TANZANIA: INVESTMENT CLIMATE STATEMENT 2006

UNCLAS SECTION 01 OF 08 DAR ES SALAAM 000063

SIPDIS

DEPT FOR EB/IFD/OIA
ALSO AF/EPS FOR M NORMAN AND AF/E FOR B YODER
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E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB TZ PGOVPZ OPIC USTR
SUBJECT: TANZANIA: INVESTMENT CLIMATE STATEMENT 2006

REF: 05 STATE 0201904

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OPENNESS TO FOREIGN INVESTMENT
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1. 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, Foreign Direct Investment (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.


2. 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 USD 300,000 if
foreign owned and USD 100,000 if locally owned. In 2004, TIC
registered 454 investment projects (worth over USD 1
billion),up from 372 in projects in 2003.


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.

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CONVERSION AND TRANSFER POLICIES
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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 USD 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.

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EXPROPRIATION AND COMPENSATION
--------------

6. Since 1985, the government of Tanzania has not
expropriated any foreign investments.

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DISPUTE 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.

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PERFORMANCE REQUIREMENTS AND INCENTIVES
--------------

8. According to the National Trade Policy (February 2003),
the Tanzanian government intends, in the course of future WTO
Trade-related Investment Measures (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 socioeconomic 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 issues the formal Investment
Certificate of Incentives, which serves as the official
recognition of one's status in the country. TIC serves as a
one-stop government liaison for investors from inquiry stage
right up to project start and all Government departments and
agencies are required by law to cooperate fully with TIC in
facilitating investors.


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 percent 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 USD 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.


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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).

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PROTECTION OF PROPERTY RIGHTS
--------------

21. Movable property and land rights: 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.

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.


22. Intellectual Property Rights: Adherence to key
international agreements on intellectual property rights in
Tanzania began only in recent years. In 1999, Tanzania passed
the Copyright and Neighboring 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.

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.

Tanzania has not yet signed or ratified the WIPO Internet
treaties.

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TRANSPARENCY OF THE REGULATORY SYSTEM
--------------

23. 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 in terms
of the steps, time and costs of complying with licensing and
permit requirements for ongoing operations. In general,
however, the regulatory system does not generally serve to
impede investment.


24. 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.


25. Although government procurement is often less
transparent than international standards, the Tanzanian
Government has recently carried out reforms in its public
procurements system. In 2004, the Government of Tanzania
passed the Public Procurement Act; implementation of this Act
took effect in May 2005. The Act aims to increase the
transparency of Tanzania's Public Procurement Regulatory
Authority (PPRA) and to provide a margin of preference for
local tenders to enhance the participation of local firms in
public procurement processes.


26. 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.


27. For example, the Government of Tanzania met with private
sector business associations, including an investor's
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.


28. 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.

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EFFICIENCY OF CAPITAL MARKETS AND PORTFOLIO INVESTMENT
-------------- --------------

29. The Capital Markets and Securities Authority (CMSA) Act
of 1994 provides for a policy that facilitate the free flow
of capital or financial resources to support in the product
and factor markets. The CMSA has opened the Dar es Salaam
Stock Exchange (DSE) to foreigners. The maximum allowed limit
for foreign participation 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


30. 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 the
normal banking procedures and best practices. While credit
is allocated on market terms, it has been uneconomical to
borrow from local sources/ commercial banks due to high
interest rates. Bank lending rates range from 14-24 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.


31. 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.
In 2005, privatization of the National Micro-
Finance Bank (NMB) advanced, with the Government approving
the sale of 49 percent of the Bank's shares.


32. The Bank of Tanzania's (BOT) international reserves have
grown steadily over the past 5 years. In 2004, international
reserves stood at 1.78 billion US dollars, which constituted
the highest level of reserves in over 30 years and equivalent
to nine months of imports. This has helped the BOT to
intervene whenever minor fluctuations have led to a slight
depreciation of the Tanzanian shilling. According to the
Bank of Tanzania, the Tanzanian shilling depreciated against
the U.S dollar by about 1.2 percent from 2004-2005. To find
more information about the value of the Tanzanian Shilling,
visit http://www.bot-tz.gov

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POLITICAL VIOLENCE
--------------

33. Tanzania is one of the most politically stable countries
in Africa and the prospects for serious and sustained
violence are extremely low. Since gaining independence,
Tanzania has enjoyed a remarkable degree of peace and
stability and in 1992, the constitution was amended to allow
for multiple political parties. In 1995, the first
multi-party election took place.


34. As the country makes the transition from a socialist to
a democratic entity, occasional conflict is possible,
particularly during election campaigns. In 2001,
demonstrators clashed with police officials on Pemba
(Zanzibar) 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 while the
opposition party, the Civic United Front, claims over 70
people died.


35. The 2005 elections, however, were primarily peaceful and
marked by an absence of major violence. In the urban area of
Unguja (Zanzibar),there were minor clashes between security
forces and the Civic United Front but currently, the
situation appears stable. Most political observers believe
further clashes on Zanzibar are unlikely and the chance for
conflict on the mainland remains remote.

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CORRUPTION
--------------

36. Corruption is one of the major difficulties encountered
by foreign investors (including U.S. firms) in Tanzania.
Former President Mkapa elevated the elimination of corruption
to a major priority of his administration, creating the
cabinet position of Minister of State for Governance in the
President's Office, charged with, among other
responsibilities, fighting corruption. Mkapa's
administration undertook a number of other important steps to
combat corruption including, 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 corrupt activity, and the
strengthening of the Prevention of Corruption Bureau (PCB).


37. In 2004, the Government initiated reforms in the PCB,
giving it increased investigative and prosecution powers,
expanding its operations to the regional and district level
and allotting additional budget resources to the bureau (a
budget increase of USD 3 million from 2004 to 2005). The
National Anti-Corruption Strategy to root out systemic
corruption, was developed, released and distributed
countrywide for implementation by the PCB. Also in 2004, the
Government of Tanzania passed the Public Procurement Act,
aiming to increase the transparency of Tanzania's Public
Procurement Regulatory Authority. Implementation of this Act
took effect in May 2005.


38. In his inaugural address to Parliament in late December
2005, the newly elected fourth President of Tanzania, Jakaya
Kikwete, pledged to continue to combat corruption at all
levels of government. Through an initiative known as the
Millennium Challenge Account Threshold program, the USG will
work with Tanzanian authorities to reduce corruption and
improve the GOT's effectiveness and accountability.


39. While giving or accepting a bribe (including bribes to a
foreign official) is a criminal offense in Tanzania, the
enforcement of laws, regulations and penalties to combat
corruption, is largely 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, although its rating has improved considerably over
the past seven years.

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BILATERAL INVESTMENT AGREEMENTS
--------------

40. Currently, the United States of America and Tanzania do
not have a bilateral investment agreement.

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OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
--------------

41. 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.


42. Tanzania is an active member of the Multilateral
Investment Guarantee Agency (MIGA),and foreign investors
have successfully utilized MIGA guarantees.


43. 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 Ex-Im Bank
Tanzania, a local commercial bank.

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LABOR
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44. 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.


45. 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.
The difficulty of hiring and firing workers in Tanzania is
well above the regional and world average, according to the
World Bank's latest report on Doing Business in Tanzania.


46. 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.

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FOREIGN TRADE ZONES/FREE TRADE ZONES
--------------

47. Beyond the incentives of Export Processing Zones (EPZs)
discussed above, the GOT 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.


48. 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.

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FOREIGN DIRECT INVESTMENT STATISTICS
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Tanzania Mainland: FDI Stocks and Flows (1999-2004)
Value: US Dollar millions and percentage of GDP

1999 2000 2001 2002 2003 2004

GDP 8,025 8,377 8,711 8,927 9,447
10,808
Nominal


FDI 541.7 282.0 467.2 429.8 526.8
469.9
Inflows


FDI 6.7 3.3 5.3 4.8 5.5
4.35
Inflows
(percent of GDP)


FDI 2,419 3,038 3,777 4,206 4,733
5,203
Stocks

FDI 30.1 36.2 43.2 47.1 50.1
48.1
Stocks
(percent of GDP)


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WEB RESOURCES
--------------

Tanzanian Investment Center: http://www.tic.co.tz

Public Procurement Regulatory Authority: http://www.ppra.go.tz

Presidential Parastatal Sector Reform Commission:
http://www.pscrtz.tz.

Doing Business in Tanzanian (World Bank Report):
http://www.doingbusiness.org

Millennium Challenge Account: http://www.mcc.gov
RETZER