. firms have shown that it is 
difficult to enforce external arbitration awards within 
Tanzania.  Disputes with the Government of Tanzania are 
generally resolved only after much effort and time. 
 
--------------------------------------- 
Performance Requirements and Incentives 
--------------------------------------- 
 
8. According to the National Trade Policy (February 2003), 
the Tanzanian government intends, in the course of future 
WTO TRIMs negotiations, to adopt measures related to equity 
requirements, local content requirements, technology 
transfer and export performance as necessary conditions for 
a Least Developed Country to expedite socio-economic 
development.  Currently, however, Tanzania has not 
introduced such measures.  There is no requirement that 
specifies that local investors must hold a certain 
percentage of a firm's equity or that the share of foreign 
equity be reduced over time.  The government does not 
require investors to purchase from local sources nor require 
local content in exports.  The government does not impose 
any "offset" requirements with respect to approval of major 
procurements.  Only companies operating in Export Processing 
Zones (discussed below) are required to export a certain 
percentage of goods produced. 
 
9. The Tanzania Investment Center (TIC) offers assistance in 
the establishment of enterprises and provides facilitation 
services for required permits and licenses for both local 
and foreign investors.  TIC is the country's focal point for 
all investors and acts as a one-stop government liaison for 
investors from inquiry stage right up to project start.  All 
Government departments and agencies are required by law to 
cooperate fully with TIC in facilitating investors.  TIC 
issues the formal Investment Certificate of Incentives, 
which serves as the official recognition of one's status in 
the country. 
 
10. Tanzania offers a well-balanced package of investment 
benefits and incentives that are applied uniformly to all 
investors (domestic and foreign investors) and 
systematically as specified by law (the Tanzania Investment 
Act, 1997 No. 26 of 1997). These incentives include: 
 
-- Zero Customs Duty and deferred VAT on capital goods for 
investments in targeted sectors: mining, export processing 
zones, infrastructure, road construction, bridges, railways, 
airports, generation of electricity, telecommunications, and 
water services. 
 
-- Five percent Customs Duty and deferred VAT on capital 
goods for other sectors: livestock, aviation, commercial 
buildings, commercial development and micro finance banks, 
export oriented projects, geographical special development 
areas, human resources development, manufacturing, natural 
resources including fisheries, rehabilitation and expansion 
projects, tourism and tour operators, transport, radio and 
television broadcasting. 
 
-- Exemption from corporate income tax for up to five years. 
 
-- Income tax benefits such as: allowing interest deduction 
on capital loans; removal of the 5-year limit for carrying 
forward losses; 100% capital allowance deduction in the 
years of income for targeted sectors. 
 
-- Further incentives for companies with EPZ status 
(discussed below). 
 
11. The Export Processing Zone (EPZ) Act has enabled the 
establishment of EPZs throughout the country. EPZ incentive 
packages are managed by the National Development Corporation 
(NDC), independently from TIC.  The government has 
established one EPZ business park for the purpose of 
attracting export industry investment, but EPZ benefits do 
not depend on location in a specific geographical area. 
Rather EPZ status reflects unique benefits offered to export 
industries.   EPZ companies must export at least 70 percent 
of goods produced, and export at least US$100,000 to qualify 
to apply for EPZ status.  EPZ status is available to both 
domestic and foreign investors, but is currently limited to 
"new export companies," thus excluding established exporters 
from benefiting. 
 
12. Companies investing within the EPZ park have access to 
ready-made buildings and reliable infrastructure, which 
limits the need for large capital investments in 
infrastructure.  The EPZ policy places emphasis on products 
that use local materials such as textiles and garments, 
leather goods, agro-processing, and the lapidary industry. 
Historically, large job-creating investments (in the textile 
industry, for example) have received significant incentives 
packages. 
 
13. Incentives offered to EPZ exporters are numerous, and 
may include: 
 
-- Exemption from corporate income tax for the first 10 
years; after 10 years, a reduced tax of 25 percent rather 
than the ordinary 30 percent. 
 
-- Exemption from withholding tax on dividends and interest 
for the first 10 years. 
 
-- Exemption from all taxes and levies imposed by local 
governments for goods and services produced or purchased in 
the EPZs. 
 
-- Exemption from potential foreign exchange control and 
restrictions. 
 
-- Exemption from pre-shipment inspection requirements. 
 
-- On-site Customs inspection in lieu of off-port 
inspection. 
 
-- Remission of Customs duty, VAT, and any other tax payable 
on goods purchased for use as raw materials, equipment, and 
machinery, or goods and services related to manufacturing in 
the EPZs (except motor vehicles, spare parts, and 
consumables). 
 
-- Provision of temporary visas at the point of entry to key 
technical, management, and training staff for a maximum of 
period of 30 days. 
 
-- Access to high-quality infrastructure. 
 
14. Incentives, whether under the TIC or EPZ provisions, are 
granted on a case-by-case basis, following general 
guidelines.  The Tanzanian Investment Act allows for the 
Minister of Trade to specify additional incentives and 
benefits in consultation with TIC's inter-ministerial board 
"for the purpose of promoting identified strategic or major 
investments." 
 
15. Incentives and investment guarantees are offered to both 
domestic and foreign investors.  Investments in Tanzania are 
guaranteed against nationalization and expropriation. 
Tanzania is a member and signatory of several international 
agreements for protecting investments. Any dispute arising 
between the Government and investors are settled through 
negotiations or may be submitted for arbitration before the 
international organizations. 
 
16. Generally, the Government of Tanzania facilitates 
investors with TIC or EPZ certificates in the otherwise 
onerous bureaucratic process of acquiring the various 
required permits.  However, investors are routinely granted 
work and residence permits for only five 5 expatriates; 
investors complain that this is insufficient and limits 
their ability to operate. 
 
17. The Zanzibar Investment Promotion Agency (ZIPA) and the 
Zanzibar Free Economic Zones Authority (ZAFREZA) offer 
roughly equivalent incentives as those offered by the 
mainland's TIC and EPZ policies. 
 
-------------------------------------------- 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
18. Tanzania observes the right of foreign and domestic 
private entities to establish and own business enterprises 
and engage in legal forms of remunerative activity.  The 
Business Registration and Licensing Act provides the right 
of any local or foreign investor to freely establish private 
entities; to own property both movable and immovable; to 
acquire and dispose of property including interest in 
business enterprises and intellectual property.  The Act 
stipulates that no business entity can enter into business 
activities in Tanzania before getting a business license 
through the Business Registration and Licensing Agency 
(BRELA).  Registration fees for foreign companies are 
significantly higher than for local companies. 
 
19. Competitive equality is applied and embedded in the 
Tanzanian National Trade Policy of February 2003 as a 
standard. The Tanzanian competition policy aims at 
perpetuating freedom of trade, freedom of choice and access 
to markets.  It prohibits firms (both private and public 
enterprises) from engaging in anti-competitive behavior and 
abuse of dominant market position. Tanzania has established 
the Fair Competition Commission (FCC) to oversee compliance 
with competitive equality standards. 
 
20. Under Tanzanian law, non-citizens or foreign companies 
cannot own land, which continues to be a significant barrier 
to foreign investment.  Land in Tanzania is government 
property and can only be leased from the government for 33, 
66, or 99 years, depending on its use.  Occupation of land 
by non-citizens is restricted to lands for investment 
purposes, as approved by the TIC.  Under this arrangement, 
known as Derivative Title, Tanzanian tenants sub-lease their 
land to a TIC-approved foreign investor.   The TIC has 
designated specific plots of land (a land bank) to be made 
available to foreign investors.  Foreign investors may also 
enter into joint ventures with Tanzanians, in which case the 
Tanzanian provides the use of the land (but retains 
ownership, i.e. the leasehold). 
 
----------------------------- 
Protection of Property Rights 
----------------------------- 
 
21. Secured interests in property, both movable and real, 
are recognized and enforced in Tanzania under an evolving 
set of laws, some of which appear contradictory.  Land in 
Tanzania is technically owned only by the government and is 
leased for periods of up to 99 years.  Recent reforms have 
tried to establish a reliable system of transferable 
property rights, with titles representing leaseholds. The 
Ministry of Lands and Human Settlements Development deals 
with the registration of mortgages and rights of 
occupancies.  The Office of the Registrar of Titles within 
the Ministry is responsible for issuing the pertinent title 
and registered mortgage deeds.  Under the recent Land Act 
(1999), such title deeds can now be used for securing loans 
from banks.  However, the concept of a mortgage is very new, 
and the system to register such security interests remains 
unreliable.  In practice, banks only issue mortgage loans on 
capital improvements on the land, and not on the value of 
the land itself. 
 
22. The establishment of both the Commercial Court of 
Tanzania and a special Land Court as special divisions of 
the High Court has been a tremendous step towards protection 
and effective enforcement of property rights.  The new Land 
Act, the Ministry of Lands registration offices and the Land 
Court comprise a legal system that will potentially protect 
and facilitate the acquisition and disposition of land, 
buildings, and mortgages, but the system is still in its 
infancy. 
 
23. Adherence to key international agreements on 
intellectual property rights in Tanzania began only in 
recent years.  In 1999, Tanzania passed the Copyright and 
Neighbouring Rights Act Number 7 of 1999, which deals with 
the protection of intellectual property rights (IPR) and 
also protects expressions of folklore. This legislation 
conforms to international copyright and property rights 
conventions, including the WTO TRIPS agreement, and provides 
adequate protection for intellectual property, patents, 
copyrights, trademarks and trade secrets.  The Act also 
establishes the Copyrights Society of Tanzania (COSOTA), 
which has the duty and authority to promote and enforce 
intellectual property rights; collect and distribute 
royalties on behalf of its members; maintain registers of 
works, productions and association of its members; and 
identify, publicize and defend the rights of copyright 
owners. 
 
24. Despite the recent legislation, enforcement of 
intellectual property rights remains ineffective. 
Violations are not seriously investigated, and the courts 
lack experience and training in IPR issues. 
25. Tanzania has not yet signed or ratified the WIPO 
Internet treaties. 
 
------------------------------------- 
Transparency of the Regulatory System 
------------------------------------- 
 
26. The TIC facilitates applications for the variety of 
permits an investor may need, which greatly decreases the 
time and effort spent on complying with bureaucratic 
regulations.  The regulatory system can be burdensome, but 
does not generally serve to impede investment. 
 
27. Government decisions are not always completely 
transparent, and Ministers and high-level officials have 
significant authority to make exceptions to the rule.  Well- 
connected companies may obtain allowances or unfair 
advantages.  Further, government procurement is often less 
transparent than international standards. 
 
28. Many of the laws and regulations in Tanzania that impact 
investment (including tax, labor, environment, health and 
safety) are outdated, but the Government of Tanzania has 
made an effort to revise and harmonize them.  In Tanzania, 
all proposed laws and regulations, including those affecting 
trade and investment matters, must be discussed by 
stakeholders and must be published in draft form for public 
comment. 
 
29. For example, the Government of Tanzania met with private 
sector business associations, including an investors 
roundtable group, to discuss a proposed income tax bill, 
which was passed into law in April 2004. Tanzania is now 
implementing the new tax charter with a view toward 
establishing a tax regime that is more transparent, 
equitable, efficient, and that will increase revenues.  This 
ambitious tax policy reform agenda has included the 
abolition of nuisance taxes, the harmonization of the 
regulatory framework, the establishment of a transparent 
incentive regime and a structure for a gradual reduction in 
rates.  It also emphasizes transparent accounting consistent 
with international norms. 
 
30. Disputes regarding the regulatory system are difficult 
to solve.  The court system continues to function slowly and 
imperfectly and is easily influenced or manipulated by 
privileged individuals. These factors increase the cost and 
difficulty of doing business in Tanzania, but can be 
overcome by diligence and on-the-ground knowledge.  Ongoing 
good governance and anti-corruption measures may continue to 
improve government transparency. 
 
--------------------------------------------- ----- 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
31. The Capital Markets and Securities Authority (CMSA) Act 
of 1994 provides a policy that facilitates the free flow of 
capital or financial resources to support in the product and 
factor markets.  Currently the CMSA has opened the Dar es 
Salaam Stock Exchange (DSE) to foreigners. The maximum 
allowed limit for foreign participation in any single 
company listed on the DSE is 60 percent.  Foreigners are not 
allowed to participate in Government Securities.  The DSE 
provides announcements, stock reports, listings and 
financial trading statistics and updates online at 
www.darstockexchange.com. 
 
32. Foreign investors are able to get credit on the local 
market for capital injection within the country and 
importation of capital goods for use within the country. 
Each credit application is vetted on its own merit using 
normal banking procedures and best practices.  While credit 
is allocated on market terms, high interest rates make it 
uneconomical to borrow from local sources.  Bank lending 
rates range from 14 percent to 24 percent for ordinary 
borrowers.  Large corporate borrowers can negotiate lower 
rates.  The private sector has access to a variety of 
commercial credit instruments including documentary credits 
(letters of credits), overdrafts, term loans, and 
guarantees. 
 
33. In the last several years, the Government of Tanzania 
has followed a very successful macro-economic policy. The 
exchange rate of the Tanzanian shilling in relation to major 
trading partners currencies like the US dollar and the EURO 
has remained significantly stable for the past twelve 
months. The stability of the exchange rate, low inflation 
and falling interest rates have been major factors behind 
excellent macro-economic stability that has attracted 
investors in all the major sectors of the economy like 
mining, tourism, manufacturing, services and agriculture. 
The international reserves at the Central Bank (Bank of 
Tanzania) stood at 1.5 billion US dollars, which is the 
highest for over 30 years and equivalent to seven months of 
imports. This has helped BOT to intervene whenever minor 
fluctuations have led to a slight depreciation of the 
Tanzanian shilling. 
 
34. The banking industry is growing in Tanzania, with a half 
dozen international banks expanding operations in the 
country.  The process of privatizing the remaining 
government owned banks is continuing, with the diagnostic 
studies for the privatization of Tanzania Postal Bank (TPB) 
completed and the privatization of the National Micro- 
Finance Bank (NMB) at an advanced stage. 
 
------------------ 
Political Violence 
------------------ 
 
35. Tanzania has enjoyed a remarkable degree of political 
peace and tranquility since it gained independence.  In 
1992, the constitution was amended to allow for multiple 
political parties and the first multi-party election took 
place in 1995.  As the country transforms from a socialist 
to a democratic entity, there will likely be occasional 
conflict, particularly during election campaigns.  The 
prospects for serious and sustained violence are nonetheless 
extremely low.  Demonstrators clashed with police officials 
on Pemba (Zanzibar) in January 2001 during a protest against 
the official outcome of the October 2000 elections. The 
number of dead remains under dispute. (The government claims 
23 people died; the CUF opposition party claims over 70.) 
While renewed short-term violence could recur on Zanzibar, 
particularly as the 2005 elections approach, sustained 
conflicts appear unlikely.  Most political observers believe 
that the chance for internecine conflict on the mainland 
remains minimal. 
 
---------- 
Corruption 
---------- 
 
36. Corruption is one of the major difficulties encountered 
by foreign investors (including U.S. firms) in Tanzania. The 
administration of President Mkapa has termed the elimination 
of corruption as a major priority.  Since President Mkapa 
was elected in 1995 his administration has undertaken a 
number of important steps to combat corruption.  The steps 
include the formation of a presidential commission of 
inquiry against corruption, the requirement for all top 
political leaders to declare their assets, the firing of 
public servants for evidence corruption, and the 
strengthening of the Prevention of Corruption Bureau (PCB). 
The president also created the cabinet position of Minister 
of State for Governance in the president's office, charged 
with, among other responsibilities, fighting corruption. The 
National Anti-Corruption Strategy to root out systemic 
corruption, has been developed, released and distributed 
countrywide for implementation by the PCB.  Giving or 
accepting a bribe (including bribes to a foreign official) 
is a criminal offense. 
 
37. Despite the laws, regulations and penalties to combat 
corruption, enforcement is ineffective.  Areas in which 
corruption persists include government procurement, 
privatization, taxation, ports, and customs clearance. 
Transparency International has consistently rated Tanzania 
as one of the worst countries in the world for corrupt 
business practices. 
 
------------------------------- 
Bilateral Investment Agreements 
------------------------------- 
 
38. Currently, the U.S. and Tanzania do not have a bilateral 
investment agreement. 
-------------------------------------------- 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
39. OPIC insurance programs are available for Tanzania. 
OPIC signed an updated incentive agreement with the 
government of Tanzania in December 1996.  Few companies have 
used OPIC programs in Tanzania. 
 
40. Tanzania is an active member of the Multilateral 
Investment Guarantee Agency (MIGA), and foreign investors 
have successfully utilized MIGA guarantees. 
 
41. The Export-Import Bank of the United States provides its 
loan and guarantee products for short-term and medium-term 
financing in Tanzania's private sector. In 2004, Ex-Im Bank 
negotiated a master guarantee agreement with Exim Bank 
Tanzania, a local commercial bank. 
 
----- 
Labor 
----- 
 
42. Tanzania passed a revised Labor Law in 2004 that 
conforms to international standards, including the ILO 
convention protecting worker rights.  Firms are able to make 
private hiring decisions without requirements to use 
specific employment agencies.  Employees have the right to 
organize in unions, to bargain collectively, and to legally 
strike under certain conditions.  Labor laws apply equally 
to private and public sector workers, including workers in 
EPZs or free trade zones. 
 
43. Unskilled labor is plentiful and inexpensive.  There 
continues to be a deficit of skilled labor in Tanzania, 
though the number of university graduates is growing, 
especially in business management and information 
technology.  Many foreign investors find that local labor is 
not sufficient to fill management and administrative 
positions.  Currently, the labor and immigration regulations 
allow foreign investors to recruit up to five expatriates. 
Though additional work permits for expatriates can be 
granted under certain conditions, it can be difficult to get 
approval. 
 
------------------------------------ 
Foreign Trade Zones/Free Trade Zones 
------------------------------------ 
 
44. Beyond the incentives of Export Processing Zones (EPZs) 
discussed above, the Government of Tanzania has made efforts 
to institute free trade zones at various ports, including 
Zanzibar, Tanga, and Kigoma.  At these free ports, importers 
may bring goods of foreign origin without paying customs 
duties and taxes, pending their eventual processing, 
transshipment or re-exportation. 
 
45. Zanzibar has named three areas as free trade zones, 
under the authority of the Zanzibar Free Economic Zones 
Authority.  These zones are effectively export-processing 
zones, with EPZ incentives for companies operating within 
the zone. 
 
------------------------------------ 
Foreign Direct Investment Statistics 
------------------------------------ 
 
46. Tanzania Mainland: FDI Stocks and Flows 
    values: US Dollar millions & percentage of GDP 
 
          1999     2000     2001     2002     2003     2004 
GDP 
Nominal  8,025    8,377    8,711    8,927    9,447     n/a 
 
FDI 
Inflows  541.7    282.0    467.2    429.8    526.8    469.9 
 
FDI 
Inflows 
(Percent   6.7      3.3      5.3      4.8      5.5     n/a 
GDP) 
 
FDI 
Stocks   2,419    3,038    3,777    4,206    4,733    5,203 
 
FDI 
Stocks 
(Percent  30.1     36.2     43.2     47.1     50.1     n/a 
GDP) 
 
Source: Bank of Tanzania 
 
OWEN