There has been much focus and attention paid to the creation of a Sovereign Wealth Fund (SWF) in Tanzania that will control the proceeds from oil and gas production. In this month’s Energy Briefing, we look into the proposed SWF law that Tanzania is likely to enact later this year, and its proposed legal and institutional framework drawing lessons learnt from existing SWFs.
What are SWFs?
SWFs are state-owned investment vehicles or entities that are established from balance of payments surpluses; foreign currency operations; proceeds of privatization, state transfer payments, fiscal payments and/or receipts resulting from resource exports. In Tanzania’s case, a SWF can be used as a mechanism for transferring the present savings and investments from oil or gas production to the future.
In oil or gas rich countries like Algeria, Libya and Kuwait, the governments want control over the revenue generated from the sector which has led to the creation of SWFs. Oil and gas being finite resources, SWFs can be used for budgetary purposes, as a safety-net for financial purposes and as a means of carrying over revenue collected today for the benefit of future generations.
SWF are structured to meet the needs of the state making considerations to prevailing circumstances and may evolve over a period of time.
Policy statement and the future of oil and gas revenue in Tanzania
The The National Natural Gas Policy of Tanzania, October 2013 (the Policy) envisions the creation of a SWF. The Policy specifically states under paragraph 3.1.3 that management of natural gas revenue will be through the establishment of a Natural Gas Revenue Fund (the Gas Fund) which will ensure long lasting benefits and the welfare of Tanzanians. The Gas Fund will also control the use of the funds to bring sustainable returns beyond the exhaustion of the resource.
The Gas Fund will be established under a specific law (the Gas Fund Act) which will be managed and administered by the Bank of Tanzania (BOT).The law is expected to be tabled and presented as a bill before the Parliament of Tanzania in October 2014. The Government of Tanzania (GoT) recently stated that the Gas Fund will apply for both oil and gas revenues. The need for a Gas Fund and a Gas Fund Act becomes more significant as GoT considers the introduction of a windfall profit tax that may be imposed heavily on international oil and gas companies (IOCs) and other investors.
Tanzania is expected to experience substantial economic growth and development from the natural gas sector once production takes-off. The proposed Gas Fund will control revenue on the following basis:
- the amount that is actually exported by IOCs and other investors;
- restrict expenditure by limiting inclusion to the GoT budget, and
- provide local communities the right to determine the use of the funds.
Legal and institutional framework of the Gas Fund
The proposed Gas Fund will be enacted by specific legislation and the Gas Fund Act must have sound institutional and governance sections. Therefore the law should be able to cater for the following:
- provide a clear structure and legal form of the Gas Fund including its interaction and connection to the BOT, the Ministry of Finance or the Minister of Finance and any public auditing body such as the Auditor General;
- be consistent with the broader legal framework for GoT’s budgetary process;
- legal soundness of the Gas Fund and its transactions or dealings with others i.e. the type of business and investments that it may involve itself in;
- should be able to support and carry through effectively its stated policy objectives as provided in the Policy; and
- promote functionality through effective accountability, governance and transparency.
There are mainly three ways in which SWFs can be legally formed. They can either be established under a specific law as a state owned corporation; or as a private entity with legal capacity to act on its own, or as a pool of assets owned by the state or central bank. In Tanzania’s case, the Gas Fund will likely be a state-owned corporation established under the Gas Fund Act as a body corporate and subject to the Public Corporations Act, 1992. Based on the Policy, the Gas Fund may take the shape of a Savings and Development Fund which will ensure there is a spread of wealth of a non-renewable resource across generations and contribution to specific socio-economic projects in the country such as infrastructure development.
BOT will be the manager and administrator of the Gas Fund, which creates an element of accountability and governance on the part of the Gas Fund. In practice, the legal shape of SWFs may have tax and investment immunity implications. It is generally more cost effective and justified to incorporate the SWF as a unit of the central bank i.e. within the existing institutional framework as it is cheaper to work with the existing human capital and infrastructure. For transparency, the Auditor General may audit the books and accounts of the Gas Fund.
Some of the other relevant institutional players would be the National Oil and Gas Company (the Company), the proposed Regulatory Authority (the Regulator) and Local Government Authorities (LGAs) that are mentioned in the Policy. Interaction with these institutions would be at different points of natural gas production. The LGAs may act on behalf of the relevant local communities that have mandate on the use of the funds. The Company will be deeply involved in the realisation of the oil and gas revenues and the Regulator would potentially oversee all matters related to oil or gas including to some extent monitoring the Gas Fund.
Issues to consider in light of the proposed Gas Fund Act
Whilst the Gas Fund Act will likely be a Savings and Development Fund for oil and gas revenue, it will also provide that the Gas Fund is an investment vehicle of the GoT that is intended to make money through investment or through collection of revenue which may result in the introduction of a windfall profit tax.
In preparation for the proposed Gas Fund Act, GoT is considering the need to control and restrict the use of funds based on the quantitiies of oil and gas to be exported by investors. At this stage the quantities of oil and gas have not been determined which would be the determinant for the restriction and control of funds.
Lastly, GoT must ensure that the proposed Gas Fund Act supports the Policy’s objectives and the proposed institutional framework. Ideally, it should also meet the following benchmarks of a SWF which are legitimacy; intent; performance and endurance.