Tanzania Investment Centre

2008
REPORT ON THE STUDY OF GROWTH AND
IMPACT OF INVESTMENT IN TANZANIA
REPORT ON THE STUDY OF GROWTH AND
IMPACT OF INVESTMENT IN TANZANIA
REPORT ON THE STUDY OF GROWTH AND
IMPACT OF INVESTMENT IN TANZANIA
2008
Tanzania Investment Centre
ii The United Republic of Tanzania - Tanzania Investment Centre
Table of ConTenTs
List of Abbreviations and Acronyms ....................................................................... v
LIST OF TABLES ...................................................................................................... vii
LIST OF FIGURES ................................................................................................... viii
Executive Summary ................................................................................................. ix
Background and Context .................................................................................... ix
Objectives ......................................................................................................... ix
1. Scope of the study ...................................................................................... x
2. Methodology ................................................................................................ x
3. Key messages from the study .................................................................... xi
4. Recommendations ...................................................................................xiii
Acknowledgements ................................................................................................. xv
1.0 Introduction ........................................................................................................ 1
1.1 Background ................................................................................................. 1
1.2 Objectives and Rationale ............................................................................ 2
1.3 Scope of Work ............................................................................................. 2
1.4 Methodology ................................................................................................ 3
1.4.1 DefnitionofInvestment .................................................................... 3
1.4.2 Overall Approach .............................................................................. 3
1.4.3 Field Survey ...................................................................................... 4
1.4.4 Data Analysis .................................................................................... 5
1.5 Organisation of the Report .......................................................................... 5
2.0 Trends and Magnitude of Foreign and Domestic Investment in Tanzania ... 7
2.1 Trends and the Structure of Capital Formation ........................................... 7
2.1.1 Trends in Total Capital Formation ..................................................... 8
2.1.2 Capital Formation by Public and Private Sector .............................. 9
2.1.3 Capital Formation by Type of Assets .............................................. 11
2.1.4 Capital Formation by Sectors of the Economy ................................ 15
2.2 TrendsandtheStructureofForeignDirectInvestment ........................... 16
2.2.1 SizeandGrowthofForeignDirectInvestmentinTanzania ............ 16
2.2.2 FDIbyModeofEntry,SectoralDistributionandOwnership ........... 18
2.2.3 FDIbyCountry/RegionofOrigin ..................................................... 20
2.2.4 SpatialDistributionofFDI .............................................................. 22
2.2.5 PortfolioInvestmentsintoTanzania ................................................ 23
2.3 LevelofDomesticDirectInvestment(DDI) ............................................... 23
2.3.1 IdentifcationofDomesticDirectInvestment(DDI) ......................... 23
2.3.2 RelationshipbetweenForeignandDomesticInvestment ............... 25
2.3.3 Literature Review ............................................................................ 26
2.4 PolicyImplications ..................................................................................... 28
iii Report on the Study of Growth and Impact of Investment in Tanzania
3.0 Investments Adequacy in Relation to Development Goals ......................... 29
3.1 Development Goals ................................................................................... 29
3.2 LinkbetweenInvestmentandGrowth ....................................................... 29
3.3 Tanzania’sHistoricalExperienceonInvestmentandGrowth ................... 31
3.4 ExplainingTanzania’sInsignifcantLinkagebetween
InvestmentandGrowth ............................................................................. 32
3.5 InvestmentAdequacy ................................................................................ 35
3.6 RaisingInvestmentandGrowth:Whatcanbedone? ............................... 37
3.6.1 ImprovingtheEnvironmentforInvestment ..................................... 37
3.6.2RaisingInvestmentProductivityandSustainingGrowth ............... 38
3.6.3 Diversifying Sources of External Finance and Raising
EffectivenessofOffcialDevelopmentAssistance .......................... 40
3.6.4 Mobilising Domestic Resources ..................................................... 41
3.6.5MakingFurtherProgressinTanzaniaInvestor
Roadmap-typeIssues ..................................................................... 41
4.0 MeasuresforEvaluatingtheCostandBeneftsofInvestments
made in Tanzania ............................................................................................. 45
4.1 Introduction ............................................................................................... 45
4.2 CurrentMeasuresforInvestmentApproval .............................................. 45
4.3 Cost-beneftMeasures ............................................................................. 47
4.3.1 SocialBeneftMeasures ................................................................. 47
4.3.2 Social Cost Measures ..................................................................... 48
4.4 CalculatingtheSocialCost-BeneftMeasures(ModusOperandi) ............ 49
4.5 PostInvestmentMeasures ........................................................................ 50
4.5.1 Statutory Measures ........................................................................ 50
4.5.2 Other Follow-up Measures .............................................................. 50
4.6 Recommendations for Addressing the Key Remaining Constraints ....... 51
4.6.1 BecomingmorePro-activeinPromotingLocalInvestments .......... 51
4.6.2 FurtherPromotionofForeignInvestments .................................... 52
4.6.3 TakingAdvantageofBilateralInvestmentTreaties ......................... 52
4.6.4 ImprovingProspectsforTechnologyTransfer ................................. 52
4.6.5 ImprovingthelinkagesbetweenSMEsandexistinginvestors. ...... 53
4.6.6 Facilitating the Creation of Employment ......................................... 53
4.6.7 Protecting the Environment ............................................................. 54
4.6.8 FacilitatingandServicingExistingInvestors ................................... 54
4.6.9 Undertaking more regular follow-up of investors ............................ 54
5.0 Investment Impact Analysis ........................................................................... 55
5.1 ImpactonEconomicGrowth ..................................................................... 55
5.2 ImpactonBalanceofPayments ............................................................... 57
5.2.1 ImpactonExports/Imports .............................................................. 57
iv The United Republic of Tanzania - Tanzania Investment Centre
5.2.2 ImpactontheBalanceofPayments ............................................... 61
5.3 InvestmentImpactonGovernmentRevenue ............................................ 62
5.4 ImpactofInvestmentonSavingsLevel .................................................... 65
5.4.1 Introduction ..................................................................................... 65
5.4.2 Trends in Government and Private Savings ................................... 65
5.4.3 ImprovingSavingsMobilisation ...................................................... 66
5.5 InvestmentPerformanceandProftability ................................................. 67
5.6 ImpactonEmploymentGeneration ........................................................... 69
5.6.1 Introduction ..................................................................................... 69
5.6.2 Investmentandemploymentcreation ............................................. 70
5.6.3 EmploymentImpactsthroughLinkageswiththe
Rest of the Economy ....................................................................... 76
5.7 ImpactonHumanResourcesDevelopment ............................................. 77
5.7.1 Introduction ..................................................................................... 77
5.7.2 Development of Human Resources ............................................... 77
5.8 ImpactofInvestmentonTechnologyTransfer .......................................... 79
5.8.1 Introduction ..................................................................................... 79
5.8.2 Tanzania’ Experience ...................................................................... 80
5.8.3 Transferring Business Skills and Working Styles ............................ 80
5.8.4 Examples of Technology Transfer in Selected Sectors ................... 81
5.8.5 TechnologyTransfer-throughImportsofCapitalGoods ................. 82
5.9 ImpactofInvestmentonEntrepreneurialGrowth ...................................... 83
5.9.1 Entrepreneurship Growth ................................................................ 83
5.10 CommunityandNeighbourhoodImpact .................................................... 86
5.11 IllustrativeCasesofSomeofthePerformingInvestments ...................... 89
5.11.1TanzaniaCigaretteCompany(TCC) ............................................... 90
5.11.2KiooLimitedCompany(KLC) ......................................................... 91
5.11.3MissionMikocheniHealthandEducationNetwork(MMHEN) ........ 92
5.11.4StandardCharteredBankTanzania(SCBT) .................................. 93
5.12 Cross-cuttingIssues .................................................................................. 96
5.12.1 The Environment ............................................................................ 96
5.12.2 The Gender Dimension .................................................................. 97
5.12.3HIV/AIDS ......................................................................................... 99
5.12.4RegionalIntegrationInitiatives ...................................................... 100
5.13 PolicyImplications ................................................................................... 101
6.0 Conclusions and Recommendations .......................................................... 104
6.1 Key Conclusions ..................................................................................... 104
6.2 Recommendations ................................................................................. 106
References ............................................................................................................. 109
Appendices ............................................................................................................ 113
v Report on the Study of Growth and Impact of Investment in Tanzania
lisT of abbreviaTions and aCronyms
AIDS - AcquiredImmuneDefciencySyndrome
BITS - Bilateral Investment Treaties
BOT - Bank of Tanzania
BRELA - Business Registration and Licensing Authority
CAER - Consulting Assistance on Economic Reform
CDTT - Centre for the Development and Transfer of Technology
CEDAW - Convention on Elimination of all forms of Discrimination Against Women
CEM - Country Economic Memorandum
CGE - Computable General Equilibrium
COMFAR - Computer Model for Feasibility Analysis and Reporting
COSTECH - Commission for Science and Technology
CUTS - Consumer Unity and Trust Society
DANIDA - Danish International Development Agency
DDI - Domestic Direct Investment
EIA - Environmental Impact Assessment
ESRF - Economic and Social Research Foundation
FDI - Foreign Direct Investment
FR - Financial Rules
STL - SunfagTanzaniaLtd
GDP - Gross Domestic Product
GFCF - Gross Fixed Capital Formation
HIPC - Highly Indebted Poor Country
HIV - HumanImmuno-defciencyVirus
ICOR - Incremental Capital Output Ratio
IDA - International Development Association
IFC - International Finance Corporation
ILO - International Labour Organisation
IMF - International Monetary Fund
IPI - Institute of Production Innovation
IIRT - International Investors Round Table
KIDT - Kilimanjaro Industrial Development Trust
KTM - Karibu Textile Mills
LDC - Least Developed Country
MDGs - Millennium Development Goals
MIGA - Multilateral Investment Guarantee Agency
MKUKUTA - Mkakati wa Kukuza Uchumi na Kupunguza Umasikini Tanzania
MNEs - Multinational Enterprises
MWATEX - Mwanza Textile Mills
vi The United Republic of Tanzania - Tanzania Investment Centre
NBC - National Bank of Commerce Limited
NBCL - Nyanza Bottling Company Limited
NBS - National Bureau of Statistics
NDC - National Development Corporation
NEMC - National Environmental Management Commission
NSSF - National Social Security Fund
ODA - OffcialDevelopmentAssistance
ODI - Overseas Development Institute
OECD - Organisation of Economic Cooperation on Development
PERs - Public Expenditure Reviews
PPP - Public-Private Partnership
PRS - Poverty Reduction Strategy
R&D - Research and Development
SADC - Southern Africa Development Community
SIDO - Small Industries Development Organisation
SME - Small and Medium Enterprises
TBL - Tanzania Breweries Limited
TBs - Treasury Bills
TIC - Tanzania Investment Centre
TIRDO - Tanzania Industrial Research and Development Organisation
TNCs - Transnational Corporations
TNSRC - TanzaniaNationalScientifcResearchCouncil
TRA - Tanzania Revenue Authority
TTCL - Tanzania Telecommunication Company Limited
UK - United Kingdom
UNCTAD - United Nations Conference on Trade and Development
UNIDO - United Nations Industrial Development Organisation
URT - United Republic of Tanzania
USA - United States of America
USAID - United States Agency for International Development
UTT - Unilever Tea Tanzania Limited
VAT - Value-Added Tax
VOIL - Vegetable Oil Industries Limited
vii Report on the Study of Growth and Impact of Investment in Tanzania
lisT of Tables
Table 2.1: FDI stock in Tanzania 1999-2004 ......................................................................... 16
Table2.2: StockandfowofFDIbyRegionalDestination,1998-2004(US$million) ..........21
Table 3.1: Investment and Growth in Selected Countries ..................................................... 29
Table 3.2: Investment and Growth in Tanzania...................................................................... 32
Table 3.3: Sources of Growth in Tanzania ............................................................................. 32
Table 3.4: Roadmap on Institutional Facilitation of Investment ............................................. 42
Table5.1: TanzaniaExports(US$Million) ............................................................................ 55
Table 5.2: Trends in Import-Export Ratio for Selected Agricultural Firms .............................. 55
Table 5.3: Trends in Export-Import Ratio for Selected Manufacturing Firms ......................... 56
Table 5.4: Trends in Import-Export-Ratio for Selected Mining Firms ..................................... 57
Table 5.5: Investment-related Income tax ............................................................................. 58
Table 5.6: Investment-related Value-added tax ..................................................................... 59
Table 5.7: Investment-related revenue from Customs ........................................................... 60
Table5.8: PerformanceofLargeTaxpayers(2003-2004) ..................................................... 64
Table5.9: Proftabilityofsomeinvestments(2002-2004) ...................................................... 65
Table 5.10: Actual Investment Created Employment by Sector and
CategorisationforMainlandTanzania(2001-2003) ..............................................67
Table 5.11: Trends in Total Actual Employment of Selected Firms .......................................... 70
Table 5.12: Network of Suppliers of Raw Materials and Other Inputs ..................................... 79
Table 5.13: TCC Performance .................................................................................................90
Table 5.14: Kioo Limited Performance .................................................................................... 91
Table 5.15: Number of patients treated between 2002-2004 .................................................. 92
Table 5.16: Tax paid during the year ending December 31 2004 ............................................ 94
Table 5.17: Additional list of some of best performing enterprises .......................................... 95
viii The United Republic of Tanzania - Tanzania Investment Centre
lisT of fIGURES
Figure2.1: CapitalFormationasa%ofGDP(CurrentPrices) ................................................ 9
Figure 2.2: Relative Importance of Public and Private Investment ......................................... 11
Figure 2.3: Value of Capital Formation by Types of Assets ..................................................... 12
Figure 2.4: Structure of Capital Formation by Types of Assets ............................................... 12
Figure 2.5: Structure of Capital Formation by Components of Building Works .......................14
Figure 2.6: Structure of Capital Formation by Components of Other Works...........................14
Figure 2.7: Structure of Capital Formation by Components of Other Works...........................15
Figure 2.8: Capital Formations by Kind of Economic Activity 1989-2002 ............................... 15
Figure 2.9: Capital Formation by Kind of Economic Activity as % of Total 1989-2002 ............16
Figure2.10: FDIInfowsintoTanzania,1990-2004................................................................... 17
Figure2.11: ForeignDirectInvestmentInfowsbySector1990-2003 ...................................... 19
Figure 2.12: Sectoral Distribution of FDI Projects in Tanzania 1999-2001................................ 19
Figure 2.13: Number of FDI projects in Tanzania 1990-2004 by Country of Origin ..................21
Figure2.14: InvestmentbyCountryofOrigin,Leadingcountries1990-2004 ........................... 21
Figure2.15: IdentifcationofDomesticPrivateInvestment ....................................................... 24
Figure 2.16: Trends in the Foreign and Domestic Private Investment ...................................... 25
Figure 2.17: FDI as a Share of Total Capital Formation ............................................................ 27
Figure3.1: RealGDPGrowthandInvestment(1965-2004) ................................................... 32
Figure5.1: FDI,DDIandGrowthofRealGDP ....................................................................... 57
Figure5.2: TanzaniaExports(US$Million) ............................................................................ 58
Figure5.3: TrendsinExports/ImportsofSelectedAgriculturalFirms(1999-2004) ................59
Figure 5.4: Trends in Exports/Imports for Manufacturing Firms .............................................. 60
Figure 5.5: Investment-related Income Tax ............................................................................. 62
Figure 5.6: Investment-related Value-added tax revenue ....................................................... 63
Figure 5.7: Revenue from Customs ........................................................................................ 64
Figure5.8: TanzaniaSavings,1990-2003(PercentageofGDP) ............................................ 66
Figure5.9: ActualemploymentofTICapprovedforeignaffliatesinTanzania,
byindustry,2001-2004 ......................................................................................... 74
Figure5.10: TrendsandStructureofTanzania’sImports(CIF) ................................................ 83
Figure 5.11: Percentage Distribution of Investor Donations to Communities- 1998-2004 ........87
Figure 5.12: Value of Investor Donations to Communities -1998-2004..................................... 88
ix Report on the Study of Growth and Impact of Investment in Tanzania
exeCuTive summary
Background and Context
In 1996 the government of Tanzania reviewed the investment policy of 1990 and in 1997 a new
investment law replaced the previous investment law of 1990 in order to streamline investment
incentives and make the TIC a “one-stop-centre” for investment facilitation and promotion. In
response,inthelastdecade,Tanzaniahasachievedsignifcantprogressinattractingthemuch
neededinvestmentespeciallyForeignDirectInvestment(FDI).Thequestioniswhetherthelevel
of investment attained is adequate to achieve the national development goals and what kind of
investmentismostbenefcialandwhatthemostcost-effectiveandsociallyharmoniouswaysto
stimulate investment are. Although a majority of investment in both developed and developing
countries are domestic, many developing countries face the challenge of developing domestic
investments in the context of very low levels of domestic savings rates. This poses a major
challenge in investment promotion programmes.
Investment policy has a number of challenges to address. First, how to make the investment
promotionandfacilitationpoliciesmoreeffcientandeffective.Second,determiningtheappropriate
balancebetweeneffortstopromoteforeignasopposedtodomesticinvestment.Third,whether
thebeneftsfrompromotingFDIoutweightheassociatedsocialcosts.Finally,howbesttodeploy
the benefts of FDI to achieve the country’s development goal. Addressing these challenges
requiresreliableinformationandstatisticsaboutthenature,structureandimpactofinvestment
on the economy.
Objectives
The main objective of this study is to evaluate the growth and impact of investment on the
economy; to assess the role played by TIC in investment promotion and facilitation, and
recommend measures for enhancing the favourable impact of investment for economic growth
and poverty reduction.
Inthisregard,thestudymakesthreeimportantcontributions.First,itexaminestheavailabledata
and information to establish the magnitude, nature and trend of total investment in Tanzania,
thekeyissuebeingthelackofaccurateinformationonthemagnitudeof(particularlydomestic)
investmentinTanzania.Second,thereportassessesoftheadequacyofrecentlevelsofinvestment
for achieving the national development goals relating to growth. Third, the study reviews the
criteria used by TIC in evaluating the impact of investment and makes recommendation on the
need for more robust criteria that incorporate the strategic need of promoting investment for
enhancinggrowthandpovertyreduction.Fourth,onthebasisoftheidentifedcriteria,thestudy
assesses the actual impact of the growth of investment in Tanzania so far. Finally, the study
recommends on how the situation could be improved.
x The United Republic of Tanzania - Tanzania Investment Centre
1. Scope of the study
Thisstudycoveredfveissues:
Providing the trends and magnitude of both local and foreign investment in Tanzania; (i)
Assessing the adequacy of investment level to meet the goals of Tanzania Development (ii)
Vision 2025;
Identifying measures for evaluating the cost and benefts of investments made in (iii)
Tanzania;
Evaluatingtheimpactofinvestments,and (iv)
Recommending measures for enhancing the impact of investment on Tanzania’s (v)
economic growth and poverty reduction.
2. Methodology
The overall approach taken aimed at adding value to the study by evaluating both primary
and secondary data. The frst task involved review of various documents and literature in both
developing and developed countries to enrich and inform the study fndings. In addition, the
consultants involved a large number of stakeholders in discussions and reviews that aimed at
soliciting information and opinions on investment issues. The stakeholders included government
ministriesanddepartments,researchandacademicinstitutions,theprivatesector,development
partnersandthecivilsociety.Inaddition,extensiveconsultationsweremadewiththeclient,i.e.the
TIC management to review progress and share valuable information on the study. Fieldwork for
thisstudywasconductedduringthefrsttwoweeksofDecember2006.Theconsultantsdeveloped
semi-structuredinterviewsandquestionnairesandmadeextensivefeldconsultativesessions.
Purposive sampling technique was used to obtain sectors and regions for interview. The sectors
selectedincludeAgriculture(themainstayoftheeconomy),Manufacturing(thefutureofeconomic
transformationandimportantdestinationofFDI),theServicessector(oneofthelargestrecipient
of FDI and SMEs particularly in tourism sectors), and the Mining sector (the largest recipient
ofFDIinTanzania).Sevenregionsweretargetedforthesurveycorrespondingtotheselected
sectors,whichwereMorogoro,Iringa,Kilimanjaro,Arusha,Mwanza,MaraandDaresSalaam.
The study team interviewed and administered semi-structured questionnaires to over 75 local
andforeigninvestmentsintheseregions.Theactualnumberoffrmsthatfullyrespondedtothe
interviewsandflledinthequestionnaireswas55(about75%responserate),outofwhich49(or
about90%)werebasedintheupcountryregions.
Dataprocessingandanalysisincludedtrendanalysis,cost-beneftanalysiscausaleffectanalysis
andimpactassessment.Theanalysiswasextendedtopolicyadequacyandlinkageassessment,
atthemacroandsectorallevels.Giventhepolicynatureoftheenvisagedendproduct,thestudy
adoptedthetriangulationapproach,usingthecombinationoftheabove-mentionedapproaches
to derive key conclusions.
xi Report on the Study of Growth and Impact of Investment in Tanzania
3. Key messages from the study
(i) Achievements made in attracting investments are encouraging
Between 1997 and 2007TIC registered over 4,084 investments, of which 25.04 percent were
foreign. TIC,BOT and NBS survey fndings show that during the period 2001-2005, the stock
of foreign private investments (FPI) in Tanzania continued to increase, growing at an annual
averagerateof13.6percenttoUSD5,785.2millionin2005.TheshareofFDIremainsthelargest
in the total stock of FPI as it contributed 88.8 percent. Investors’ confdence in the Tanzanian
economy is increasingly getting stronger. Equity from shareholders remains the major source
offnancingofFDI.ThistypeoffnancingrosefromUSD1,921.3million(55.1percent)toUSD
3,651.3million(71.9percent)in2005.Sectorsthatbeneftedmostfromtheincreasedinfows
are:manufacturing,mining,servicesandtourism.Agriculturereceivedlessthan10percentofthe
investments – in part due to unfavourable infrastructure that continues to retard this sector.
(ii) …but more investment is required as well as increased productivity
The current level of investment is not yet adequate for realising Tanzania’s Development Vision
2025 goal of reducing poverty and promoting sustained development through GDP growth of over
8 percent. The study, using historical data, fnds insignifcant relationship between investment
and growth. The weak link is associated with low productivity of investment and inadequate
complementary factors particularly lack of skilled human resources and poor infrastructure.
However,thestudyhasalsoestablishedthatthissituationhaschangedforthebetterinrecent
years.StudiesfromothercountriessuchasChina,Japan,SouthKoreaandTaiwanshowthat
investments averaging 25-30 percent of GDP have been pivotal in their country’s fast economic
growth.IfTanzaniaistoachieveitsdevelopmentgoals,recentinvestmenttoGDPratiohasto
be increased to at least 25 percent to achieve a growth rate of at least 8 percent. This entails
making further economic improvements (e.g. in policy and institutional effectiveness) that will
attract further both local and foreign investments. For instance, further liberalisation of foreign
account may raise funds for investors to invest outside the country.
(iii) TICisatruly“onestop”centrethatcangreatlybeneftforeignaswellasdomestic
investors
TheoverarchinggoalofTanzaniaInvestmentCentre(TIC)istofacilitateandpromoteinvestment
inTanzania–thusfacilitatingeconomicgrowthandpovertyalleviation.Toalargeextent,fndings
of this study indicate that TIC is making commendable progress. Stakeholders interviewed
applaud TIC as a truly “one-stop” centre for investment facilitation and promotion. Apart from
promotinginvestment,TICisalsoofferinginvestor-friendlypost-investmentservices.However,
one major criticism on the way the investment promotion policy has been implemented is that TIC
hasnotgivensuffcientattentiontopromotingdomesticinvestmentespeciallytheSMEs.Many
domesticstakeholdershavetheperceptionthattheplayingfeldistiltedinfavourofFDI.
xii The United Republic of Tanzania - Tanzania Investment Centre
(iv) Robustcriteriaarerequiredtoevaluateimpactofinvestment
Inevaluatingtheimpactofinvestmentontheeconomy,differentcriteriashouldbeinvolvedsoas
toexaminethecostsandbeneftsofinvestment.Inadditiontotheconventionalcriteriasuchas
employmentandtaxrevenuegeneration,itisimportanttoemphasisethattheoverallobjectiveof
promoting investment is to improve productivity and competitiveness of the Tanzania’s economy.
Forinstance,oneoftheimportantcriteriaforevaluatingtheimpactofforeigninvestmentisthe
extent of linkages generated to the rest of the economy, and to the domestic investments in
particular.Thereportalsoemphasisesuseofsocialcostbeneftanalysisinevaluatinginvestment
proposals so that social and environmental concerns are also mainstreamed in investment
decisions.
(v) Investments are having desirable impact …
In examining the impact of investments at the community level, there are marked differences
between the impact of foreign and that of local investment in terms of corporate responsibility.
Foreign investment embraces the practice of corporate responsibility more than the local
investment, and the former has further impacted favourably on the surrounding community,
especiallybyimprovingthesupplyofpublicutilitiesandinfrastructure.However,atamacrolevel,
andingeneralterms,domesticsavingsarerising,jobsarebeingcreatedandnewskillsarebeing
learnt as a result of growth of both domestic and foreign investments. There is also evidence on
transferoftechnologyandinnovation,albeitslowly.Investmentsarealsofosteringentrepreneurial
growth through forward and backward linkages, revamping exports and contributing towards
community development and government tax revenue.
Together with the solid achievements being made in fscal and monetary management,
investments are contributing towards the country’s economic growth - which is poised to grow by
8-10 percent per annum in the next 2-3 years. Impressive impact has been apparent in certain
areasandweakinothers.Forinstance,whilemanyofFDIandprivatisedfrmshavegenerated
signifcanttaxrevenuestothegovernmentandmodestemploymentopportunities,stillimpacton
addingvalue,technologytransfer(includingR&D)andenvironmentalconservationisrelatively
weak.DespitesignifcantinfowofFDIandimprovementinthebusinessoperatingenvironment,
the manufacturing sector is still struggling to improve productivity. Existing FDI in the agriculture
sectorhasmanagedtobringaboutsignifcanttransformationbothintermsoftheperformance
of the particular commodity/sub sector (such as Floriculture) and in economic impact of the
neighbouring community.
The key message is that investment has had favourable impact generally on the economy
andintherespectivecommunities.However,theimpactofinvestmentislessrobustgiventhe
means through which that impact occurs and the structural constraints that are characteristic
of the economy. First, there are weak sectoral linkages in the economy and limited structure
xiii Report on the Study of Growth and Impact of Investment in Tanzania
of investment distribution. Second, the impact on the local community is rather ad hoc and
voluntary depending on the discretion of large investors. Finally, the weak and rather ad hoc
linkages between foreign and local investment demeans the trickle down effect of investment to
the domestic economy and to SMEs in particular for broad based growth that is consistent with
effective poverty reduction.
4. Recommendations
In order to amplify both the magnitude and impact of investment in Tanzania, ten important
recommendations are made as follows.
First, make further improvement in the investment climate, especially in the taxation area
(multiplicityoftaxesespeciallyatlocalgovernmentlevel)andprovisionofinfrastructureincluding
competitive public utilities.
Second,reducefurtherthecostofdoingbusinesstostimulatesupplyresponseatmicro-
level. This is important in order to complement the current achievements on macroeconomic and
political stability by greater efforts to improve the investment climate.
Third,solicithigherqualityinvestmentsbytargetinginvestmentinvalue-addingandkey
sectorsforgrowth. Experience with the promotion of mining sector reveals that targeting sectors
ispossibleandcanbeeffective.However,ithasalsorevealedthatproblemsoflinkageswith
localsuppliersend,communitiescanariseifnoeffortsmadetopromotesuchlinkages.
Fourth, promote domestic investment effectively in order to enhance synergy and
complementarity between foreign and domestic investment and in particular between large and
small enterprises. The study argues that the domestic investment has undisputable role and
potentialinenhancinggrowthandreducingpoverty.Tostartwith,alevelplayingfeldcouldbe
attained by extending incentives that are applicable to FDI to domestic and especially SMEs. In
addition,optionsforspecialadditionalincentivestostimulatethedevelopmentofSMEsshouldbe
explored. PromotingSME,typeofinvestmentmayrequireselectedinterventions,butadditional
incentives could be provided to domestic investors that have demonstrated success particularly
in key sectors for growth or and in the economically disadvantaged regions/locations. Greater
engagement of TIC in promoting DDI would imply extending TIC services nearer to the local
areas.
Fifth, TIC is urged to undertake targeted promotion of investments internally and abroad
based on thorough research. Market research-driven investment promotion tends to be more
effcientincuttingcostsofpromotionandachievingmoredesirableinvestmentoutcomes.
xiv The United Republic of Tanzania - Tanzania Investment Centre
Sixth, make regular post-approval follow-up of investors. This will help in understanding
whether the actual investments being undertaken in the country are in line with those approved
and/orbeneftedfromTICincentives.Inthisway,itwillbeconvenienttoassessthebenefcial
impact investors bring to the nation as a whole and in accordance with plans and objectives of
TIC.
Seventh,improveinvestmentafter-careservicesthroughTICzonaloffces.TIC has been
performing well in the area of investment after care services through its headquarters in Dar es
Salaam.Theseafter-careservicesarebenefcialbothtotheinvestorandTICinrealisingcustomer-
oriented investment promotion and support. It is suggested that the services be provided through
TICzonaloffcesinordertocutcostsandincreaseeffciencyinserviceprovision.
Eighth,improvehumancapabilitiesandencouragetechnologytransfer as a precondition for
enhancing productivity of investment and attaining the desired level of competitiveness.
Ninth,Institute Presidential Investor Awards. Some investments make large contributions to
thesocio-economicdevelopmentofthecountry,notonlybycreatingmuch-neededjobsbutalso
byhavingnetresourceinfowswhilefosteringhighlinkageswiththerestoftheeconomy.Itis
recommended that outstanding investment performers be publicly recognised through bi-annual
Presidential Awards that would be managed by TIC.
Tenth,strengthenbalancebetweensocialandprivategoalsofinvestors in order to achieve
the social goal of promoting investment.
xv Report on the Study of Growth and Impact of Investment in Tanzania
aCknowledgemenTs
In 2006 TIC commissioned ESRF to conduct Research Study of Growth and Impact of Investment
in Tanzania. The purpose of this study was to evaluate the growth and impact of investment on
the economy; to assess the role played by TIC in investment promotion and facilitation, and
recommend measures for enhancing the favourable impact of investment for economic growth
and poverty reduction.
Whilethisisthefrststudyofitskind,TICintendstoundertakeitafterevery5years.Sincethe
factors and parameters that lead to the conclusions change over time.
We wish to thank ESRF for their efforts and time that they devoted to this work. We also wish
tothankallstakeholdersincludingMOA’s,individualsandNGO’swhoinonewayortheother
participatedinmakingcontributionsthatledtotheproductionofthefnalreport.
EXECUTIVE DIRECTOR
TANZANIA INVESTMENT CENTRE
xvi The United Republic of Tanzania - Tanzania Investment Centre
1 Report on the Study of Growth and Impact of Investment in Tanzania
1.0 inTroduCTion
1.1 Background
The national investment policy of 1990 and Investment Code of 1990 were reviewed in 1996
and 1997 respectively taking into account the new policy developments in the country as well
as the experiences of TIC during the 1990-96 period. The thrust of the new legislation was to
unifyallinvestmentincentivesunderthegeneralfnancialsystem.Thelegislationprovidesthe
basis for Tanzania Investment Centre (TIC) to become the “primary agency of government to
co-ordinate,encourageandpromoteinvestmentinTanzaniaandtoadvisetheGovernmenton
investment policy and related matters”. In this regard, TIC has transformed itself into a “one-
stop centre” for investment facilitation and promotion, creating a positive climate for private
investment,stimulatingandattractinglocalandforeigninvestmentandprovidingassistanceto
all investors. The revised policy and code included greater emphasis on promoting domestic
capacitiesandencouragementofdomesticentrepreneurship,exportdevelopment,facilitationof
new technology and enhancement of transparency in the legal framework and deregulation of
investment processes. It further made improvements in providing more competitive incentives
with a view to directing investments towards areas that are most crucial for Tanzania’s economic
development.
The review of the literature shows agreement that investment is critical for the growth process
and hence social welfare (see Phillips et al.2000).The question is whatkind of investment is
mostbenefcialandwhatarethemostcost-effectiveandsociallyharmoniouswaystostimulate
investment? Although a majority of investment in both developed and developing countries are
domestic,manydevelopingcountriesfacethechallengeofdevelopingdomesticinvestmentsin
thecontextofverylowlevelsofdomesticsavingsrates(Phillipset al.2000:5).Thisposesamajor
challenge in investment promotion programs. Yet FDI tends to be subjected to political economy
concerns when it involves governments making major concessions in order to compete for foreign
investment,oftenprovokingdomesticdebatesonthebalanceandrelationshipsbetweenforeign
and domestic investors.
Theaboveargumentsimplythatinvestmentpolicyhasanumberofchallengestoaddress.First,
onhowtomaketheinvestmentpromotionandfacilitationpoliciesmoreeffcientandeffective.
Second,determiningtheappropriatebalancebetweeneffortstopromoteforeignasopposedto
domestic investment. Third, addressing the balance between the benefts from promoting FDI
and the associated social costs. Finally, on how best to deploy the benefts of FDI to achieve
the country’s development goals. Addressing these challenges requires important information
2 The United Republic of Tanzania - Tanzania Investment Centre
andreliablestatisticsaboutthenature,structureandimpactofinvestmentontheeconomy.This
study seeks out to address these concerns.
1.2 Objectives and Rationale
InthecaseofTanzania,signifcantprogresshasbeenachievedinattractingFDI.Thisimpliesthat
thecurrentinvestment(promotion)policyhasbeeneffectiveontheabovefrstchallenge.However,
the promotion of FDI has not matched expectations of its perceived impact. To corroborate this
concern,Kabelwa(2003)notes:“…debateonFDIinTanzaniahassomehowneglectedtherole
offoreigninvestmentinthecountry.Thatis,whetherforeigninvestmenthasmetthecountry’s
expectationsandwhatimpactithasonTanzania’seconomicdevelopment”(2003:18).Therefore,
the issue that lies ahead is to ensure that attracting more FDI goes in tandem with the analysis of
costsandbeneftsofthisinvestment,whichrequiresmonitoringandevaluatingofFDI.
Monitoring and evaluating FDI in Tanzania is constrained by poor data. However, efforts by
the Bank of Tanzania (BOT), Tanzania Investment Centre (TIC) and the National Bureau of
Statistics (NBS) is commendable in putting together many sources of data and information in
order to generate a more plausible data series. These efforts should also include establishing
aneffectivemechanismfortrackingprivateforeigninvestmentinallitsforms,andsubsequently
capital fight. In the case of domestic investment, two challenges are key for Tanzania in her
effort to make investment policy more robust. First, given the structural features of Tanzanian
domesticinvestment,whataretheviableandeffectivepolicies(specifcincentivesormodalities)
for promoting suitable domestic investment? Second, to what extent has domestic investment
benefted from FDI in a way that will augment the formers’ productivity and competitiveness.
Thesechallengesareamplifedfurtherbytheseverelackofreliableinformation/statisticsabout
theprecisemagnitudeofdomesticinvestment,moreso,domesticprivateinvestment.
The main objective of this study is to evaluate of the growth and impact of investment, asses
the role played by TIC in investment promotion and facilitation and recommend for measures
for enhancing the impact of investment on Tanzania’s economic growth and poverty reduction.
In particular, the specifc objectives of the study as provided for in the Terms of Reference
correspond to its scope as outlined in section 1.3 below.
1.3 Scope of Work
Thisstudyidentifedfveareasforanalysis,namely:
Providing the trends and magnitude of both local and foreign investment in Tanzania; (i)
3 Report on the Study of Growth and Impact of Investment in Tanzania
Assessing the adequacy of investment level to meet the goals of Tanzania Development (ii)
Vision 2025;
Identifying measures for evaluating the costs and benefts of investments made in (iii)
Tanzania;
Evaluatingtheimpactofinvestments,and (iv)
Recommending measures for enhancing the impact of investment on Tanzania’s (v)
economic growth and poverty reduction.
1.4 Methodology
1.4.1 DefnitionofInvestment
In standard economic conceptualisation, investment can be defned as any use of resources
intendedtoincreasefutureproduction,outputorincome.Invalueterms,investmentismoney
directedtowardthepurchase,improvementanddevelopmentofanassetforcreationofvalue
in expectation of generating income or profts. Clearly, this defnition distinguishes investment
fromtradeenterprise,whichisbasicallyabusinessdealingwithexchangeofgoodsorservices
atapremium.Inotherwords,foraparticularassetormoneytobecomeaninvestment,ithasto
involve creation of output not premium.
Inthecontextofthisstudy,itiscrucialtomakethedefnitionofinvestmentcleargivendiffculties
involvedinmeasuringinvestment,andthevarietyofinvestment(bysize,source,andownership
etc.)Therefore,notallbusinessenterprisesareinvestment(andofcourse,notallinvestments
are business enterprises. For instance, road construction is an investment but not a business
activity. In this case, the wholesale and retail trading enterprises notably preoccupying most
enterprises in Urban Tanzania or SMEs that do not involve creation or use of asset to generate
output,incomeorotherassetsmaynotbeconsideredasinvestment.
Grossfxedcapitalformationisusuallyusedasaconvenientdefnitionof(orproxyformeasuring)
total investment, as such it measures assets created or used in generating output (market or
public)orincome.Grossfxedcapitalformationisdividedintoprivateandpubliccomponents.
However,asdiscussedinsection2.3,fromthewayoffcialstatisticsareconstructed,theprivate
component is not disaggregated further to make possible a distinction of relative contribution of
foreignandlocalfundstocapitalformation.Nevertheless,insection2.3,thisstudyproposesa
way to estimate the domestic private investment.

4 The United Republic of Tanzania - Tanzania Investment Centre
1.4.2 Overall Approach
The overall approach taken aimed at adding value to the study by evaluating both primary
and secondary data. The frst task involved reviews of various documents and literature in
both developing and developed countries to enrich and inform the study fndings. In addition,
the consultants involved a large number of stakeholders in discussions and reviews aimed at
soliciting information and opinion on investment issues. The stakeholders included government
ministriesanddepartments,researchandacademicinstitutions,theprivatesector,development
partners and the civil society. In addition, extensive consultations were made with the client,
i.e. the TIC management to review progress and share valuable information on the study. The
stakeholder discussions and evaluations were pivotal in the process of evaluating growth and
impact of investment. Further, the documentary and literature review enabled the study team
to design a purposive semi-structured feld survey instruments to collect key information from
investors that was considered critical for achieving the study’s goals and objectives.
1.4.3 Field Survey
Fieldwork for this study was conducted in December 2006. The consultants developed purposive
unstructured and semi-structured interviews and questionnaires and made extensive feld
consultativesessions.Thepurposeofthefeldworkwastocollectprimarydata,solicitadditional
information that was considered key in complimenting secondary information and gather
contextual information for validating and updating existing investment information. Purposive
sampling technique was used to obtain sectors and regions for interview. The sectors selected
were as follows:
Agriculture: Information was collected on the magnitude as well as quality of investments (i)
in the sector. The agricultural sector is particularly important because at the moment it
is dominant in terms of contribution to GDP and employment in Tanzania.
The services sector: This was included in the sample, in part because documents (ii)
reviewed showed that this sector receives considerable FDI and domestic investment
resourcesinparticularly,servicesrelatedtothetourismindustry.Theseweresurveyed
to obtain information lacking in most reviewed documents.
Themanufacturingsector:Thishasincludedtocapturethesignifcantshareofdivested (iii)
parastatal enterprises that are in this category and some information relevant to the
study that lack from reviewed documents.
5 Report on the Study of Growth and Impact of Investment in Tanzania
The Mining sectors: Apparently given its notable the special position of mining in having (iv)
its own policy and code in addition to general investment policy and code.
Oncethesectorshadbeenselected,thenexttaskwastoidentifyregionsthatcouldbestprovide
the sector-wide information needed. Morogoro and Iringa regions were selected largely to provide
information on agricultural-related investments in farming, agro-based industries and services.
Kilimanjaro and Arusha regions were selected to provide information on mining and related
mining services, agriculture and agro-based industries and tourism-related services. Mwanza
and Mara regions were selected to provide information on mining, mining-related services,
manufacturing and services. Dar es Salaam was selected to provide data on manufacturing
and investments in services. The study team envisaged interviewing and administering semi-
structured questionnaires to over 75 local and foreign investments in these seven regions. The
actualnumberoffrmsthatrespondedpositivelytotheinterviews55,ofwhom49(or89percent)
of them are located in up country regions.
1.4.4 Data Analysis
Thestudyteamcollectedawidearrayofprimary(throughtheinterviewsandquestionnaires)and
secondary (published andunpublished fromTIC)dataoninvestment thathas beentabulated,
computerised and stored within ESRF data bank. Data processing and analysis included trend
analysis, cost-beneft analysis, causal effect analysis and thus impact assessment. In addition
analysiswasextendedtopolicyadequacyandlinkageassessment,atthemacroandsectoral
levels. Given the policy nature of the envisaged end product, the study did not use empirical
models to analyse the investment or linkage impacts. However, triangulation approach was
adopted using the above mentioned study approach to derive key conclusions. That is using
different(threeinthiscase)approaches:feldworkinformation,literatureandsecondarydatato
examine the issue under investigation.
1.5 Organisation of the Report
The report is organised as follows.After this introduction, Chapter 2 examines the trends and
structureoftotal(domesticandforeign)investment,andidentifedthemagnitudeofinvestment
inTanzania.AsTanzaniahasmadesignifcantprogressinattractingFDIfows,itisnotknown
if the current level of investment is adequate for the desired poverty reducing economic growth
rate. This challenge is discussed in Chapter 3. Chapter 4 presents the proposed measures for
evaluating the cost and benefts of (particularly foreign) investment inTanzania.The aim is to
provide consistent criteria upon which to promote particular investment and recognise its impact
in relation to the costs associated with its promotion and operation. The impact of investment
6 The United Republic of Tanzania - Tanzania Investment Centre
on the Tanzanian economy using some of the suggested criteria and various other economic
dimensionsofinvestmentisdiscussedinChapter5.Givenunreliableandofteninsuffcientdata,
the problem is not to identify the net impact of investment in ways suggested in Chapter 4 rather
attenuatethepolicyinquiryonthegeneralimpactofinvestmentinthecountry.Finally,Chapter6
provides the main conclusions and recommendations.
7 Report on the Study of Growth and Impact of Investment in Tanzania
2.0 Trends and magniTude of foreign and domesTiC invesTmenT
in Tanzania
One of the main objectives of this study was to identify the precise magnitude and structure of total
investmentinTanzania.Althoughthereareobviousdatalimitationsinachievingthisobjective,in
this section we attempt to put together and use the available data to show the revealed structure
and trends in investment while discussing some existing data gaps/limitation. This is important
sinceanyobservedlimitationdoesimpairafullassessmentofthebenefcialimpactandcostof
investment,hencetheleveragetoformulateorregulatecredibleinvestmentpolicies.
The chapter begins in section 2.1 by utilising data on the familiar Gross Fixed Capital Formation
(GFCF)toshow,atleastforgeneralandconvenientpurposes,therevealedtrendsandstructure
ofinvestmentinTanzania.Insection2.2thechapterpresentstrendsandstructureofFDI,data
of which are widely available from the TIC. In this section, we also reiterate the key fndings
fromthevariousjointsurveysonFDIbytheBankofTanzania,TICandNBS(seeBOT,relevant
years).Identifcationandtrendsofdomesticdirectinvestment(DDI)ismadeinsection2.3while
discussingevidenceontheempiricalrelationshipbetweenFDIandDDI.Thekeyissueisthat,
the data on DDI is undeveloped, yet it is important in distinguishing the impact of investment
policyfromtheperspectivesoflocalversusforeigninvestment.Withsuchlimitation,thischapter
may contribute to the debate on the need to develop such a database. Finally in section 2.4 the
chapter concludes by bringing to the fore key policy issues arising from the trends and structure
of investment in Tanzania.
2.1 Trends and the Structure of Capital Formation
Totalinvestmentincludesforeignanddomesticinvestment.However,thetwocomponentsare
differentinmanyaspects,afactthatposeschallengeinestimatingtotalinvestmentforTanzania,
but also showing the imperative of knowing the exact structure of each. Domestic investment
may also be distinguished into private and public investment. On the one hand, domestic
private investment or for convenience, Domestic Direct Investment (DDI), despite being the
largest component of total investment, its investment activities are mainly characterised by (i)
predominanceofsmallandmicro-enterprises(SME)mostlysupplyinglowtechnologyproducts
andservices inthelargestsectionofthemarket;(ii)existence offewlargescalefrmsmainly
in light manufacturing activities. Moreover, the public domestic investment is characterised by
signifcant share of infrastructure and construction activities, mainly the buildings and physical
infrastructures.Ontheotherhand,FDIhasbecomeanimportantcomponentofprivateinvestment
inthelastdecadeintermsofitseconomicsignifcance(taxrevenue,technologicalcapacityand
exportperformance)despiteofitsrelativelysmallersizecomparedtoDDI.FDIisalsoamajor
player in the privatisation of the former state-owned enterprises and boosts development of some
sectors such as mining and tourism.
8 The United Republic of Tanzania - Tanzania Investment Centre
Nevertheless, statistics on the magnitude and structure of domestic and foreign investment
arenecessaryinformulatingpoliciesforincreasingthevalue(benefts)andfowofinvestment.
However, such statistics are not readily available. First, data on FDI has been available only
from 1992 (and revised in 1998), so that comparable trend with domestic investment is not
possible for the earlier period. Second, domestic investment varies widely in size and nature
of activities, which makes it diffcult to defne, compared to FDI that is easier to trace through
the investment promotion agency (TIC) and has almost universal defnition. Third, unlike FDI,
domestic investment is composed of public and private components – whereas most of the
former is also undergoing divestiture and privatisation, information which is diffcult to access.
Therefore,GrossFixedCapitalFormation(GFCF)isusedforconvenienceasaproxyfortotal
investment in the country.
2.1.1 Trends in Total Capital Formation
Inaggregateterms,GFCFhasfuctuatedovertime,withsomeyearsshowinggrowthandothers
adecline.Thisisdividedintoprivateandpubliccomponents.Nevertheless,fromthewayoffcial
statisticsareconstructed,theprivatecomponentisnotdisaggregatedfurthertomakepossiblea
distinction of relative contribution of foreign and local funds to capital formation.
1
Capital formation
in Tanzania as a percent of GDP is still too low relative to its desired role of fostering the economic
growth at levels that are adequate for sustainable per capita income growth and therefore poverty
reduction(CUTS,2002).
The GFCF declined from the peak of nearly 30% of GDP in 1992 to only 12% in 1997. Although
arecoverywasobservedintheyearsthatfollowed,ithasnotbeenabletogobacktotherate
achievedintheearly1990s.In2003,GFCFasaproportionofGDPwasnearly19%.AsFigure
2.1clearlyshows,therecoveryinoverallinvestmentsince1997isentirelydrivenbyarecoveryin
investmentbythepublicsector,whiletheinvestmentbytheprivatesectorcontinueditsdownward
trend.Thisgivesreasonforconcern,sincemuchoftheliteratureoneconomicgrowthsuggests
thatprivateinvestmentiscloselyassociatedwitheconomicgrowth,whilethelinkagebetween
public investment and growth is much weaker (Utz, 2005). The relationship between public
investmentandgrowthisinfuencedconsiderablybythenatureofpublicinvestmentandwhether
it has a crowding in or crowding out effect on private investment. Previous decline in investment
starting from 1992 has been mainly associated with a marked decline in public investment as a
result of parastatal sector restructuring and privatisation of the former state-owned enterprises
as well as cuts in public expenditure that was not matched by a proportional growth of private
investment.
The notable increase in the share of GFCF by public sector may also wrongly imply expansion of
thepublicsector.Morethananythingelse,wepresumethegrowthintheshareofpublicGFCF
1 ThejointsurveyonFDIbyBOT,TICandNBSfoundthatlocal/domesticinvestment
shareanaverage14%ofthejointventureFDI’s.
9 Report on the Study of Growth and Impact of Investment in Tanzania
to arise from the surge in foreign aid mostly used in developing infrastructure. Surprisingly, in
thesameperiod,privateGFCFhasstagnatedatlessthan15%ofGDP.SinceFDI(considered
to be part of the private GFCF) has been increasing dramatically in the same period of time,
this stagnation implies that Domestic Private GFCF (DDI) has been declining at a more than
proportionalincreaseinFDI–aclaimthatisdiffculttoestablishintheabsenceofreliabledata
ondomesticprivateinvestment.Inaddition,itisnotclearifandtowhatextentthevalueofprivate
GFCFdataincludesthatofFDI.Nevertheless,weproceedwiththeseshortcomingsinmindto
examinetrendsineachofthetwo(publicandprivate)componentsoftheGFCF.
F|gure 2.1: 6ap|ta| Format|on as a 7 of C0P [6urrent Pr|ces}
0
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Gross Fixed Capital Formation Gross Fixed Capital Formation by Private Sector
Gross Fixed Capital Formation By Public Sector
Source: Calculated using data from the Economic SurveyandNationalAccounts(variousyears).
2.1.2 Capital Formation by Public and Private Sector
Asaproportionoftotalcapitalformation,therelativeimportanceofpublicandprivateinvestment
has also varied in the last decade. Until 1999, the relative contribution of public investment
in total investment declined continuously. This may be attributed to the changing role of the
government and the decision to shift from direct production of goods and services by the state
to facilitating growth of the private sector
2
. Nonetheless, since 2000 the relative importance of
2 Theroleofthestateisnowattunedtomaintenanceoflawandorder,provisionofbasic
infrastructural and social services and building of a suitable environment for the private
sector to take control of production activities.
10 The United Republic of Tanzania - Tanzania Investment Centre
publicinvestmentintotalinvestmenthassincebeenincreasing(SeeFigure2.2).Thiscouldbe
attributed to increased investment in infrastructural and social services for poverty reduction,
fnancedheavilybyforeignaid.
3
The percentage of GDP capital formation by the public sector
declined steadily until 1997 reaching its lowest level of 2.9% in 1997 and did not grow much until
2000. In 2000 the proportion of public investment as a percent of GDP grew to about 6% and
althougharecoveryhasbeenobservedsincethen,theincreasehasnotbeenabletomatchthe
levelsexperiencedintheearly1990.GrowthoftotalfxedcapitalformationasapercentofGDP
has also been modest.
Nevertheless,therewasamarkedincreaseinprivateinvestmentasaproportionofGDPfrom7%
in 1989 to 19% in 1994
4
,buthassincethenbeenadeclinegraduallytojust10%in2003(which
isclosetointernationalaverage,accordingtoWorldBankdraftCEMfor2005).Thedeclinein
privateinvestmentcoincidedwiththedramaticincreaseinFDIsincethemid1990s,whichpeaked
in2000exceeding5%ofGDP,buthasreturnedtothepreviouslevelofabout3%ofGDP(See
Figure5.1).Asashareoftotalcapitalformation,privateinvestmentdoubledbetween1989and
1995from40%to80%(SeeFigure2.2).Thereversalexperiencedatthistimecouldbeattributed
to inadequacies of the institutional reforms for which more rigorous measures started to feature
only in mid 1990s. Inadequacies of the institutional reforms that remained as liberalisation efforts
started limited the ability of the system to redress the high transaction costs experienced by the
private sector. The unsatisfactory performance of the private investment from 1995 after peaking
in 1994 could also be linked to persistent high interest rates and shortage of credit facilities
followingtherelativelytighterfscalstancebythegovernment.Nonetheless,privateinvestmentin
Tanzania is currently an important contributor to overall investment since public sector has withdrawn
fromproductiveandcommercialactivities;hencealimitedshareintotalcapitalformation.However,
the relative decline in the share of the public sector experienced in the 1990s is likely to reverse
inthenearfuture.Forinstance,accordingtoFigure2.2,havingdeclinedfrom65%in1989to
20%in1995,theshareofpublicsectorintotalcapitalformationhasbeenincreasinggradually
to about 50% in 2003.
A World Bank CEM study established a close relationship between central government capital
formationandinfowsofdevelopmentassistance.AsithasbeenshowninvariousPERs(e.g.
World Bank, 2003), about 90% of the development budget in Tanzania is fnanced by foreign
aid.Interestingly,duringthedecadeoffscaladjustmentinTanzania(1985-1995),development
budgetwasthemostaffected(Utz,2005:24).Anothersourceofinformationoninvestmenttrends
aredataonimportsofcapitalgoods,whichdeclineddramaticallyfrom14%ofGDPin1992to
about4%in1997,recoveringtoabout7%in2003.
3 Itisworthnotingthattheshareofforeignaidintotalgovernmentexpenditurehasin-
creasedtremendously,currentlyaccountingforcloseto50%oftotalspending.
4 Note that the real exchange rate depreciation between 1990 and 1994 increased the
priceof(mostlyimported)capitalgoodsoverthisperiod.
11 Report on the Study of Growth and Impact of Investment in Tanzania
F|gure 2.2: Re|at|ve |mportance of Pub||c and Pr|vate |nvestment
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Source: Calculated using data from the Economic Survey and National Accounts (various years).
2.1.3 Capital Formation by Type of Assets
It is not suffcient to examine the component of capital formation by private and public sector.
Oneotherstructuralfeatureofcapitalformationisthetypeofassetsthatconstitutefxedcapital
formation either in the public or private sector. Examining this can unveil important insights about the
relationship between capital formation and economic growth. Capital formation includes residential
and rural own-account buildings and various public expenditure mainly on infrastructure. These
expenditures are not productive in themselves but complements private investment activities to
fourish.AccordingtoUtz(2005),theshareofdirectlyproductiveinvestmentintotalinvestment
has been declining during the past decade by 10 percentage points from 63% in 1993 to 53% in
2003. This raises the question about the appropriate balance between public and private sector
investment; and whether public funds should be used to fund public expenditures and public
investment. Offcialdataonnationalaccountsandeconomicsurveysconsistentlyreportstatistics
on the composition of capital formation by different assets. Although these sources of information
donotreportsuchcompositionforseparatelypublicandprivatesector,itmaybeimportantto
only examine the major sources of capital formation because such results will inform on the
differentialimpactofadopted(hencetheprospectsforalternative)investment/economicpolicies
thatcouldhaveinfuencedsuchcomposition.
Trends in the value and structure of the three broad types of assets that constitute capital formation
in Tanzania namely buildings, equipment and other Works are shown in Figures 2.4 and 2.5
respectively. The value of capital formation has been increasing in real terms from 280 billion Tshs
in 1997 to about 500 billion Tshs in 2003 after it declined from around 400 billion Tshs in 1991.
ExceptforEquipments,thevalueofotherassets(BuildingsandWorks)isshowntobeincreasing
over time.
12 The United Republic of Tanzania - Tanzania Investment Centre
F|gure 2.3: Va|ue of 6ap|ta| Format|on by Types of Assets
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F|gure 2.4: 8tructure of 6ap|ta| Format|on by Types of Assets
0%
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Source: Calculated using data from the Economic SurveyandNationalAccounts(variousyears).
Equipment that include transport, machinery and other equipments constitute the largest
share(about50%onaverage)oftotalcapitalformation,whileworks(developmentofphysical
infrastructure) constitute the smallest (about 20% on average), hence buildings occupy about
30% on average. There have also been some marked changes in the trend of capital formation
by assets. The composition of Buildings and Works has both been increasing notably from 2000.
One clear explanation for this trend is the relative importance of infrastructured development
before and after 1995. As noted earlier, signifcant share of donor aid money has gone into
13 Report on the Study of Growth and Impact of Investment in Tanzania
developing of infrastructure. In addition, the share of building is increasing much faster from
1998onwards–inpartrefectingtheboomintheconstructionindustryevidencedbyexistence
of large buildings and ‘own home’ construction throughout the country especially in Dar es
Salaam.Equipmentshareoftotalcapitalformationincreasednotablyin1998,perhapsindicating
a purchase of particular high value equipment in that year, most probably, mining equipment.
Fromabovetrends,itseemsthatinthenearfuture,buildingsandworksarelikelytoincrease
evenfasterincompositionthanequipments,asthegovernmentdevelopmentpolicyasoutlined
invision2025andintheMKUKUTA,placecontinuedemphasisoninfrastructuraldevelopment.
Andmostequipments(includingtransport)arenotreplaceableintheshortrun.
FurtherdecompositionofcapitalformationbyspecifctypeofassetsisshowninFigure2.5for
Building works, Figure 2.6 for other Works and in Figure 2.7 for Equipment. The purpose of
this decomposition is to bring on the surface information that may be useful in explaining the
changing structure of capital formation and which may not be easy to pursue using only broad
categories of assets.
Overall, each type of asset has experienced differential growth of its major constituents with
a more consistent and structured trends in the case of Buildings and equipment compared to
somewhat sharp and erratic trends in the case of Works. The major items in Building works is
rural own account (for obvious reasons of the subsistence character of rural sector), but the
rest of the items: residential and non-residential buildings have variably changed in importance
until from 2000 when the importance of non-residential building increased sharply surpassing
residential and rural dwellings whose share continue to fall.
InthecaseofotherWorks,weobserverathererratictrendsisvariousitems.Thelargestitem
in this type of asset has alternated between roads and bridges on the one hand, and other
infrastructure works on the other. The former has risen sharply since 1997 to become the largest
component,asopposedtothelatterwhoseshareoftotalhasfallenfrom90%in1990tolessthan
5%in2003.Overall,theimportanceofwatersupplyincapitalformationhasalsoincreased–its
share has doubled from an average of 10% between 1990-1997 period to about 20% in the later
period. There are indications that roads and bridges construction and water supply will continue
toincreaseinsharerefectinggovernmentpolicyemphasisonpovertyreduction
5
.
The structure of Equipment is much more clearer and steady. Equipment is composed of two
majoritems:transportandother(includingmachineryandelectrical)equipmentwherethelatter
constitute close to 60% and 40% for the former.
5 OneoftheHIPCconditionisthatthemoneyresultingfromdebtforgivenessbespent
on social services and infrastructure development for poverty reduction. These services
includeeducation,health,waterandsanitation.
14 The United Republic of Tanzania - Tanzania Investment Centre
F|gure 2.5: 8tructure of 6ap|ta| Format|on by 6omponents of ßu||d|ng works
0
10
20
30
40
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60
1
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R
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W
R
W
D
O
Residential Rural Own Account Non-Residential
Source: Calculated using data from the Economic Survey and National Accounts (various years).
F|gure 2.ô: 8tructure of 6ap|ta| Format|on by 6omponents of 0ther works
0
10
20
30
40
50
60
70
80
90
100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

R
I

W
R
W
D
O
Land Ìmprovement Roads & Bridges
Water Supply Others
Source: Calculated using data from the Economic Survey and National Accounts (various years).
15 Report on the Study of Growth and Impact of Investment in Tanzania
F|gure 2.7: 8tructure of 6ap|ta| Format|on by 6omponents of 0ther works
0
10
Z0
30
40
50
60
70
80
1990 199* 199Z 1993 1994 1995 1996 1997 1998 1999 Z000 Z001 Z00Z Z003 Z004
Transport Equipment Other Equipment
Source: Calculated using data from the Economic Survey and National Accounts (various years).
2.1.4 Capital Formation by Sectors of the Economy
Intermsofsectoraldistribution,capitalformationinTanzaniabetween1989and1998wasmainly
concentratedinmanufacturing,transportandcommunication,andstorage.Between1989and
1997 manufacturing and transport communication and storage activities contributed more than
56% of total capital formation of the economy while the remaining seven sectors contributed
only 44% in total. Construction and mining grew in importance considerably starting in 1998,
before which their contribution to total capital formation was only modest. Investment in the
agricultural sectors has been very small throughout the last decade. The highest level recorded
as a percentage of total investment was 4.7% in 1991. On average, capital formation in the
agriculturalsectorhasbeenaround3.4%between1989and2002(Figure2.9).
F|gure 2.8: 6ap|ta| Format|ons by K|nd of Econom|c Act|v|ty 1989-2002
0
Z00000
400000
600000
800000
1000000
1Z00000
1400000
1600000
1800000
T
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I
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i
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1989 1990 1991 199Z 1993 1994 1995 1996 1997 1998 1999 Z000 Z001 Z00Z
Y e a r s
Agriculture, Forestry, Fishing and Hunting Mining and Ouarying ManuIacturing
Llectircity and Water 5upply Construction Wholesale and Retail Trade, hotels and Restaurants
Transport, 5torage and Connunication Finance, lnsurance, Real Lstate and Business 5ervices Public Adninistration and Other 5ervices
Notes: Data for 2002-2004 could not be availed as the most recent series of National Accounts
by economic sectors are for year 2001. Similar note apply for Figures 2.9 and 2.12.
Source:CalculatedusingdataNationalAccounts(variousyears).
16 The United Republic of Tanzania - Tanzania Investment Centre
F|gure 2.9: 6ap|ta| Format|on by K|nd of Econom|c Act|v|ty as 7 of Tota| 1989-2002
0
0.2
0.4
0.6
0.8
1
A
c
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s

%

o
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1989 1991 1993 1995 1997 1999 2001
Year
Public Administration and Other Services
Finance, Ìnsurance, Real Estate and Business Services
Transport, Storage and Communication
Wholesale and Retail Trade, hotels and Restaurants
Construction
Electircity and Water Supply
Manuf acturing
Mining and Quarying
Agriculture, Forestry, Fishing and Hunting
Notes: Data for 2002-2004 could not be availed as the most recent series of National Accounts are for year 2003.
Source: Calculated using data National Accounts (various years).
2.2 Trends and the Structure of Foreign Direct Investment
Having discussed total investment (GFCF) by various aspects, we proceed to distinguish the
foreignanddomesticcomponentofinvestmentfortwobasicreasons.First,theinvestmentpolicy
(promotionandfacilitation)hasgivensignifcantpolicyemphasisonattractingforeigninvestment
asone“sure”waysoffnancinggrowthanddevelopment.Secondly,therehasbeenconcernby
variousstakeholders(especiallytheprivatesector)thatdomestic(local)investorshavenotbeen
facilitated to access the kinds of incentives that FDI is accessing despite the dominant share of
DDI in total investment. Below we examine the structure and trends of FDI in Tanzania.
2.2.1 Size and Growth of Foreign Direct Investment in Tanzania
ForeigndirectinvestmentfowsintoTanzaniagrewconsiderablyinthesecondhalfof1990s.Thisis
alsotheperiodthatwasmarkedbyimprovementsintheeconomicsituation,rigorousreformefforts
to improve the investment environment and beginning of the privatisation programme. UNCTAD
(2002) notes that the market oriented reforms reached a critical mass and sound foundations
foranenablingframeworkforFDIwereputinplace,whichtriggeredthepositiveresponsefrom
prizvate investors from abroad. Total FDI into Tanzania between 1995 and 2004 totalled US$
2476.4millioncomparedtolessthan$2millionbetween1986and1991.Onanannualbasis,
from1992FDIinfowsintoTanzaniaincreasedfaster,reaching$150Millionin1996.Althoughthe
growthrateslowedbetween1996and1998theachievedratesofFDIinfowswereremarkable.
Theyear1999and2000experiencedthehighestrecordofFDIinfowsintoTanzaniamostofwhich
came forth with the proliferation of mineral prospecting activities in the country.
17 Report on the Study of Growth and Impact of Investment in Tanzania
F|gure 2.10: F0| |nf|ows |nto Tanzan|a, 1990-2004
0
100
200
300
400
500
600
U
S
$

M
i
I
I
i
o
n
s
1990 1992 1994 1996 1998 2000 2002 2004
Year
Foreign Direct Ìnvestment Flows US$ Mill.
Source: TanzaniaInvestmentCentre,EconomicSurvey
TheinwardstockofFDIinTanzaniahasalsogrownconsiderablyandwasrevised(upwards)by
theinformationcollectedintheBOT/TIC/NBSsurveyfor2001.AsapercentofGDP,UNCTAD
(2002)estimatesthatthestockofFDIinTanzaniain1980wasaround0%ofGDP.Nevertheless,
itrecoveredwiththegrowthofFDIinfowsandin1998ithadreached2.1percent.Fortheperiod
1990-1998 the stock of FDI as a proportion of GDP in Tanzania averaged 1.3%. In 1999 FDI
stockasapercentofGDPhadreached11.2%(UNCTAD,2002)
6
. Data from local sources on FDI
stocksforyearsbefore1998isnotavailable.However,theBOT/TIC/NBSsurveyofforeignfrms
establishments between 1998 and 1999 and in 2001 revealed that the stock of FDI had grown
considerably. FDI stock as a proportion of GDP has almost doubled between 1998 and 2001 from
closeto20%in1998to38%in2001(Table2.1).
Table 2.1: FDI stock in Tanzania 1999-2007
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
FDI Stock Millions US$
1,637.7 1,903.0 2,891.6 3,637.0 3,877.4 4,125.2 4,385.4 4,833.0 5,307.5 5,820.0
GDP (mp) Millions US$
8,382.4 8,637.9 9,093.7 9,476.6 9,660.9 10,047.3 11,201.1 14,220.5 15,167.2 16,399.3
FDI stock as % of
GDP
19.5 22.0 31.8 38.4 40.1 41.1 39.2 33.99 34.99 35.49
Source: FDI stock up to 2001 are from Tanzania Investment Centre and from 2002 –2007 are own
computationbyaddingfowstopreviousyearsstockusingdatafromEconomicSurvey(2007).
6 WhileindicativeofthegrowthtrendofFDIfowsandstocksTIC/BOT/NBScensusof
foreign establishments reveals that the UNCTAD reports and many other sources may
seriouslyunderestimatetheFDIinfowsintothecountry.In1998forinstanceUNCTAD
reportedFDIstockstostandatUS$803Million,whilethecensusestimatedthestocksto
standUS$1637.7Million
18 The United Republic of Tanzania - Tanzania Investment Centre
2.2.2 FDI by Mode of Entry, Sectoral Distribution and Ownership
The main channel of FDI entry into Tanzania has been Greenfeld investments (Figure 2.11).
According to UNCTAD (2001), acquisitions of companies by foreign investors have been few
in numbers but have nevertheless given a signifcant push to annual FDI infows. Overall, the
share of foreign acquisitions in FDI infows until 2003 was about 28% while new investment
establishments accounted for 72% of total number of projects into Tanzania. Cumulative data
on foreign investment projects approved by TIC between 1990 and 2003 thus points to the
dominanceofinterestinGreenfeldinvestmentsbyforeigninvestors.
AnalysisofsectoralstructureofFDIdistributionhasimportantpolicyimplications.Insomecases,
sectoral distribution of FDI has not matched the corresponding sectoral economic impact. For
instance,evidencebyKabelwa(2003)indicatesthatservicessectoraccountsforover85%ofall
employmentgeneratedbySouthAfricanbusinesses(excludingmining)inTanzania.Therestof
the15%iscontributedbythreesectors:manufacturing(10%),tourism(2%)andothers(3%).The
samestudynotesthatMiningaccountsforthelargestshare(47%)ofallSouthAfricaninvestment
duringthatperiod,followedbytelecommunication(21%)andmanufacturing(16%);whiletourism
contribute 5% and services 6%.This implies that, although the services sector accounts for a
relativelysmallershareoftotalSouthAfricaninvestment,ithasthemostsignifcantemployment
generation potential compared to others.
Based on the number of approved projects by sector (Figure 2.11) one can observe that the
manufacturing and tourism sectors seems to have attracted more establishments compared
to other sectors of the economy. This may be attributed to a number of reasons one being that
establishments in these sectors have been mainly small in size and therefore do not require high
initial capital. But another reason could be that the efforts to promote local manufacturing and
tourismactivitiesarepayingoffandencouragingfrmstoinvestinthesectors.
Given the relative importance of the agricultural sector on economic growth and development in
Tanzania,thenumberofprojectsattractedtotheagriculturalsectorisstilltosmalltomakeamajor
impact. Although it is encouraging to note that efforts to counter the bottlenecks of investment
in the sector are underway (e.g. example the Agricultural Marketing systems Development
Programme,andParticipatoryAgriculturalDevelopmentProgramme,etc)itisneverthelesstoo
earlytoassessthedirectionofprogress.Atthemomenthowever,mostprojectshavegoneto
cutfowersubsectorsleavingfoodcropandtraditionalcashcropsubsectorslaggingbehind.
Variousrisksassociatedwiththesector,lackofcreditfacilitiesforbothlongterminvestmentand
workingcapitalandthegenerallackofincentivesspecifcallydesignedtoattractinvestmentinto
thesector,willstillneedtobeaddressedtoensureadequacyofinvestmentparticularlyinfood
crop production.
However in terms of stock of FDI in Tanzania the picture is different. The manufacturing sector
19 Report on the Study of Growth and Impact of Investment in Tanzania
continues to lead, it is followed by mining and quarrying and service sectors such as trade
(wholesaleandretailtrade),andfnancialsectorinsuranceandrealestate.ConcentrationofFDI
in the mining sector is possibly due to expensive equipment given the small number of projects
attracted to the sector.
F|gure 2.11: Fore|gn 0|rect |nvestment |nf|ows by 8ector 1990-2003
0
100
200
300
400
500
600
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F|gure 2.12: 8ectora| 0|str|but|on of F0| Projects |n Tanzan|a 1999-2001
30.4%
Z3.Z%
ZZ.Z%
9.8%
6.7%
5.3%
Z.1%
0.3%
0.0%
Z8.0%
35.Z%
9.Z%
7.5%
10.0%
Z.8%
4.0%
Z.0%
1.3%
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34.3%
7.7%
6.1%
7.Z%
Z.8%
7.0%
1.7%
3.5%
0.0° 5.0° 10.0° 15.0° 20.0° 25.0° 30.0° 35.0° 40.0°
Mining and Quarrying
ManuIact uring
Wholesale & Ret ail t rade
Financing. Insurance. real est at e
Agricult ure. hunt ing. Iorest ry
Const ruct ion
Transport . st orage & communicat ion
Communit y. social and personal
Ut ilit ies
6
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1999
2000
2001
&RQVW&RQVWUXFWLRQ

Source:TanzaniaInvestmentCentre,ReportofCensusofForeigninvestmentinTanzania2001
Examinationofthekeysectorsforgrowth(namelyagriculture,manufacturingandservices)and
20 The United Republic of Tanzania - Tanzania Investment Centre
theprioritysectorsforpovertyreductionshowsthatthetypesofFDIinfowtoTanzaniaareless
povertyfocused(KwekaandMboya,2004).Forinstance,theminingsectorhasveryinsignifcant
sectoral linkage and multiplier effects compared to the agricultural cash crop sector such as
cotton or a service sector such as tourism (Kweka, Morrissey and Blake, 2003).The revealed
structureofFDIinfowismoreatestimonyofFDIpreferencesandopportunitiesavailableinthe
high concentration sectors than promotion efforts by the TIC in such sectors.
Inaddition,socialsectorsidentifedaskeyforpovertyreduction(inthefrstPRS)haveattracted
disappointedly smaller share of total FDI. This implies that the impact of FDI on poverty in
Tanzania is not consequential. The small share of FDI into the agricultural sector in total FDI
isalsoattributedtotheadverseconditionsintheagriculturalsector(includingadverseweather
condition,lowpricesofagriculturalproductsintheworldmarket,insuffcientdomesticmarkets
andothersupplysideandinstitutionalbottlenecks).AstudybyESRF(forthcoming)analysedthe
factorsconstrainingsignifcantinfowofFDIintotheAgriculturalsectorasbeinglackoffavourable
agricultural infrastructure and slow privatisation of existing state owned parastatals.
Thatis,suffcientpolicyeffortshavenotbeenmadetoattractFDIintotheagriculturalsector.The
government needs to make deliberate efforts to attract more FDI to the agricultural sector as a
wayofenhancingitseffortstoalleviatepovertybyamongotherthings,expeditinglandownership
reforms and addressing the infrastructure and other supply side bottlenecks to rural enterprises.
Intermsofownershipstructure,thereisagrowingtrendtowardsformationofjointventures. Of
foreigninvestmentprojectsthatwereregisteredinthecountrybetween1990and2003,about
52% were joint ventured while foreigners wholly owned projects accounted for the remaining
42%. This tendency is encouraging especially because formation of joint ventures is associated
with transfer of proprietary knowledge and skills; thus encouraging faster development of human
capitalthroughlearningbydoing.However,theshareoflocalinvestmentinjointventureshas
remainedlow(onaverage14%)especiallyinservicesectors.
2.2.3 FDI by Country/Region of Origin
Data from TIC on approved projects by country of origin between1990 and 2002 shows that
investment from Western Europe (both in value and in numbers) dominated the scene. In
numbers, UK has been the largest single source of investment projects coming to Tanzania
(35%)followedbyKenya(13%),UnitedStates(10%)andIndiaandSouthAfrica(7%)asshown
in Figure 2.13.
21 Report on the Study of Growth and Impact of Investment in Tanzania
F|gure 2.13: Number of F0| projects |nto Tanzan|a 1990-2004 by 6ountry of 0r|g|n

Sweden Swiss Ìtaly German
Canada Chinese S. Africa Kenya
United States Netherlands UK Ìndia
Source: Tanzania Investment Centre
The large number of projects from UK may be attributed to the long established relationship
between Tanzania and UK, which dates back to the colonial era. In terms of value however,
projects from India though few in numbers (accounting for 7% only of all projects with foreign
interestsestablishedinTanzaniabetween1990and2002),accountforthelargestshareinvalue
terms of all the projects established since early 1990s (see Figure 2.14). Most projects with
Indian interests were established between 2000 and 2002, thus changing the structure, which
until 2001 was dominated by investments from UK.
F|gure 2.14: |nvestment by 6ountry of 0r|g|n, Lead|ng countr|es 1990-2004
0
0.05
0.1
0.15
0.2
0.25
0.3
S
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Country
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Data Source: Tanzania Investment Centre
22 The United Republic of Tanzania - Tanzania Investment Centre
2.2.4 Spatial Distribution of FDI
ConcentrationofFDIremainsinthesameregionsnamelyDaresSalaam(42.5percent),Mwanza
(26.4 percent) and Shinyanga (12.7 percent). Apart from its commercial and infrastructure
advantage, concentration of FDI in Dar es Salaam is partly attributable to the location of
headquarters of some companies, which have reported consolidated data that includes up-
country investments. Large share of investments in Shinyanga and Mwanza is on account of
theregions’richnessindiamondandgolddeposits.InZanzibar,NorthUngujareceivedlargest
amount of FDI. The government is urged to enhance the efforts that are already in place to
improve infrastructure and utilities especially in the regions that have attracted less FDI.
Table2.2:StockandfowofFDIbyRegionalDestination,1998-2005(US$million)
REGIONS
1
2001 2002 2003 2004 2005
p
% of total for 2005
Dar es Salaam 1,762.90 1,742.80 1,973.40 2,125.20 2,184.40 42.5
Mwanza 332.5 400.3 770.5 1,128.90 1,354.90 26.4
Shinyanga 151 465.3 693.7 657.6 652.4 12.7
Arusha 145 124.8 135.5 206.1 183.8 3.6
Morogoro 179.5 134.3 166.7 193.6 180.7 3.5
Mara 122.1 128.6 125.3 123.9 122.3 2.4
Iringa 50.7 49 52.5 54.2 90 1.8
Kilimanjaro 37.6 35.4 49.1 53.2 70.2 1.4
Kagera 0.2 0.2 0.1 0.1 55.1 1.1
Mbeya 13.2 17.9 18 22.7 22.8 0.4
Manyara 10.6 10 11.2 12.7 14.6 0.3
Tanga 27.8 14 13.1 13.8 13.9 0.3
Pwani 7.5 8.6 8.6 8.9 8.8 0.2
Tabora 3.1 3 2.7 2.8 2.5 0.0
Ruvuma 0.6 0.6 0.4 0.3 0.3 0.0
Singida 0.2 0.1 0.1 0.1 0.1 0.0
Total for Mainland 2,844.30 3,134.90 4,021.10 4,604.30 4,956.70 96.5
North Unguja 44.7 38.9 43.6 75.9 92.3 1.8
23 Report on the Study of Growth and Impact of Investment in Tanzania
Urban West 38.2 40.3 47.5 52.4 61.4 1.2
South Unguja 31 27.3 24.1 23.6 22.7 0.4
South Pemba 0.1 0.1 1.1 1.2 1.3 0.0
North Pemba 1.4 1.2 1.2 1.2 1.1 0.0
Total for Zanzibar 115.4 107.8 117.5 154.3 178.9 3.5
Total for Tanzania 2,959.70 3,242.70 4,138.60 4,758.50 5,141.8 100.0
*Notes: CellscontainingzerovaluesmeansthattheFDIvaluewasinsignifcant;emptycells(-)means
therewasnoFDIfow.Figuresfor1998areFDIinStock,andfowsforsubsequentyears.
Source:CollatedfromTanzaniaInvestmentReportsanddatabase,2001and2005.
2.2.5 Portfolio Investments into Tanzania
AlthoughmostoftheforeigninvestmentfowispopularlyconsideredasFDI,itcanalsotakeother
different forms including portfolio investment. Until the opening up of the Dar stock Exchange
MarketforEquityparticipationbyforeignfrms,portfolioinvestmentintoTanzaniawascloseto
absent. The Capital Markets and Securities Authority was established in 1994 but wasn’t until
1998thatthefrstStockExchangemarket,TheDaresSalaamStockExchangeMarket(DSE),
started operations with only one company listed—the Tanzania Oxygen Limited (TOL). The
number of companies listed to participate in the market has since then increased to seven and
3crosslistedcompaniesandtheopeningupofthemarketforparticipationbyforeignfrmshas
openedthewayforportfolioinvestmentfundstofowintoTanzaniawithmoreease.Thelevelof
activity in the market is nevertheless still low.
2.3 Level of Domestic Direct Investment (DDI)
2.3.1 IdentifcationofDomesticDirectInvestment(DDI)
Except for the generous series on the Gross Fixed Capital Formation (GFCF), there are no
systematicdataonprivatedomesticinvestmentinTanzania,whichmakesacompleteanalysis
ofdomesticprivateinvestmentdiffcult.Intheabsenceofabetteralternative,belowwedescribe
a methodology for identifying DDI using the available information data on FDI and GFCF. Since
FDIisbasicallyprivateforeigninvestment,wecanobtainthevalueofDDIbynettingFDIfromthe
private GFCF. Figure 2.15 describes the major components of investment to identify DDI.
24 The United Republic of Tanzania - Tanzania Investment Centre
F|gure 2.15: |dent|f|cat|on of 0omest|c Pr|vate |nvestment
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Thisapproachmayhavevarioussnags,butthreearenotable.First,notallforeigninvestmentis
capturedintheFDIdata.ThepublisheddataonFDIarethoseproducedbytheTIC–andrefect
investmentsthatpasstheTICthreshold/defnition.Foreigninvestmentfowsinanon-FDIform,
andthosenotcapturedbyTICwillbelargelyleftout,henceundervaluethetruemagnitudeof
foreign investment. Secondly, this approach may not effectively distinguish the foreign versus
domesticcomponentinthejointventuresFDIs.However,theTIC/NBS/BOTsurveysestimatethe
shareoflocalprivateinvestmentinjointventureFDItobeonaverage14%.Nevertheless,some
sectorssuchasmanufacturingandfnance/insurancehadasgreatershareoflocalinvestment
as about 50% and 20% respectively. However, we consider this weakness less serious since
its effect can be cancelled out with the value of domestic investments that has foreign joint
ventures.
It should be noted that we use the above approach as a second best alternative while recognising
asusual,unreliabilityoftheinformationonthevalueofdomesticinvestmentandtheseverelack
of statistics on the number of domestic establishments. Figure 2.16 shows the resulting trends of
DDI relative to FDI.
AclearertrendintherelativesignifcanceofdomesticandforeigninvestmentisshowninFigures
2.17and5.1.Ingeneral,thetwofguresshowthatalthoughpublicpolicyhastendedtobemore
favourabletotheFDI,domesticprivateinvestment(orDDI)hasbeenasignifcantcomponentof
totalinvestmentinTanzania.However,itisonlyintherecentyears(since2000)thatdomestic
investmenthasbecomeaconsistentcontributortoeconomicgrowth(seeFigure5.1insection
5).Domesticinvestmentisthesignifcantpartoftheeconomyunlikeforeigninvestmentwhose
importance in economy has been recognised only since the last decade.
25 Report on the Study of Growth and Impact of Investment in Tanzania
0
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
0
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V
Foreign Direct Ìnvestment Domestic Private Ìnvestment Total Private Ìnvestment

6RXUFH2ZQFRPSXWDWLRQEDVHGRQGDWDIURP7,&DQG1DWLRQDO$FFRXQWVRI7DQ]DQLD
F|gure 2.1ô: Trends |n the Fore|gn and 0omest|c Pr|vate |nvestment
Source: Own computation based on data from TIC and National Accounts of Tanzania
2.3.2 Relationship between Foreign and Domestic Investment
One of major concerns by most developing countries’ appraisal of policy on FDI is the extent
to which FDI has had a positive externality to domestic investment. This is because FDI is
expected,atleastintheory,toprovidelinkageandstimulitolocalenterprises,wherethelatter
is expected to learn and grow from the relationship with the former. In practice, however, the
relationship between the two may not be as automatic and useful. It may require deliberate
public intervention to steer the relationships in the direction that is consistent with achieving the
national development goals.
First,theinstitutionalframeworkguidingpromotionandfacilitationofFDIdoesnotprovidepolicy
leverage for enticing foreign investors to relate to local investors. The relationship between
the two has not been developing according to existing market requirements and opportunities.
Second,existinginitialconditionsdonotreadilyenhancesubstantivelinkagesbetweenforeign
andlocalinvestments.Suchsupplysideproblemsasunderdevelopedmarketsinsomesectors,
weakproductionbaseonthesideoflocalenterprises(poorquality,lackofstandardsandpoor
infrastructures)andweakmarketinstitutionsdemeanprospectivecollaborationbetweenthetwo.
Third,manyFDIdevelopfromor/andhavealreadydevelopedinternationallinkages(forsupply
chain)thatmayfurtherlimittheextentofcollaboratingwithlocalsthatcannotcompeteonsimilar
footing unless deliberate effort is made to support their development.
Finally,therecanbemismatchbetweenforeignanddomesticinvestorsintermsofthesectors
26 The United Republic of Tanzania - Tanzania Investment Centre
ofinterestsorstrategicinterestsoftheirrespectiveestablishment.Ifthismismatchissignifcant,
itimplieslittleroomforanysubstantiallinkages.Forinstance,asminingisthebiggestrecipient
of FDI for Tanzania in the last decade, it has feeble sectoral linkage with other sectors of the
economy,hencelimitedparticipationofthelocalenterprises.Evenwhenthelatterareengaged
inthissector,theyaremostlyundertakingartisanminingusingrudimentarytechnology,products
which are exported indirectly through dealers from neighbouring countries. Technical composition
of many FDI activities is too advanced for the local enterprises to learn/adopt in the short run. The
learning/adaptationbylocalfrmsoftheadvancedtechnology/skillsoftheforeignenterprisesmay
becompromisedifthestrategicmotiveofthelatterisexportmarketopportunities(i.e.products
arenotsoldinthedomesticmarkettherebylearningoradopting).
2.3.3 Literature Review
One controversial area in which FDI has received critical examination in the literature is its impact
and relationship with domestic investment.Appendice A2.2 andA2.3 summarise key fndings
from the theoretical and empirical literature. The literature is unfortunately inconclusive on this
matter(fordetailedliteraturereviewseePhillipset al.2000).Inallthecases,thereseemsto
befrmagreementontheaffrmativesideoftheequation(thatFDIisgenerallybenefcial),but
controversiesonthenegativeside.Thedebatehasincludedthreeissues.First,howbenefcialis
FDItogrowth.Second,whatisthestatisticalrelationshipbetweenFDIanddomesticinvestment
orDDI(i.e.isforeignnessthatimportant)andthethirdissueis,whatistheimpactofFDIonthe
domesticinvestment(DDI).
The frst question has received a lot of emphasis in policy debates and analysis compared to
thelasttwoquestions.Since,inaddition,thisquestionhasbeentreatedinchapter3inseveral
dimensions, our purpose here is to focus on the last two questions, but more specifcally on
the last one
7
.Notehowever,thattheanalysesinvestigatingthestatisticalrelationshipbetween
FDIandDDIaimatdeterminingwhichofthetwoinvestmentsleadtheother.Thatis,istheFDI
the leader or follower of the DDI? Various studies conclude that the relationship can go either
way(blurred),butnotinglikethestylisedfactthatDDIisinprinciple,theprimesourceofcapital
formationandwhichisexpectedtocontributetoGDPgrowth.Subsequently,ifgrowthandmarket
size are key determinants of FDI, then DDI is the leader of FDI. The opposite is true when
DDI has to learn and adopt a more advanced (or new) technology and export markets. Such
literaturerecommendinviewofthesefacts,policiesthatintendtobettertheoverallinvestment
environmentasthesearemostbenefcial.Anotherfndingfromempiricalstudiessuggeststhat,
incountrieswhereDDIgrowthisfnancedfromdomesticfnancialsector,FDItendtoparticipate
moresubstantially(hencefollowDDI).
OuraiminthelastquestionistofndoutwhetherandtowhatextentFDIisbenefcialtoDDI,
7 Initssimplestformation,FDItheorysuggeststhatFDIcanpromoteeconomicgrowth
throughincreasesinthecapitalstock,taxrevenue,trade,wagelevelsandemployment.
27 Report on the Study of Growth and Impact of Investment in Tanzania
since one of the principle and theoretical objectives of promoting FDI is to enhance its positive
externalitytoandforthegrowthofdomesticfrms.Asexpected,FDIhasbeencontributingtothe
growthofcapitalformation(Figure2.17).AlthoughtheshareofFDItototalcapitalformationhas
beendecliningsince1999afterasharprisein1998,thereareprospectsthatitwillincreasein
the medium term.
F|gure 2.17: F0| as a 8hare of Tota| 6ap|ta| Format|on
FDÌ as a Share of Total Capital Formation
0
10
20
30
40
50
60
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
FDÌ/TPÌ
Source: Own computation based on data from TIC and National Accounts of Tanzania
In addition, economic theory points to at least two ways through which FDI may affect DDI.
First, FDI may have an impact on the proftability of domestic investment by, for instance,
improvinginfrastructure.ThisistrueinthecaseofTanzania,where,asdiscussedinchapter3,
many FDI companies have developed infrastructure in the local communities surrounding them
(electricity,water,roadandotherproductiveamenities).Inaddition,thecountryenjoyssubstantial
improvementinhertelecomsectorasaresultofforeigninvestmentinthatsector(establishment
ofworld-classtelecommunicationsystemsandavailabilityofmobilephones).Secondly,FDImay
alter the ownership structure of total investment in the host country thereby easing availability of
investmentfundsthrough,forinstance,privatisationsales(thatcanbeusedtoincreasepublic
domesticinvestmentorofferfnancetoDDI).
Otherstudies(SeeAppendixA2.3)haveshownthatFDIcanhaveapositiveoranegativeimpact
ondomesticinvestmentdependingontheleveloftradebarriers(TBs)andfnancialregulation
(FR)imposedbythehostcountry;suchthatthemorerestrictivearetheTBsandFR,theless
benefcialFDIaretoDDI.However,itisimportanttonotethefactthatFDIcancrowdoutDDIby
demeaningproftabilityoftheDDI.Thisnegativeeffectisamplifedifthedomesticinvestmentis
notassociatedwithjointventureswithFDI.However,FDIisunambiguouslybenefcialinajoint
venture type of ownership.
28 The United Republic of Tanzania - Tanzania Investment Centre
The above discussion plus information in Appendix A2.2 and 2.3 implies that the precise impact
of FDI on DDI can vary by country and time – such that each country case can provide a different
experience. The impact should be assessed in a dynamic context as impact can change as
policies/investment environment changes over time. In general, the studies make clear the
fact that neither the theoretical work nor the empirical evidence provides a defnitive answer
regarding the impact of the FDI on domestic investment. On balance, however, the empirical
work seems to suggest that FDI has a positive impact on domestic investment (Phillips et al.
2000:24).Yetanotherconclusionfromliteraturesuggeststhat,whilethebeneftsofFDIforMNEs
areeasilyquantifable,thepotentialhostcountrybeneftsarelessapparent.CriticsofFDIargue
thattheproftseekingmotivesofMNEsareofteninconsistentwiththeobjectivesofdeveloping
countries.
FordevelopingcountriessuchasTanzania,FDI’simportancefordomesticinvestmentmayalso
bedemeanedbystructuralweaknessescharacterizingboththeeconomyatlargeandspecifc
frmsinparticular.Forinstance,accordingtoMashindano(2004:70),Tanzaniahasacknowledged
and recognized the importance of attracting FDI in order to attain a desirable economic growth
rate and improve living standards. It is the economic defciencies in poor country’s thrive for
development. more than impact on domestic investment that actually drives their quest for FDI.
ThegovernmentshoulddesignpoliciesthatwillenhancepossiblebeneftsofFDIonDDInotonly
those that maximize infows of investment. However, according to the FDI promotion policies
haveshort-termbeneftstothedomesticinvestmentinTanzania,especiallywhenthosepolicies
are targeted at regional level.
2.4 Policy Implications
The review of literature shows agreement that investment is critical for the growth process and
hence social welfare (see Phillips et al. 2000).The question is about what kind of investment
is most benefcial and what the most cost-effective and socially harmonious ways to stimulate
investment.To corroborate this concern, Kabelwa (2003) notes “…Debate on FDI inTanzania
has somehow neglected the role of foreign investment in the country.That is, whether foreign
investment has met the country’s expectations and what impact it has on Tanzania’s economic
development. The issue that lies ahead is to ensure that the attracting more FDI gores in tandem
withtheanalysisofcostsandbeneftsofthisinvestment…”(2003:18).
MonitoringandevaluatingFDIinTanzaniaisconstrainedbypoordata.However,effortsbythe
BankofTanzania(BOT),TanzaniaInvestmentCentre(TIC)andtheNationalBureauofStatistics
(NBS) is commendable in putting together many sources of data and information in order to
generate a more plausible data series. These efforts should also include establishing an effective
mechanismfortrackingprivateforeigninvestmentinallitsforms,andsubsequentlycapitalfight
since, as Nyoni (2000) notes,Tanzania’s investment incentives structure lends itself to capital
fight(Mashindano,2004:61).
29 Report on the Study of Growth and Impact of Investment in Tanzania
3.0 invesTmenTs adequaCy in relaTion To developmenT goals
3.1 Development Goals
Tanzania’s Development Vision 2025 provides a statement of hope in the country’s quest for
socio-economicdevelopment.Nevertheless,ithasambitioustargets:halfabjectpoverty;create
a base for sustained development of the economy; and fashion a diversifed, middle-income,
marketeconomy.Toachievethesetargets,thestrategyistocreateasustainedexport-ledgrowth
of8.0percentormoreperyear,throughjudiciouslyexploitingthecountry’srichnaturalresource
base and fostering domestic and foreign investment.
TanzaniaisalsopartytotheMillenniumDevelopmentGoals(MDGs).Thesearealsoambitious:
eradicate extreme poverty and hunger by 2015; achieve universal primary education by 2015;
promote gender equality and empower women; reduce child mortality; improve maternal health;
combatHIV/AIDS,Malariaandotherdiseases;ensureenvironmentalsustainability;anddevelop
global partnership for development. To attain these goals it requires an increasing amount of
qualitydomesticandforeigninvestments,sustainedoveralongperiod.
Inordertoprogressinachievingtheabovedevelopmentgoals,economicgrowthisnecessary.
This section answers the question: “Is Tanzania’s investment adequate to attain its development
goals?”Toanswerthisquestion,wefrstestablishthelinkbetweeninvestmentandgrowth.Then
we discuss Tanzania’s historical experience in relation to investment and growth. Finally, we
examine what should be done to make investment more productive in support of growth.
3.2 Link between Investment and Growth
Experience in other countries shows that there is a strong link between investment and economic
growth. In the long run, economic growth is highly linked with investment in new capital and
increases in productivity that is associated with investment in new technology, Research and
Development (R&D) and training. Empirically, most growth regressions, including those that
focusonSub-SaharanAfrica,showthatinvestmentisthelargestandmostrobustdeterminant
of economic growth.
Empirical work by Chi Hung Kwan (2004), reveals that for China, Japan, South Korea and
Taiwan,investmentwastheengineofeconomicgrowthinthosecountries.Kwan’sfndingsare
summarised in Table 3.1:
30 The United Republic of Tanzania - Tanzania Investment Centre
Table 3.1: Investment and Growth in selected countries
Country Year
Investment Ratio
(% of GDP)
a
GDP Growth
(%)
b
ICOR
a/b
1 China 1991 - 2003 39.1 11.6 3.4
2 Japan 1961 - 1970 32.6 10.2 3.2
3 South Korea 1981 - 1990 29.6 9.2 3.2
4 Taiwan 1981 - 1990 21.9 8.0 2.7
Source:Kwan(2004),Analysisbasedonoffcialstatisticsofeachcountry.
ICOR = Incremental Capital Output Ratio
With regard to Sub-Saharan Africa, Barro and Lee (1994), Collier and Cunning (1999) and
Calamitsis et al (1999) using growth regressions have all shown that investment is one of the
main determinants of growth
1
.SimilarfndingswereobtainedbyYoung(1994,1996),andMankiw,
Romer,Weil(1993).AstudyonTanzaniabyWangwe,etal(2001)alsoconcludedthatphysical
capitalaccumulation(investment)iscrucialforlong-rungrowthinTanzania.
Despitetheaboveempiricalevidence,therearealsostudiesthatshownegligiblelinkagebetween
investmentandgrowth.Forexample,between1960-75Zambiahadanaverageinvestmentrate
of over 35 percent of GDP but achieved only 0.4 percent per capita growth (Easterly, William
andLevine,Ross,1997).Similarly,cross-countryanalysislinkinginvestmenttogrowthinAfrica
conducted by Devarajan, Easterly and Pack (2002) show little correlation between investment
and growth. During 1960-94 Africa invested 9.6 percent of GDP but achieved only 0.5 percent
real per capita growth. The study tested several theories by examining the relationship between
the change in investment ratios and the change in growth per capita. One of the most famous
predictionsindevelopmenteconomics,datingbacktoSirArthurLewisandWaltRostov,isthat
increases in investment ratios lead to growth accelerations. The study on 29 African countries did
not establish signifcant association between increases in investment inAfrica and changes in
growth from 1960-79 to 1980-1999. Only Botswana had high investment and high growth. Private
investmenthadasignifcantpositiveimpactongrowthbutonceBotswanawasfactoredout,the
effect of private investment on growth became relatively small.
Several factors have been cited as being important in facilitating high investment and growth in
the countries shown is Table 3.1 above. These are:
Economicandpoliticalstabilityandtransparency:AccordingtoOliviaJensen(2001), •
social and political stability in a country is almost a sine qua non for investment.

1 Otherexplanatoryvariablesincludeschoolenrolmentrates,lifeexpectancy,macroeco-
nomicpolicyvariables,theinfationrate,politicalstabilityandgeographyvariables.
31 Report on the Study of Growth and Impact of Investment in Tanzania
A steady policy-making environment is conducive for both investment and economic
growth.Similarly,transparencyindecision-makingisimportantforinvestors.Investors
seeking sites for long-term investment attach great importance to the predictability
of the operating environment. Integral to this issue is the degree of transparency of
policy choices and the accountability of policy makers. Investors also value highly a
transparent and reliable legal system.
Stable macroeconomic policies: The size and growth rate of the market and low cost of •
productionareimportantforinvestment.Lowinfationandcommitmentbygovernment
topursuenon-infationarypolicies,includingfollowingappropriatemonetarypolicyare
valuable for investors.
Supportive conducive infrastructure: Studies conducted byAmar Bhattacharya, et all •
(1997) indicate that good physical, fnancial, human and institutional infrastructure
is essential in facilitating investment and growth.An educated, hard-working labour-
force was found to be crucial for investors in the above-mentioned countries. Good
roads,wellfunctioningandeffcientharbours,stableandreliableelectricitysupplyand
supportivefnancialinstitutions,wereallingredientsforattractinghighinvestmentand
fostering high growth.
Government resolute commitment and pro-active support for private domestic and foreign •
investment: In most of these countries, Olivia Jensen (2001) observes that there was
signifcantactiveparticipationbygovernmentinfacilitatinginvestmentthroughextensive
programmes aimed at creating a conducive environment for investment and growth.
AsthestudybyEasterlyetal,(1997)amplyshows,countriesthathavemarkedinadequacies
of the attributes outlined above have experienced low growth despite high investments in some
of these countries. The upshot of this is that in order for Tanzania to accelerate investment and
achievehighergrowth,relentlesseffortsmustbemadeinimprovingtheenablingenvironment.In
particular,focusshouldbeoncontinuedandsustainedeconomicandpoliticalstability,enhanced
transparencyinallaspectsofeconomicandsocialmanagement,stablemacroeconomicpolicies
thatfosterlowinfation,greaterimprovementsinthecountry’sinfrastructureandmorepro-active
government support for domestic and foreign investments.
3.3 Tanzania’s Historical Experience on Investment and Growth
Tanzania’sexperience(Figure3.1)showsthatinvestmentandgrowthhardlyseemtocorrelate.
The period of highest investment 1980-83 when the investment ratio as percentage of GDP
averaged24.6percentcoincideswiththelowestgrowththataveragedonly0.3percent.Similarly,
whenTanzaniaachievedaninvestmentratioof25.8percentbetween1991-94,averagegrowthof
GDPwasonly1.6percent.Incontrast,between1960-79aninvestmentratiothataveraged16.5
percentachievedagrowthof3.8percent.Similarly,aninvestmentthataveraged16.8percent
between 1995-2002 coincides with a growth of 4.5 percent.
32 The United Republic of Tanzania - Tanzania Investment Centre
The results depicted on Figure 3.1 appear to be confrmed by a recent World Bank study on
Tanzania (Devarajan, Easterly, and Pack 1999). The study that used “growth accounting”
methodology revealed that the correlation between output growth and capital growth was
insignifcant.TheR
2
wasonly0.10,indicatingthatcapitalgrowthexplainsonly10percentofthe
variation in growth of output. This apparent lack of correlation between investment and growth in
Tanzania is explained in sub-section 3.4.
F|gure 3.1: Rea| C0P Crowth and |nvestment [19ô5-2004}
0
5
10
15
20
25
30
1965-73 1974-79 1980-85 1986-90 1990-95 1995-2000 2000-2004
3
H
U
F
H
Q
W
Gross fixed capital formation/GDP Real GDP growth

Source: BasedonBureauofStatisticsandBankofTanzaniastatistics(variousyears).
3.4 ExplainingTanzania’sInsignifcantLinkagebetweenInvestmentand
Growth
There are several reasons why Tanzania’s relatively high investment has not achieved high
growthrates.OnereasonconfrmedbytheresultsofthegrowthaccountingstudybyDevarajan,
etal.(1999)relatestolowproductivityofinvestment. Value-added in manufacturing sustained
a39percentdeclinebetween1975and1990.Accordingtothestudy,themainreasonsforlow
productivity were lack of complementary human skills needed to use complex capital gainfully.
EmpiricalstudiesbyElbadawi,Ndulu,andNdung’u(1997)andJaspersenetal.(1995)provethat
productivity of FDI is higher in countries with a higher educational attainment. Both studies cited
confrm that the interaction between FDI and secondary educational attainment is statistically
signifcantinexplaininggrowth,whiletheinteractionwithprimaryeducationisinsignifcant.Thus,
giventhatTanzaniahasthelowestlevelofsecondaryeducationintheworld(about6percentof
therelevantschoolagepopulation);thiscouldbeanexplanationoftheslowergrowthrate.
AccordingtoPaulKrugmanofPrincetonUniversity,the“EastAsianMiracle”(calledsobecause
ofthehighratesofgrowth)wasachievedthroughariseinproductivityandanincreaseinthe
33 Report on the Study of Growth and Impact of Investment in Tanzania
use of larger amounts of factors of production – especially capital and labour. When considering
investment effciency (productivity), the “incremental capital-output ratio (ICOR)’ serves as
a guide
2
. Japan, for example, invested 32.6 percent of its GDP between 1961 and 1970 and
achieved 10.2 percent sustained growth, implying an ICOR of 3.2. In other words, in order to
boost growth by one percentage point, the equivalent of 3.2 percent of GDP had to be newly
invested. Similarly South Korea invested 29.6 percent of its GDP between 1981 and 1990 and
achieved9.2percentgrowth,implyinganICORof3.2.Inallthesecountriessustainedgrowth
was achieved through improved productivity. Now lets turn to the experience of Tanzania.
The relationship between investment and growth in Tanzania is shown in Table 3.2.
Table 3.2: Investment and Growth in Tanzania
Investment ratio
(% of GDP)
GDP growth
(%)
ICOR
1965 - 73 20.8 5.2 4.0
1974 - 79 20.6 2.5 8.2
1980 - 85 16.4 1.1 14.9
1986 - 90 27.7 3.9 7.1
1990 - 95 24.6 2.5 9.8
1995 - 2000 16.0 4.1 3.9
2000-2004 17.6 5.6 3.2
Source: WorldBank(2002),“TanzaniaattheTurnoftheCentury–BackgroundPapersandStatistics,”
WashingtonD.C.BankofTanzania(2004),“EconomicandOperationsReportfortheyearended
30
th
June,2004,”DaresSalaam.NationalBureauofStatistics,“TheEconomicSurvey2001,”Dares
Salaam,June2002.
The data provided in Table 3.2 indicate that there is hardly any direct relationship between
investment and growth. Periods of high investment are not automatically translated into high
growth. For example, during the period 1973-87 and 1987-99, investments were 17 and 20
percentofGDPbutregistered–1.3percentand1.0percentgrowthrespectively.Theeffciencyof
investmentwaslow,registeringanICORof15.7and20respectively.Inthelattercase,itmeans
that in order for Tanzania to achieve a one-percentage point growth it has to invest 20 percent
ofitsGDP–ahighlyineffcientwaytoachievegrowth.Whatarethereasonsforlowinvestment
productivity?
2 The“incrementalcapital–outputratio(ICOR)”isobtainedbydividingtheratioofinvest-
mentasapercentageofGDPwithrealeconomicgrowth(realGDPgrowth).Thesmaller
theICORis,themoreeffcienttheinvestment.Forexample,asTable3.2shows,Tanza-
nia’sICORformostyearsarehighcomparedwiththoseofdevelopingcountries.Accord-
ingtoWangweandTsikata(1999),thehighICORisarefectionoflowproductivityof
public investments and low rates of industrial capacity utilisation.
34 The United Republic of Tanzania - Tanzania Investment Centre
According to Devarajan, Easterly, and Pack (1999), the low growth in Tanzania is not due to
lack of investment but is associated with ineffciency.Thisfndingisalsosupportedbystudies
by Wangwe et al (2001) using “Growth Accounting” analysis. The results of their study are
reproduced on Table 3.3.
Table 3.3: Sources of Growth in Tanzania
Output per worker Capital per worker Education per worker
Total factor
productivity
1960-1970 1.9 0.4 0.3 1.2
1970-1980 1.3 1.0 0.1 0.3
1980-1990 -0.3 0.2 -0.1 -0.4
1990-1998 -0.2 -0.2 0.0 0.0
1960-1998 0.7 0.4 0.1 0.3
Source:IMFcalculations.CountryEconomicMemorandum(1999).
As shown in Table 3.3, output per worker increased by 0.7 percent per year over the period
1960-98.Increasesincapitalperworkercontributed0.4percentperyear,whileeducationper
worker contributed only 0.1 percent. The remaining 0.3 percent of annual growth is attributed
totheresidual,totalfactorproductivitygrowth.Noticethatthereisalargedeclineintotalfactor
productivity between 1960 and 1990. From a high 1.2 percent between 1960-70, it fell to 0.3
percent per year between 1970-80 and turned negative between 1980-90. This happened
despite an increasing level of investment during this period. The empirical evidence suggests
that productivity of public sector investment and industrial capacity utilisation rates were too
low to sustain high levels of growth. More generally, the lack of complementary investment
(presumablyduetoadverseinitialconditionstypicalinlowincomecountriessuchasTanzania)
andespeciallyinservicesectorsandrequiredskills(thatfacilitateeffcientutilisationofresources)
have exacerbated the high ICOR.
The observation made above shows that during 1960-70 increases in total factor productivity were
the main driving force behind the relatively high economic growth – contributing 1.2 percentage
pointstooverallannualgrowth.However,after1970,totalfactorproductivitybegantodecline,
turning negative between 1980-90. The main reasons for declining productivity were
3
:
Poorincentivesforincreasingproductivityunderthesocialistregime, 
Weakmacro-economicpoliciesthatledtoforeignexchangeshortages, 
3 Pritchett(1999)arguesthatlowratesofproductivitycouldalsoindicateproblemsin
measuringthevalueofthecapitalstock.Inparticular,corruption,lackofgovernmentef-
fciencyininvestment,patronage,andavarietyofmanyotherfactorsmayleadtocosts
of investment that overstate the actual contribution of investment to capital accumulation.
35 Report on the Study of Growth and Impact of Investment in Tanzania
Inadequateinstitutionstosupporthighproductivity, 
Insuffcient availability of inputs and complementary investment into the production 
process,
Poorinvestmentdecisionsbyparastatalorganisationsthatresultedinover-capacities,and 
Inadequate supportive legal and regulatory framework. 
The reforms initiated in the 1990s reversed the declining factor productivity but have not been
suffcienttoboostgrowthtohighlevels.
Thecontributionofeducationtogrowthissmall,averagingonly0.4percentperyearbetween
1960-98 (Table 5.3). Experience in other countries shows that investing in human capital in
theformofeducation,training,healthcare,orimprovednutritioniskeytofasterandsustained
economic growth. Investment in human capital is particularly important for growth because it
affects the development of entrepreneurial, managerial, and organisational skills, as well as
innovation,learning,andadaptationofnewtechnologyandmodernpractices.Thus,apartfrom
beinggrowthenhancing,investmentinhumancapitalalsodirectlyimprovesthequalityoflifeof
thebenefciariesandthesocietyasawhole.Unfortunately,thequantity,relevanceandquality
ofTanzania’seducation,especiallypost-primary,areamongthelowestinSub-SaharanAfrica.
Asaconsequence,theexpectedcontributionofeducationtoeconomicgrowthhasbeenweak.
Education,therefore,isanareathatrequireshigherinvestmenttoboostgrowthinthefuture.
The low observed investment productivity is also due to inadequate or weak infrastructure. A
studybyDeepacketal,(2001)illustratesshowthatinvestmentproductivitytendstobehigherin
countries with well-developed physical infrastructure. Tanzania’s erratic and unstable electricity
supply,inadequatewatersupply,poorroads,inadequatecommunicationinfrastructureandthe
like,tendtoreducetheproductivityofinvestment.
3.5 Investment Adequacy
In this section the question posed in Section 5.1: “Is Tanzania’s investment adequate in relation
toherdevelopmentgoals?”AsdiscussedinSection5.1,thecountry’svision2025requiresa
GDP growth rate of 8.0 percent or more to achieve desired development goals. The discussion
in Section 5.2 to 5.4 above is not conclusive about the relations between investment and growth.
SomecountriessuchasJapan,SouthKorea,TaiwanandChinainvestedover22percentoftheir
GDP and achieved a sustained 8.0 percent growth or more over a period of 10 years. Others
suchasBotswanainvestedaboutthesamelevelasTanzania(averaging17.0percentofGDP)
andachievedover7.0percentgrowthsustainedforaperiodof10yearsormore.Others,like
Zambia invested over 35 percent of their GDP but achieved only 0.4 percent per capita growth
for 15 years between 1960-75. Tanzania like Zambia achieved a dismal growth as discussed in
Section 7.3. Similarly most Sub-Saharan African countries invested over 9.6 percent of their GDP
36 The United Republic of Tanzania - Tanzania Investment Centre
between1960-94buthadthelowestgrowthintheworld(Hoeffer1999).However,despiteall
theseobservations,thereareanumberoflessonsthatwecandrawfromtheaboveempirical
evidence.
First, investment is one of the few most robust variables in cross-country growth regressions
(LevineandRenelt,1992).ThisimpliestogettheTanzanianeconomygrowingat8.0percentper
annum or more requires higher levels of investment that are channelled to sectors of the country’s
highestcomparativeadvantage.Inaddition,thereisneedforgreaterpublic-privatepartnerships
indevelopment,eachcomplementingoneanother.Further,greaterfacilitationoflocalinvestors
is needed in tandem with current efforts to promote foreign investments. Other complementary
conditions are discussed further below.
How much more investment is needed? Using empirical studies quoted by William Easterly
(1998),anincreaseofdirectinvestment/GDPof1.3percentagepointsresultsinanincreaseof
one percentage point in growth. This means for Tanzania to increase its growth from the current
5.0percentto8.0percent,weneedtoraiseinvestment/GDPby3.8percentagepoints.Inother
words,investment/GDPneedstorisefromthecurrent17.6percentto21.4percent.Forexample,
Taiwaninvestedaboutthatlevel(21.9%)between1981-1990andachieved8percentsustained
growth over that period.
Alternatively,wecanknowhowmuchinvestmentisneededbylearningfromempiricalstudies
conducted using the Financing Gap approach. This approach uses the Incremental Capital
Output Ratio (ICOR) to project growth.The EBRDin its annual 1995 report on ex-Communist
economiessaid,“growthof5percentrequiresinvestmentof20percent”.ThisimpliesanICOR
of 4. A 1995 World Bank report on Latin America says “enhancing savings and investment by
8 percentage points of GDP would raise annual growth by around 2 percentage points – again
implying an ICOR of 4. The IMF Institute in its training manual for developing countries suggests
that investment requirements be calculated as “Target growth * ICOR.” In Section 5.4, Table
5.2, Tanzania’s experience with regard to investment effciency as measured by ICOR varies
widely from a high 20.0 between 1987-97 to a low 3.2 between 2000-2004. If we assume the
mostrecentexperiencecanbesustained,thenusingtheIMFapproach,Tanzaniawouldneed
an investment/GDP level of 25.6 percent – about 8.0 percentage points higher than the current
level of investment.
Wecannowconclude,albeitonthetheoreticallevel,thatTanzaniawouldneedtoincreaseher
investment/GDP level by between 21.4 to 25.6 percent per annum in order to achieve her Vision
2025ofraisingGDPgrowthby8.0-10.0percentormore.However,asSection7.2to7.4amply
illustrates,sustainedgrowthrequiresnotonlyincreasinglevelsofsavingsandinvestment,but
alsotheeffciency/productivityofthatinvestmentandothercomplementarygrowthdeterminants.
We discuss these other growth-enhancing factors in the next section.
37 Report on the Study of Growth and Impact of Investment in Tanzania
3.6 Raising Investment and Growth: What can be done?
3.6.1 Improving the Environment for Investment
Tanzania’s ratio of investment to GDP averaged about 17.0 percent of GDP between 1965-2004.
This is well below the ratio attained in developing countries of LatinAmerica (20-22 percent)
andAsia (27-29 percent). Therefore, it is important for Tanzania to strive to raise investment
to those levels achieved by other higher growth developing countries. Also, the empirical
evidence shows that Tanzania’s ratio of private investment to GDP is low. This is worrisome for
tworeasons.First,privateinvestmenthasbeenfoundtohaveasignifcantlystrongereffecton
growththangovernmentinvestment–probablybecauseitismoreeffcientandlessassociated
with corruption. However, both public and private investments are needed because these
complement one another – especially where the government improves markedly the country’s
physicalinfrastructure.Second,offcialdevelopmentassistance,whichprovidesthefnancingfor
alargeshareofTanzania’sinvestment,isdeclining–exceptforprioritysectors.Thus,Tanzania
has to do more to attract more domestic and foreign private investment. To achieve this noble
goalandfostersustainedgrowth,thefollowingstepsareimportant.
First,thereisneedtoensurecontinuedmacroeconomicstability.Cutbudgetdefcit.Reducethe
rateofincreaseinmoneysupplyandinfation.Managemorecarefullyarrears–bothdomesticand
external.AnempiricalstudiesbyPritchett(1998)hasshownhighcorrelationbetweenadequate
macroeconomicpolicyandrapidgrowth.Investorstendtohavegreaterconfdenceincountries
thathavesustainablepricestability.Ndulu(1997)alsocallsforreducingthesizeofthebudget
defcitsthroughconcertedeffortstoraiserevenuecollectionandreducewastefulexpenditures
as a way of fostering sustainable price stability. Case studies on Sub-Saharan Africa cited by
Nduluetal(2000)alsoshowhighlinkagebetweensustainedmacroeconomicstabilityandrapid
economicgrowth,thelatterbeneftingfromincreaseddomesticandforeigninvestment.
Second, make continuous improvements in the legal system. Private investment is not likely
to take off on a sustained level where investors and lenders lose their capital because of
dysfunctional court system that fails to enforce contracts and property rights. Tanzania has made
commendable progress in this area but much remains to be done. In particular making further
improvements to enhance effciency of the recently established Tanzania’s Commercial Court
and Tanzania National Business Council as well as considering possibilities for institutionalising
rural property rights.
EmpiricalstudiesbySachs,J.etal(1997)showthatimprovementsinthequalityofinstitutions
emphasising the rule of law and security of property as well as more stable political and social
environment conducive to higher investment have the potential to add 0.6 percent to a country’s
annual growth. Similarly, cross-country studies cited by Ndulu (2000) conclude that improving
38 The United Republic of Tanzania - Tanzania Investment Centre
governancescores(byreducingcorruption,improvingthequalityofbureaucracyandadheringto
theruleoflaw),hasthepotentialofincreasinglong-rungrowthbynearlyathirdofapercentage
point per year.
Third, review the entire taxation system to provide for greater transparency and more equal
levelplayingfeldbetweendomesticandforeigninvestors.Hightaxesarenormallyassociated
with low investment. This is particularly evident in agriculture where investment is low due to
high taxation, inadequate infrastructure support especially poor roads, unavailability of power
supply,inadequatewatersupply,poortelecommunicationsandaworkforcethatleavesmuchto
be desired.
Forth, the debt overhang that Tanzania continues to accumulate despite recent HIPC debt
reductions discourages private investment by reducing the expected after-tax rate of return on
capital. Therefore better management of the country’s domestic and external debt is essential.
Fifth, refrain from special “subsidies” (tax exemptions) for foreign investors. The Government
of Botswana refrained from offering tax exemptions to foreign investors but managed to attract
more foreign investment in part because of following prudent economic management principles
thatalsoassuredinvestorsthattheirpropertyrightswouldprotected.Thatis,achievingarobust
macroeconomic policy environment and favourable investment climate is more fundamental to
attracting FDI than just offering tax exemptions.
3.6.2 Raising Investment Productivity and Sustaining Growth
OverallfactorproductivityinTanzaniaislow(Table5.3)becauseofavarietyofdistortionsand
institutionaldefciencies.Inordertospurgrowthinproductivityandoutput,thefollowingsteps
havetobetakentoreducethosedefciencies:
Make concerted efforts to improve the country’s physical infrastructure (i)
EmpiricalstudiesbyDeepaketal(2001)showthatproductivitygainsarehighincountrieswith
skilled workforce and well-developed physical infrastructure that complements the investment.
StudiescitedbyEasterly(1997)showthatanincreaseof1.7percentofGDPinpublicinvestment
in transport and communication can increase growth by one percent. Similarly in the case of
Tanzania, fndings by Kweka (2003) indicate that improvement in infrastructure has signifcant
infuenceongrowth.ThestudyobservesthatrealGDPgrowthincreasesby0.5percentandtotal
welfare rises remarkably by about 2.0 percent. World Bank studies on Sub-Saharan Africa have
cited poor infrastructure as a major deterrent to investors. Good infrastructure is key to “crowding
in”domesticandforeigninvestments.Unfortunately,Tanzania’sbasicinfrastructureandutilities
are poor. The road network is undergoing major improvements but much more remains to be
donetoensureregularmaintenanceandupgrading.Kweka(2004)observesthatinthecaseof
Tanzania investments being made to improve transportation infrastructure has reduced trade-
39 Report on the Study of Growth and Impact of Investment in Tanzania
relatedtransactioncosts,butthesearestillhigh–typicallyabout5percentofvalue.Powersupply
is erratic, unreliable, and expensive and has limited coverage. Electricity costs are over 215
percent higher in Tanzania than neighbouring Kenya and nearly seven-fold the charges in South
Africa(Musonda,2000).Muchimprovementisrequiredinthisareatoensurethatpowersupply
does not constrain productivity and growth. Progress is evident in telecommunication services
but more competitive conditions are needed to lower costs. Water supply for productive activities
is irregular and inadequate to support a growing economy. All these and other infrastructure
require urgent improvement to spur investment and growth.
Improve policy and institutions (ii)
Policies and institutions are important determinants of growth. A Study by Parente and Prescott
(1999)showsthatremovingpolicyandinstitutionalconstraintscouldtripleoutputthroughmore
effcient use of existing capital and adoption of new technologies. Recent projections by the
World Bank using cross-country regressions of per capita GDP growth in 1990-97 show that
if Tanzania improved its policies and institutions and thus raise its performance rating by 0.5
percent,percapitagrowthwouldincreaseby2.5percentagepoints(WorldBank,2002).Tanzania
hasmadecommendableprogressinputtinginplacesoundinvestor-friendlypolicies.However,
some of the institutions are still plugged with past rigidities and do not fully support the ensuing
market economy. Civil servants are still not customer-focussed and investor-friendly. Attitudes
andmindsetsneedtochange.Thetaxauthority(TRA)needstomakeimprovementsinservice
delivery and avoid undue harassment of investors. This also applies to the business licensing
authority and immigration which need to speed up service provision.
Improve work-force skills and knowledge (iii)
Empirical studies indicate high correlation between a country’s growth and its labour-force skills
andknowledge.AstudybyEasterly,(1998)indicatesthatanincreaseof1.2yearsinaverage
schoolingofthelabourforcecouldraisegrowthbyonepercent.Similarly,thesamestudyshows
that an increase in secondary enrolment of 40 percent could raise growth by one percent. Primary
educationhadnosignifcantcontributiontogrowth.AsshowninTable5.3,Wangwe,etal(2001)
also revealed that education per work is one of the factors contributing to growth in Tanzania. In
addition tosecondary andhigher education thathave ahigh contribution togrowth,theWorld
Bank(1998b)hasidentifedtwosortsofknowledgethatarecriticalinenhancingtheproductivity
of investment and growth. These are:
Knowledge about technology – technical knowledge or know-how. In the context of 
economic growth; examples would be knowledge about manufacturing processes,
agriculturalmethods,andorganisationalmethods.
Knowledgeaboutattributes,suchasthequalityofaproduct,thediligenceofaworkers,or 
thecreditworthinessofafrm–whichareallcrucialforestablishingeffectivemarkets.
40 The United Republic of Tanzania - Tanzania Investment Centre
Basedontheaboveobservations,thecurrentgovernment’seffortstoexpandsecondaryeducation
are in the right direction. It is also important to expand the knowledge base of the workforce
through skills upgrading and improvement in the information and communication infrastructure.
Improve further the legal and judicial framework (iv)
Experience shows that investors are enticed to invest in countries that have a well functioning
legal system that is capable of protecting property rights. Although Tanzania has made progress
in reforming its legal and regulatory system, much needs to be done. In particular, further
improvements are needed in corporate and contract law, competition policy, bankruptcy law,
labourlaw,andpropertyandlandrights.Thisisessentialtofacilitatethecountry’squesttobuild
atransparent,expedient,andcost-effectiveregulatorysystemthatprovidesalevelplayingfeld
for both domestic and foreign investors.
Strengthen public-private partnerships (PPP) (v)
Growth comes as a result of a great deal of effort by many people and their government doing
therightthingoveranextendedperiod.Acredible,transparent,well-fnancedandwell-managed
governmentisessentialinimposingeconomy-widedisciplineoflaw,securepropertyrightsand
provide for adequate social safety net. This market-friendly government environment should
be expected to encourage saving new investment and foster further growth through powerful
public-privatepartnerships(PPP)fordevelopment.Inturn,theprivatesectorhastoreciprocate
by abiding with rules and regulations, improving investment quality and actively engaging the
government in win-win dialogues that foster social-economic development.
3.6.3 DiversifyingSourcesofExternalFinanceandRaisingEffectivenessofOffcial
Development Assistance
Tanzania needs to put greater efforts at diversifying its sources and composition of external
fnance. Prime to this effort relates to fostering creditworthiness to attract private investment.
In this respect there is need to reduce sovereign risk as infuenced partly by the ability to
service debt and by constraints to cross-border transfer of profts. Studies by Jaspersen et al
(1995) and Kharas et al (1991) have shown that creditworthiness is important especially in
determiningwhetherornotprogressionfromoffcialtoprivatelendingwillbesmooth.Inaddition,
macroeconomicstability,policycredibilityandsustainedeffortstomaintainbothareimportantfor
reducinguncertaintyandraisingcreditworthiness.Helleiner(1993)reiteratesthatkeyelements
insecuringpolicycredibilityaretheadequacyoffnanceandtheassuranceofitscontinuation.
ThisunderscoresthecriticalimportanceofstabilityofOffcialDevelopmentAssistance(ODA)in
reducing the perceived likelihood of policy reversals in response to sudden resource crunches.
Thus, donor assistance can be expected to play a signifcant catalytic role in attracting other
forms of foreign capital in the future.
41 Report on the Study of Growth and Impact of Investment in Tanzania
Experiencealsoshowsthatonewayofdiversifyingsourcesoffnanceistodevelopco-fnancing
arrangements between ODA and private capital in a way that will permit ODA to leverage private
resources. The scope for such arrangements is high especially in infrastructure investments
(suchasIPTL,SONGAS).
3.6.4 Mobilising Domestic Resources
The current situation where development assistance plays a large role in both recurrent and
development expenditure is not sustainable. A more conducive environment for progressive
andorderlytransitiontolessdependenceonexternalfnancingofthecountry’sdevelopmentis
essential.Inparticular,actionsareneededinfvemainareas:
Fostering domestic resource mobilisation including increases in domestic savings, 
generation of higher foreign exchange earnings, and making further improvement in
government revenue collection. These efforts are critical because experience shows that
ownresourcesformthefnancialbaseforsustaineddevelopmentofeconomies–bothin
developed and developing countries.
Reforming the country’s taxation system. High taxes and low credibility of banks tend to 
discourage savings and therefore retard growth. High growth and high savings are inter-
related. A low tax policy is important for encouraging savings and fostering high growth.
Thus,forhighergrowthtobeachievedinaccordancewiththecountry’smillenniumgoals,
savings as a share of GDP has to rise from the current 12 percent to over 30 percent – a
monumental task unless urgent actions are taken towards encouraging savings.
Promoting private investment to support economic expansion while sustaining on-going 
economic reforms. Tanzania’s experience shows that the response of private investment
to the reforms that were initiated since the mid-1980s has been slow. Where response
has come-forth, investments have been dominated by short-term low risk behaviour –
especially channelled totradingactivities (Elbadawi,NduluandNdung’u,1997,Severn,
1996).Toreversethistrend,reformshavetobedeepenedfurthertocreateassurances
ofnegligiblechancesofpolicyreversal,civilandpoliticalstabilityhastobefosteredatany
cost,andtheinvestmentcodemustbeimplementedinfairnesswithintheframeworkofa
level-playingfeldforbothdomesticandforeigninvestment.
3.6.5 Making Further Progress in Tanzania Investor Roadmap-type Issues
Tanzania has made commendable progress in investment facilitation since the frst Investor
Roadmap assessment was made in 1996. The January 2004 Tanzania Investor Roadmap
indicates signifcant progress in removing investment bottlenecks. In this section we review
progress to date and recommend for further actions to improve the process further.
42 The United Republic of Tanzania - Tanzania Investment Centre
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43 Report on the Study of Growth and Impact of Investment in Tanzania
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44 The United Republic of Tanzania - Tanzania Investment Centre
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45 Report on the Study of Growth and Impact of Investment in Tanzania
4.0 measures for evaluaTing The CosT and benefiTs of
invesTmenTs made in Tanzania
4.1 Introduction
TanzaniaInvestmentCentre(TIC)wasestablishedin1997bytheTanzaniaInvestmentActNo.26
of1997.ItsmainobjectiveistobetheprimaryagencyofGovernmenttoco-ordinate,encourage,
promote and facilitate investment in Tanzania and advise the Government on investment related
matters. In performing these functions, TIC undertakes various procedures as measures to
decide on any investment approval and uses several measures to inform investment decision
approval.
In the context of cost-beneft analysis, investment can be defned as a long-term commitment
of economic resources made with the objective of producing and obtaining net gains in the
future. Evaluation refers to the determination of the values of project inputs and outputs. Under
normal circumstances, investors conduct private cost-beneft analysis to determine proftability
of alternative investment options. Therefore, before an investor submits request to Tanzania
Investment Centre (TIC) for approval, it is expected that the investor has completed initial
assessmentandhasfrmideasthattheinvestmentisviableandproftable.Therefore,whatTIC,
needstodoistosubjecttheinvestor’sprojectintosocialcost-beneftanalysis.
The main reason for conducting social cost-beneft analysis is to subject project choice to a
consistentsetofgeneralobjectivesofnationalpolicy.Forexample,“doestheproposedinvestment
contributetowardsnationalgoals(TanzaniaVision2025andMillenniumgoals)relatedtohigher
employment, output, consumption, savings, foreign exchange earning, income distribution
and other important national objectives”. “Does the investment meet desirable environmental
standards?”“Willthenetsocialbeneftsexceedsocialcosts?”Answerstosuchquestionsbefore
investment approval are important, not only to protect the national interest, but also to ensure
that all investments contribute towards higher and sustainable economic growth and poverty
alleviation.
Afterthisintroduction,thischapterisdividedintothreesections.Sectiontwodiscussesstatutory
measures that TIC has to implement before investment approval. Section three focuses on
measuresrelatedtosocialbeneft-costassessment.Sectionfourisdevotedtopost-investment
thatareessentialinensuringthatinvestors“walkthetalk”–thatis,areinrealityimplementing
projectsinaccordancewithTIC-awardedcertifcateofinvestmentapproval.
4.2 Current Measures for Investment Approval
Currentmeasuresforinvestmentapprovalarestipulatedinthe“TanzaniaInvestmentAct,1997”.
UndertheAct,whichaimsatprovidingfavourableconditionsforinvestors,thefollowingminimum
46 The United Republic of Tanzania - Tanzania Investment Centre
conditions have to be met before an investment is approved.
Iftheinvestmentiswhollyownedbyaforeigninvestororifitisajointventure,theminimum ♦
investment capital is not less than Tanzanian shillings equivalent to three hundred thousand
USdollars(US$300,000);
If locally owned, the minimum investment capital is not less than Tanzanian shillings ♦
equivalenttoonehundredthousandUSdollars(US$100,000).
Fornewinvestments,submissionofinvestmentapplicationforapprovalhastocontainthe ♦
following:
Thenameandaddressfortheproposedbusinessenterprise,itslegalform,itsbankers, -
thenameandaddressofeachdirectororpartnerandthename,address,nationality
and shareholding of each share holder;
The qualifcations, experience and other relevant particulars of the project -
management;
The nature of the proposed business activity and the proposed location where that -
activity is to be carried on;
The proposed capital structure or the amount of investment and the projected growth -
overthenextfveyears;
Howtheinvestmentwillbefnanced; -
Evidenceofsuffcientcapitalavailableforinvestment;and -
An undertaking that the project shall be implemented as indicated in the projections of -
the project.
Where the application is to rehabilitate or expand an existing enterprise or both, the
application shall contain:
The name of the existing enterprise, its articles of association and Memorandum of -
association or partnership agreement;
Thequalifcationsoftheprojectmanagement; -
A statement of audited accounts for the three previous years; -
The nature of rehabilitation or expansion; -
Thecapitalstructureandprojectedgrowthoverthenextfveyears; -
Financingoftherehabilitationorexpansionproject,togetherwithevidenceofavailability -
offnances;
An undertaking that the expansion or rehabilitation shall be implemented as indicated -
in the projection.
Where the application is for equity investment, shares or stock in an enterprise, it shall
contain:
The name of the enterprise in which the equity investment is made or shares held; -
47 Report on the Study of Growth and Impact of Investment in Tanzania
Constitution of the enterprise or partnership agreement; -
The amount of equity investment made; -
Thenumberofsharesorstockheldbytheequityinvestor,and -
The currency in which the equity investment is made. -
The evaluation team fnds these minimum statutory measures to be inadequate because
investmentsarenotsubjectedtosocialcost-beneftanalysisasdiscussedbelow.
4.3 Cost-beneftMeasures
Asstatedintheintroductorysection,aninvestmentisorientedtowardsthegenerationoffuturenet
gains. This objective can be achieved only when an investment is properly integrated within the
Tanzanianbusinessenvironment.Therefore,anyproposedapplicationforinvestmentapproval
should be viewed not only as a part of a system of supply and demand of goods and services that
aimatmakingprofts,butalsoasanintegratedpartofasocio-economicandecologicalsystem
withinwhichtheinvestmentperforms.Thus,fortheinvestmenttobesociallyandeconomically
benefcial,ithastoservetheneedsanddevelopmentobjectivesoftheTanzaniansocio-economic
system(e.g.TanzaniaVision2025,Millenniumgoals,etc.).Sinceitisinthepublicinterestthat
investmentsmakeeffcientuseofscarceresourcesandcontributeasmuchaspossibletowards
national development, social beneft-cost analysis has to be applied to each investment. The
measuresmostcommonlyusedtoassessbeneftsareasfollows:
4.3.1 SocialBeneftMeasures
Employment Creation. 1. Will proposed investment create jobs, both directly and
indirectly?
Technology, Knowledge and Skills Transfer. 2. One important measure for evaluating
investment is whether the proposed project has a chance of enhancing technology,
knowledge and skills transfer. Often FDI can bring into the country both hard technology
(e.g.equipment,industrialprocesses)andsofttechnology(e.g.knowledge,information,
expertise, organisational skills, management, marketing and technical know-how).
Sometimes some investments are also associated with growth of research and
development (R&D) thus increasing the country’s technological capacity. All these are
important measures in evaluating investment applications.
Promotion of the country’s exports, competitiveness and markets. 3. Transnational
companiescanhelpboostthecountry’sexportsthroughtheirforeignaffliates.Ingeneral,
Foreign Direct Investment (FDI) can be an important intermediary between Tanzanian
domestic producers and markets abroad. Foreign investors engaged in export-oriented
primary manufacturing and service activities can be particularly useful in enhancing the
county’s export competitiveness – in part because of their technological superiority and
48 The United Republic of Tanzania - Tanzania Investment Centre
quality consciousness.
4. Linkageswithsectorsoftheeconomy. Is the investment likely to source inputs in the
local market? Will the investment improve the supply chain of goods and services? Will the
investment add value to domestic resources. These and other considerations that foster
linkages within the economy are important for accelerating economic growth.
Improvement in the country’s fnancial infows and balance of payments. 5. Foreign
directinvestmentcaninjectsubstantialfnancialresourcesintothecountrybeyondthose
referred to in the statutory requirements. Such resources if channelled to new investments
(Greenfeld-typeinvestments)orinfrastructure(e.g.electricity,telecom,waterandsanitation,
roads (build-operate principles) can make marked contribution to national development.
Undersocialbeneft-costanalysis,investmentinfowshavetoexceedoutfowsintermsof
proftandotherremittances).
4.3.2 Social Cost Measures
Generally,thedistinctionbetweenbeneftsandcostsissimplyoneofsign.Acostisasacrifced
beneft.Apartfromtheusualprojectcostsnormallysubmittedduringaninvestmentapplication,
(e.g. costs of initial investment, production, marketing and distribution, plant and equipment
replacement,workingcapitalrequirementsanddecommissioningattheendoftheprojectlife),
there are important social costs that have to be evaluated. The rationale for assessing social cost
measuresrelatestothepossibilitythatseeminglyproftableinvestmentsmayhavedetrimental
effects on the economy such as destroying the environment, reducing employment, retarding
entrepreneurial development, reducing the supply chain of domestic goods and services, to
mention but a few. Some of these social costs are discussed below.
1. Crowding out local investors. Due partly to technological superiority, some FDI
investmentshavesqueezedoutlocalproducers.Forexample,alargegarmentmanufacturer
that supplies cheap clothes to the domestic market can easily kill local small-scale garment
manufacturers. Large foreign banks are known to “crowd out” local banks and due to
automation reduce labour considerably.
2. Holding back local skills development and reducing entrepreneurial growth. If an
investment application demands the use of many expatriate managers and professionals.
whoseskillsaredomesticallyavailable,thiscouldberegardedasholdingbacklocalskills
development.Similarly,ifFDIinvestorsprefertouseforeignsuppliers,thiscanbetaken
asreducingentrepreneurialdevelopment.Inthefnancialsector,excessiveautomationby
both foreign and local banks has resulted in to reduced employment and lost opportunities
for further learning. In situations where investors cut off an existing domestic supply chain
duetosourcingabroad(e.g.TBLimportofbarleyfromSouthAfrica),thisactioncouldbe
result in killing local entrepreneurial linkages.
49 Report on the Study of Growth and Impact of Investment in Tanzania
3. Environmental Damage. Some investments may have negative effects on the environment
althoughtheprojectmaybefnanciallyproftable.Atypicalexampleisthepollutionofair
or water by industrial plants. The discharge is a by-product of the industrial process that
resultsinnetdisbeneftstothesurroundingpopulation.ForsuchprojectsanEnvironmental
ImpactAssessment (EIA) is mandatory. However, forTIC purposes, it is a good idea to
include environmental concerns as one of the measures for investment evaluation.
4. Social costs related to systemic risk. Sometimes an economy can be exposed to
signifcantinstabilityduepartlytostructuralandinstitutionalweaknessesoftheeconomy.
Forexample,theentryofforeignfnancialinstitutionsmightunderminetheabilityofthe
Bank of Tanzania to exercise control over international capital movements into and out of
the country – despite the existence of good regulations.
4.4 CalculatingtheSocialCost-BeneftMeasures(ModusOperandi)
The inclusion of social beneft-cost analysis in investment evaluation is implemented using
UNIDO’s software. The Computer Model for Feasibility Analysis and Reporting (COMFAR)
developed by UNIDO is a computational tool for the analysis of investment projects. TIC has in-
housecompetenceandaccesstothissoftware.UNIDOdonatedtoTICfvecomputersthathave
been installed with COMFAR. TIC staffs have also received training on the COMFAR programme.
Data for inputting onto the software is derived from the investor’s application as mandated by the
1997 Investment Act and any additional information TIC might request from the investor.
Inanutshell,COMFARcomputationalanalysisforsocialbeneft-costanalysisworksasfollows:
The model assumes tht it is desirable to assess and evaluate the impact of national ♦
development projects.
Projectinputsandoutputsarevaluedatshadowpricesthatrefecttheirtruevaluetothe ♦
nationaleconomy.(Shadowpricesindicatethevalueofgoodsandservicesassumingno
marketdistortions).
Directeffectsontheeconomy(involvingimports,exports,employment,foreignexchange, ♦
supply and demand, environment and ecological conditions, etc), as well as indirect
effects (affecting the performance in other sectors, through reduced under utilisation of
installed capacities, new investment initiatives, disbenefts associated with skills and
entrepreneurship,etc.),areincludedintheanalysiswheresignifcant.Theeffectsmaybe
economicbeneftsorcosts,bothtangibleandintangible.
Accounts for social time preferences. (Social time preference refects the weight that ♦
societyattachestothefutureasopposedtopresentconsumption.Forthesocialbeneft-
cost analysis, time preferences are expressed by the social discount rate, which differs
50 The United Republic of Tanzania - Tanzania Investment Centre
fromtheindividualdiscountrateappliedinprivatebeneft-costanalysis).
Parties that require more details on the COMFAR computational tool should refer to: UNIDO,
“COMFAR 111 Expert Reference Manual,”Vienna,1997.
4.5 Post Investment Measures
Post investment measures have three objectives. First, to ascertain whether the approved
investors are doing what the application said they would do. Second, to provide feedback on
fulflling investment goals and aspirations.Third, to provide opportunity for closer co-operation
between TIC and investors in resolving problems and fostering greater impact of investments.
This section outlines statutory and non-statutory post investment measures.
4.5.1 Statutory Measures
The post investment statutory requirements are stated in the Tanzania Investment Act of 1997.
These are:
A holder of an investment certifcate is required to inform TIC in writing of the date ♦
of commencement of investment. TIC is expected to verify the commencement of
operations.
If a holder of investment certifcate ceases to operate, the investor has to notify TIC in ♦
writing.
AholderofaninvestmentcertifcateisrequiredtoinformTICwhen: ♦
Apersonotherthanthepersontowhomthecertifcatewasissuedhassucceededto -
the investment;
The name or description of the business or enterprise is changed; or -
There is an enlargement of or substantial variation in the investment. -
TICisexpectedtoverifyaboveinformationandifsatisfedamendthecertifcate.
4.5.2 Other Follow-up Measures
Arms-lengthtrackingofapprovedinvestmentsisconsideredvaluable,bothasawayofknowing
progress and creating a more friendly business environment. TIC is resolute in its efforts to
establish close client relationship with all investors, and to build strong linkages with all other
public and private parties involved in the investment process. The measures most useful in
tracking post investment are as follows:
Annual progress reports. A simple investor tracking system (ITS) should be developed 1.
to monitor progress. The tracking system could provide minimum information such as:
Number of employees disaggregated by gender and local/foreign; production; exports/
imports; investment; taxes/royalties paid to government. All investors could complete the
51 Report on the Study of Growth and Impact of Investment in Tanzania
simple ITS and e-mail or fax it to TIC.
Monitoring performance of commercial courts to ensure fair play for all businesses, 2.
domestic and foreign. This is an important investor support by TIC to ensure prompt and
amicableresolutionofinvestmentconficts.
Organising and participating in investment forums. The forums are expected to provide 3.
opportunityforTICtolearnfrominvestorsuccessesandproblems.Inaddition,participation
in investment forums within the country and outside is important in promoting investment
and facilitating investor access to important information concerning Tanzania’s unique
investment opportunities.
Facilitationofsmallandmediumenterprise(SMEs).Theaimistostimulateandfacilitate 4.
development of entrepreneurship skills and growth of domestic investors, especially
SMEs.EstablishmentofTICzonaloffcesinMwanzaandMbeyatocomplementthatin
Moshi is an important step in this direction. TIC is also keen to work closely with the Better
Regulation Unit and Local GovernmentAuthorities to advocate for the removal of legal,
regulatory and administrative barriers that face local investors.
Follow-up of investors. TIC needs to know if the investments being undertaken in the 5.
country are becoming benefcial to the investors and the nation as a whole. Through
follow-up TIC can also learn if the investments being implemented are in accordance with
investors’ original plans as channelled through TIC. To date investor follow-up by TIC has
been inadequate. It is urged that TIC develop mechanisms for undertaking investor follow-
up and further streamline current procedures.
4.6 Recommendations for Addressing the Key Remaining Constraints
To date, TIC has made commendable progress in investment promotion and facilitation. The
achievements so far have been acknowledged worldwide and over 96 percent of the surveyed
frmsrevealedthatTICisresoluteinitscommitmenttoturnTanzaniaintoapremierinvestment
destination. The task ahead, however, is formidable. The investment climate must undergo
furtherimprovements–muchbeyondTIC’sovertcontrolanddirection.Nonetheless,thefollowing
recommendations may be considered by TIC as a way forward.
4.6.1 Becoming more Pro-active in Promoting Local Investments
TIC is urged to make more efforts at promoting domestic investment at all levels, particularly
Small and Medium Enterprises (SMEs). TIC initiative to establish Zonal Offces in Moshi,
Mwanza and Mbeya to stimulate domestic investment and entrepreneurship development is to
becommended.Inthisregard,TICisurgedtodevelopplansandstrategiesforsupportingSMEs.
Thestrategiescouldincludesensitisationseminars,entrepreneurshiptraining,andfacilitationof
SMEstosecure.TICcouldfacilitateestablishmentofSMEs“seed”fund.Inaddition,TICcould
actasmatchmakerinfacilitatingtechnologyandjointventurepartnershipswithforeignfrms.To
52 The United Republic of Tanzania - Tanzania Investment Centre
accomplishthesenobletasks,TIChastoworkcloselywithotherstakeholdersintheprivatesector
and government departments. Since SMEs are plugged with insuffcient supportive business
environment, TIC has to work closely with the Better Regulation Unit and Local Government
Authoritiestoensuretheremovaloflegal,regulatoryandadministrativebarriersthatconstrain
local business establishment and operation.
4.6.2 Further Promotion of Foreign Investments
Tanzania,likemostAfricancountries,suffersfromnegativeimageportrayedoverdecades.This
makes the marketing ofTanzania as an attractive investment destination extremely important,
albeitdiffculttask.Thus,asawayforward,TIChastocontinuetoimprovethefunctioningofits
“one-stop shop” for investment promotion and facilitation. Investors are generally attracted to
countries where the regulatory and administrative requirements are not a hustle. Image building
will require relentless networking efforts.Inparticular,networkingwithInternationalinvestment
consultants,participatinginInternationalinvestorsRoundTableWorkingGroups(IRT),funding
investment missions abroad, using local and international media, through seminars and
conferences,moreactiveuseoftheTICandNationalWebsites,andinvestmentpublicationsof
all sorts. All these efforts should sell Tanzania as a premier investment destination and insulate
the country from earlier negative perceptions.
4.6.3 Taking Advantage of Bilateral Investment Treaties
BilateralInvestmentTreaties(BITs)contributetotheestablishmentofafavourableinvestment
climate between countries by providing assurances and guarantees to investors. Currently over
158nationsaresignatoriestoalmost1,900treaties.TICisurgedtopursuethisoptionbecause
BITs play an important role in attracting investors’ attention to a country as well as building the
necessary confdence that Tanzania is indeed an investment destination of choice. However,
necessary precautions must be taken prior to signing any BIT treaty to ensure all provisions of
suchanagreementarebenefcialtothecountry.
4.6.4 Improving Prospects for Technology Transfer
The survey conducted for this study showed that technology transfer is taking place, albeit
slowly. The next steps might be for TIC in collaboration with key stakeholders such as Tanzania
Commission for Science and Technology to develop guidelines for technology policy. In
particular, TIC might make provision for attracting foreign investors that have high technology
in sectors important for Tanzania’s development – especially in agriculture, biotechnology
and agricultural processing industries. TIC could also assist in speeding up the establishment
of industrial parks with high quality infrastructure to attract high technology investors. These
industrial parks could be developed by private investors under appropriate support – especially
in acquiring land and other infrastructure.
Equally important is the urgent need for improving domestic human resources through training.
53 Report on the Study of Growth and Impact of Investment in Tanzania
TIC might work with relevant government authorities to place a training requirement on investors
toraisethequalityofthelabourforcewithinthefrmorprovideresourcesfortrainingoutsidethe
frm.AnotherapproachwouldbeforTICtocontinueimprovingitseffortsincollecting,organising
anddisseminatinginformationabouttechnicalissues,researchfndings,Tanzania’scomparative
advantages and training facilities that can be used as springboards for technological transfer.
Last,butnotleast,TICcouldfacilitateimprovementoftechnologyaccessforlocalenterprises,
by providing information on foreign and local sources of technology.
4.6.5 Improving the linkages between SMEs and existing investors.
Forginglinkagesbetweentheexisting(largescale)investmentswithSMEsisimportantforthe
development of the latter but also in enhancing competitiveness of the former by cutting down costs
ofimportingifsupplycanbesourcedlocallyatsimilarstandards.Inthisway,furtherdevelopment
of SMEs to become seedbed for industrialisation can become effective. The ensuing question
is how that linkage can be forged on. TIC can play a role by encouraging existing investors to
contract out some of their supplies to SMEs. The existing investors can also undertake training
of SMEs so as to improve the quality of their supplies to meet the required investor standards.
Additionally, the Government could institute an investor-friendly policy that would encourage
and forge such linkages especially through the design of investment incentives. The role of the
government in forging these linkages is extremely important not only because of the perceived
economy-wideanddynamicbeneftstothenation,butalsobecausetheexistingleveloflinkages
betweenvariouskeysectorsoftheeconomyistoolow(seeKwekaet al,2003)tobelefttothe
market forces.
4.6.6 Facilitating the Creation of Employment
The survey conducted for this study showed that both local and foreign investors were having
signifcant impact on employment creation. Further efforts are now needed byTIC to facilitate
even higher levels of employment creation. In particular, the following approaches could be
useful:
Targeting employment-intensive FDI through proactive market-friendly policies or selective 
intervention. In this regard, TIC can work with other government departments to attract
FDI:
Inindustriesthatarelabourintensive(e.g.garments), -
In industries that have strong linkages to the local economy (e.g. Agro-processing -
industries),and
In particular regions with high unemployment or under employment. -
WorkingcloselywithNDC,EPZandotherstakeholderstofacilitatethecreationofindustrial 
parks and export processing zones as a way of increasing employment.
54 The United Republic of Tanzania - Tanzania Investment Centre
Providinginvestmentincentiveslinkedtothenumberofjobscreatedbythefrm. 
4.6.7 Protecting the Environment
The survey conducted for this study showed that investors were concerned with environmental
protection and most of them conducted environmental impact assessment prior to commencement
of activities. TIC is encouraged to follow-up implementation of environmentally friendly investments
byensuringthatregulationsandstandardsarebeingupheld.Further,TICcanemploythefollowing
strategies with regard to environmental protection:
Conductingpre-establishmentscreeningofinvestmentonenvironmentalgrounds, 
Requiring all local and foreign investors to provide their corporate environmental policy 
statementsandrecordswhenmakinganinvestmentapplication,
Requiringallinvestors,localandforeigntoconductanEnvironmentalImpactAssessment, 
Introducing or reforming existing policies to ensure that regulatory and market incentives 
encourageenvironmentallysoundproductionandconsumption,
Grantingaccelerateddepreciationforcleantechnologycapitalgoods,and 
Encouraging investments in industries that involve improvements to the environment such 
aswaste-to-energyplants,andconstructionofsanitarylandflls.
4.6.8 Facilitating and Servicing Existing Investors
Over64percentofthesurveyedfrmsindicatedmaintainingalinkwithTICafterbecomingfully
operational.TICcontinuedtoofferafter-investmentservices,especiallyinareasofinvestment
disputes and acquisition of foreign experts. TIC is encouraged to continue facilitatiing and
servicingbusinessesthatarealreadyestablishedandoperational.Further,TICisurgedtofoster
closerclientrelationshipswithallinvestors,andbuildstronglinkageswithallpublicandprivate
stakeholders involved in the investment process.The use of the recently developed Workfow
Management System should be valuable in monitoring investment development and proactively
responding to investor’s problems and inquiries.
4.6.9 Undertaking more regular follow-up of investors
Asnotedearlier,theimperativeofconductingregularpost-approvalfollow-upofinvestorscannot
be overemphasised. Such follow up will also act as a deterrent to unscrupulous investors who
aimtoabusetheincentivescheme.Inaddition,thefollowupwillalsohelptounderstandwhether
theinvestmentsbeingundertakeninthecountryarebecomingbenefcialtothenationasawhole
and are in accordance with the objectives of TIC.
55 Report on the Study of Growth and Impact of Investment in Tanzania
5.0 invesTmenT impaCT analysis
Tanzania has made progress towards facilitating and promoting domestic and foreign investment.
Asaresult,thecountryisnowmorereceptivetonewideasandbetterwaysofdoingbusiness.
Newfacilitiesarebeingbuiltandtheinfrastructurethatsupportsproftableinvestmentisimproving.
Investments are creating jobs and opportunities for people to apply their talents and improve their
situations.Availabilityofgoodsandservicesisimprovingbothinurbanandruralareas,impacting
heavily on poverty reduction. Investments are also becoming the main source of tax revenue,
contributing to public spending for health, education, water and other services. Thus, overall,
investments being undertaken in Tanzania are laying solid foundation for economic growth and
prosperity that should translate into poverty reduction over time.
This chapter reviews the impact of investment to date. It is observed that progress is being
madeinraisinggrowth,improvingthecountry’sbalanceofpayments,increasingemployment,
technologyandentrepreneurialgrowth.However,theroadtosustainedhigherlevelsofimpactis
long,requiringhigherlevelsofinvestmentinfows,pushingFDIanddomesticinvestmenttonew
frontiers,especiallyintheagricultureandsmallandmediumenterprisesectors,andincreasing
thescaleandscopeofthebeneftsderivedfromtheinvestments.
5.1 Impact on Economic Growth
One measure of the impact of investment is its effect on economic growth. Experience shows
thatthereisastronglinkbetweeninvestmentandeconomicgrowth.Inparticular,inthelongrun,
economic growth is highly linked with investment in new capital and increases in productivity
that is associated with investment in new technology, research and development (R&D) and
training.
What has beenTanzania’s experience?As discussed elsewhere in this report (Chapter 1 and
2),Tanzania’seffortstoincreaseforeignanddomesticinvestmentbeganinmid1980s,andfor
FDI-typeinvestmentlargelyaftertheestablishmentofTICin1997(thatisabout8yearsago).
Theperiodtodateistooshorttomakeadefnitiveassessmentoftheimpactofinvestmenton
economicgrowth.First,thepayoffofsomeinvestmentsmaytakeseveralyearstooccurdueto
thenatureoftheinvestment(e.g.miningactivitythatmayinvolveyearsofexplorations).Second,
economic growth is an outcome of various factors other than investment; hence disentangling its
separateeffectisnotstraightforwardandmayrequireanempiricalstudy.Third,notallsectors
receiving FDI are directly growth enhancing. Some FDI recipient sectors such as mining have
very low employment generation capacity and also poor linkages with the rest of the economy.
Thesocalled“boomingsectors”inTanzania,andwhichhavesubsequentlyreceivedsubstantial
FDI, particularly Mining and Tourism, have mostly been criticized for massive capital drain –
which exacerbate their (except for tourism) low level of linkage with the domestic economy.
Finally,theneteffectofFDIongrowthalsodependsonthewaytheyimpactonexistingDomestic
56 The United Republic of Tanzania - Tanzania Investment Centre
investment. Some FDIs have resulted into undue competitive pressure on domestic investors,
suchthatforthosethatcouldnotcopeexited.Inaddition,asmanyoftheFDIwereactualised
throughsaleoftheformerStateownedEnterprises(SoE),someFDIhasledtonetjoblosses–
thatisthenumberofjobslostishigherthanthenumberofjobscreated(seedetaileddiscussion
ontheemploymentimpactofFDIandPrivatisation,alsoseeMkenda,2005).
However,itisworthnotingthattheratioofFDIfowstocapitalformationrosesteadily,reaching
an average of 14 percent between 1996-2004, and increased further to 17.6 percent between
2000-2004period.AssumingthatallFDIis“GDPinvestment”(whichisnotnecessarilythecase),
andeverydollarofinvestmentcontributesequallytoGDPgrowth,outof4.2percentand5.6%
of average annual growth rates in the respective periods, only about 0.6 and 1.0 percentage
pointswouldbeduetoFDIrespectively.Thepointis,thelevelofFDIinfows,despiteimproving
substantiallyinthelastdecade,maybetoolowtohaveasignifcantimpactongrowth.
An interesting fnding as shown by Figure 5.1 is that it is the trend in FDI part of the private
investment that seems to impact on the GDP growth trend rather than the domestic direct
investment(DDI).However,asfurthernotedfromtheFigure,DDIandFDIhaveassociatedwith
GrowthofGDPdifferentlyindifferentperiods,i.e.preandpost2000.Before2000,FDIpositively
associated with GDP growth – but causal relationship between the two may be blurred so that
it requires a fuller empirical analysis. At the same period, Domestic Investment (DDI) seems
to have been declining as GDP grew – implying a negative relationship but one that can be
explainedpresumablybytwofactors.First,increasedFDImighthavehadacrowdingouteffect
on DDI thereby demeaning its growth prospects. Second, the continuation of privatisation of
State-owned enterprises (SoE) substantially decreased the public investment associated with
suchenterprises,someofwhichweredivestedintonewforeignowners(FDI)
1
.Thatis,asthe
paceofreformsthroughprivatisationincreased,morepublicinvestmentsweredivested,anda
more favourable policy environment resulted that attracted further FDI and increased growth of
theeconomy.However,since2000whenmostoftheprivatisation(ofSoE)hadbeencompleted,
association with GDP growth by FDI and DDI swapped; where DDI moved positively with growth
and vice versa for FDI. These trends can be explained not only by the declining level of FDI
infow,butalsotheincreaseintheeffciencyandlevelofprivatesectordevelopment.
1 The share of public in total investment declined drastically from about 70% in 1989 to
20%in1995,butincreasedsincethentoabout40%in2004.
57 Report on the Study of Growth and Impact of Investment in Tanzania
F|gure 5.1: F0|, 00| and Crowth of Rea| C0P
0
2
4
6
8
10
12
14
16
18
20
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

FDÌ/GDP DDÌ/GDP GDP growth rate
Source :Own computation using data from TIC, National Accounts and Economic Surveys (various years)
The conclusion we draw is that investments are having favourable impact on the economy.
The period since Tanzania began to attract high FDI into the country may be too short to make
defnitiveempiricalassessmentoftheimpactofinvestmentoneconomicgrowth.However,itis
usefultoaddresstheissueofinvestmentpayofftoGDPgrowthinbroadercontext;thatis,the
investment policies being implemented in the country are laying solid foundations for attracting
higher levels of foreign and domestic investment that are necessary to spur and sustain higher
growth and poverty reduction in the future.
5.2 Impact on Balance of Payments
5.2.1 Impact on Exports/Imports
Another measure of the impact of investment is its effects on increasing the country’s export
earnings – and thus the capacity to import more goods and services. Experience shows that
FDIplaysabigroleinrevampingacountry’sexports.AffliatesofforeignfrmsinTanzaniaoften
createnewtradefowswiththeirparentcompaniesorforeignsuppliersandalsoexporttothird
countriesorbacktothehomecountry.Similarly,somedomesticinvestorsareengagedinexport-
oriented enterprises.
Overall,Tanzania’sexperiencetodateshowsthattherehasbeensomeimpactonexportsearnings
emanatingfrominvestments.Inrecentyears,Tanzania’stotalexportsearningshaverisentoone
half of imports compared with only a third a decade ago. There is a growing consensus that
exports earnings from domestic and foreign investment is rising rapidly. Table 5.1 and Figure 5.2
provideroughmagnitudesofthecontributionofinvestmentinthecountry’sexportsearnings.(The
58 The United Republic of Tanzania - Tanzania Investment Centre
impactonexporthasbeen‘massive’consideringthefactthat,by2005about50%ofTanzania’s
exportsweregold–aresultofFDIintotheminingsector)
Table 5.1: Tanzania Exports (US $ Million)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
TotalExports(a) 439.3 519.4 682.9 764 753 588.5 543 663 851.4 979.9 1210.7 1473.1 1676.4 1736.0 2006.7
o/w Investment-
related(b)
183.1 182.5 299.4 328 317 232.2 242 371 545.3 697 731 812
b/a (%)
41.7 35.1 43.8 42.9 42.1 39.5 44.6 55.9 37.5 59.4 57.3 55.8
Source: BankofTanzaniaEconomicandOperationsReport(variousyears).
F|gure 5.2: Tanzan|a Exports [U8 $ H||||on}
0
200
400
600
800
1000
1200
1400
1600
U
S

$

M
i
I
I
i
o
n
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Total Exports
o/w Ìnvestment-related

Source: BankofTanzaniaEconomicandOperationsReport(variousyears).
AsTable5.1shows,investmentcontributiontoexportearningshasrisenfromabout37.5percent
in 2001 to about 55.8 percent in 2004. The export earnings from investment have largely come
fromtheminingsector,whichreceivedanaverageof47percentofallinvestmentsbetween1993-
2004.Nexthasbeenthemanufacturingsector,whichreceivedanaverageof16percentofall
investments between 1993-2004. Less than 7 percent of the investments have been channelled
to agriculture – a sector that in the past accounted for over 50 percent of the country’s GDP and
export earnings. The main reasons are: un conducive environment and lack of complementary
public investment to attract domestic and foreign investments into agriculture.
Analysisofsampledfrmsshowsthetrendsintheimport-exportratioispositiveforagricultural
investments,negativeformanufacturingfrmsandmixedformineralfrms.Table5.2andFigure
5.3 illustrate the trends in imports and exports for the agricultural sector.
59 Report on the Study of Growth and Impact of Investment in Tanzania
Table 5.2: Trends in Import-Export Ratio for Selected Agricultural Firms
2
1999 2000 2001 2002 2003 2004
Exports(Tshs,million) 2,778 5,524 5,159 5,732 5,586 7,420
Imports(Tshs,million) 30 40 64 104 195 275
Imports/Export (%) 1.1 0.7 1.2 1.8 3.5 3.7
Source: ESRFSurvey(2004)forTIC(Itisdoubtfulwhetherthiscanbeupdated,unlessthesurveywas
doneagainsometimesrecently)
As Table 5.2 clearly illustrates, there is almost a negligible amount of imports going to the
agricultural sector compared with revenue generated through exports.
The conclusion we make here is that investments undertaken so far have had little impact on
the agricultural sector. This may imply a need to develop more attractive policies, which will
encourage greater investment into agriculture – especially through investment in irrigation
agriculture, introducing modern livestock production systems and importing or manufacturing
agricultural equipment and machinery locally.
F|gure 5.3: Trends |n Exports||mports of 8e|ected Agr|cu|tura| F|rms [1999-2004}
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1999 2000 2001 2002 2003 2004
T
s
h
s
,

m
i
I
I
i
o
n
Exports
Ìmports

Source: ESRF(2004)SurveyforTIC
The trends in export-import ratio for sampled manufacturing frms are shown inTable 5.3 and
Figure 5.4. The picture that emerges in the manufacturing sector is completely different from that
intheagriculturalSector.Exportstoimportsaverage4.5percentandasFigure5.4shows,the
trend has remained almost the same since 1999.
2 SevensampledagriculturalfrmsinMorogoro,Iringa,KilimanjaroandArushaRegions.
60 The United Republic of Tanzania - Tanzania Investment Centre
The conclusion we arrive at is that the trade impact of investment is essentially negative for the
manufacturing sector. This implies, amongst other things that policies have to be reviewed to
encouragemoreexportsofmanufacturedgoods,especiallythosethatTanzaniahasacomparative
advantage like garments and processed agro-products.
Table 5.3: Trends in Export-Import Ratio for Selected Manufacturing Firms
3
1999 2000 2001 2002 2003 2004
Exports(Tshs,million) 29 29 32 38 47 53
Imports(Tshs,million 620 693 705 879 979 1130
Exports/Imports
4.6 4.1 4.5 4.3 4.8 4.7
Source: ESRF(2004)SurveyforTIC
F|gure 5.4: Trends |n Exports||mports for Hanufactur|ng F|rms
0
200
400
600
800
1000
1200
1999 2000 2001 2002 2003 2004
T
s
h
s
,

m
i
I
I
i
o
n
Exports
Ìmports

Source: ESRF(2004)SurveyforTIC
Table5.4illustratesthetrendsinimport-exportratioforselectedminingfrms.Thedatashows
thatinvestmentintheminingsectorisassociatedlowimportsandhighexports.Overall,however,
initial capital imports in the mineral sector are high but over time as the initial high investment
bear fruit exports tend to rise.
The conclusion we draw from the data is that investments in the mineral sector have a high potential
for increasing the country’s export earnings.The mineral exports earning, however, appear to

3 Seven sampled manufacturing frms in Kilimanjaro, Arusha, Mwanza, Morogoro, and
IringaRegions.
61 Report on the Study of Growth and Impact of Investment in Tanzania
be low - in part due to under-declaration of production and smuggling through neighbouring
countries. Further policy improvements are needed to entice investors in the mineral sector to
contributemoretotheexportearningsofthecountry.(IamnotsureifmineralexportsinTanzania
arelow–comparedtoanyothersector–maybe,exportsarelowcomparedtowhatshouldbe
the‘optimal’level–whichhasnotbeenestablishedanyway)
Table 5.4: Trends in Import-Export-Ratio for Selected Mining Firms
4
1999 2000 2001 2002 2003 2004
Exports(Tshs,million) 28,563 44,565 68,340 41,297 35,524 39,680
Imports(Tshs,million) 252 2 9 10 5 7
Import-Export ratio 0.88 0.00 0.01 0.02 0.01 0.02
Source: ESRF(2004)SurveyforTIC
5.2.2 Impact on the Balance of Payments
Another measure of impact is whether the effect of investments is positive or negative on the
country’s balance of payments. It is often argued that if external outfows exceed infows, the
impactonthebalanceofpaymentswillbenegative,andviceversa.
What has been Tanzania’s experience? As discussed in Chapter 2, total FDI into Tanzania
between 1995-2004 reached US$ 2,476.4 million compared with only US$ 2 million between
1986-1991.ThislevelofinfowsofaboutUS$309perannumischangingthestructureofexternal
fnancialfowstoTanzania.Whileduringthesameperiodoffcialdevelopmentassistance(ODA)
declined from an annual average of US$ 876 million between 1990-1994, to US$ 617 million
between 1995-2003, the FDI infows compensated for over half of the decline in ODA. During
theformerperiod(1990-94),proftremittancesonFDI(US$151million)exceededFDIinfows
(US$82million).InsubsequentyearsannualproftremittanceshaveaveragedUS$170million
comparedwithinfowsaveragingUS$309–thusimpactingpositivelyonthecounty’sbalanceof
payments.
Despiteobservationsmadeabove,theimpactisnotconclusive.Thisisbecauseitisnotpossible
tomakedefnitiveconclusionsontheimpactofFDIonthebalanceofpayments.Themainreason
isthatdataonthetransactionsofforeignaffliatesandtheindirectimpactofFDIonconsumers
anddomesticfrms(suchasthosediscussedearlierinthisreport)arenotavailablecountrywide.
However,thecontributionsofforeignaffliatestoexportearningsandhardcurrencyfromtourism
impact positively on the country’s balance of payments.
4 FoursampledminingfrmsinArusha,Mwanza,andMaraRegions.
62 The United Republic of Tanzania - Tanzania Investment Centre
5.3 Investment Impact on Government Revenue
Another measure of impact is the contribution of investments to government revenue. It is
expected that once the incentives provided under the investor’s investment certifcate have
expired,enterprisesbeobligedtopaytaxes.
DatafromTanzaniaRevenueAuthority(TRA)showsthatsincetheremovalof“taxholidays”in
1997(whichwerereplacedbycapitalallowanceincentive),investmentshavebeencontributing
signifcantlytogovernmentrevenue.Table5.5andFigure5.5providesasummaryofincometax
derived from investment-related enterprises.
Table 5.5: Investment-related Income tax
Tshs, Million
1998/99 171,674
1999/00 224,541
2000/01 210,353
2001/02 170,403
2002/03 201,818
2003/04 317,340
Source: TanzaniaRevenueAuthority(variousyears)
F|gure 5.5: |nvestment-re|ated |ncome Tax
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
T
s
h
s
,

m
i
I
I
i
o
n
1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

Source: Based on TRA Income Tax Databank
As Table 5.5 and Figure 5.5 show income tax from TIC –related investments has been fairly
stable,rangingbetweenTshs.170,000milliontoaboutTshs.200,000millionperyearbetween
63 Report on the Study of Growth and Impact of Investment in Tanzania
1998/99and2002/03,risingtooverTshs.300,000millionin2003/04.
Withregardtotheimpactofinvestmentonincometax,theconclusionwearriveatisthatexcept
for2003/04,wheninfationisfactoredis,therehasbeenrelativelylittleincreaseinincometax
revenue since 1999. In the future, however, if the country continues to maintain low infation,
investments should make greater real contribution in the form of income tax.
Table 5.6 and Figure 5.6 provide a summary of investment-related ValueAdded Tax. Overall,
thedatashowsthatrevenuefromthissourcedeclinedbynearly40percentfromTshs232,908
millionin1998/99tojustTshs176,450millionin2003/04.Laxityinrevenuecollectioncoupled
with increased tax exemptions is largely responsible for the decline.
Table 5.6: Investment-related Value-added tax
Tshs. Million
1998/99 232,908
1999/00 240,242
2000/01 210,925
2001/02 115,756
2002/03 145,176
2003/04 176,450
Source: TanzaniaRevenueAuthority(variousyears)
F|gure 5.ô: |nvestment-re|ated Va|ue-added tax revenue
0
50,000
100,000
150,000
200,000
250,000
T
s
h
s
,

m
i
I
I
i
o
n
1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

Source:TanzaniaRevenueAuthority(variousyears)
64 The United Republic of Tanzania - Tanzania Investment Centre
With regard to investment contribution to value-added tax, there has been a decline between
1998/99and2000/01andareboundafter2001/02,althoughpreviouslevelshavenotbeenreached.
Thecurrenttrend,however,isencouragingandhigherimpactisexpectedinthefuture.
Another important source of government revenue is derived from customs. Tanzania Revenue
Authority estimates that nearly 55 percent of the custom revenue is investment related. Based on
thisestimate,Table5.7andFigure5.7provideanestimateoftheamountoftaxesobtainedfrom
investment-related custom revenue. The data shows that revenue from this source has increased
byover56percentfromTshs.222,803millionin1998/99tooverTshs.516,940millionin2003/04.
Thus,withregardtocustomsrevenue,thedataclearlyshowstherehasbeenpositiveandrising
impact on this source of government budget resources.
Table 5.7: Investment-related revenue from Customs
Tshs, million
1998/99 222,803
1999/00 241,794
2000/01 412,556
2001/02 455,276
2002/03 471,096
2003/04 516,940
Source:TanzaniaRevenueAuthority(variousyears)
F|gure 5.7: Revenue from 6ustoms
0
100,000
200,000
300,000
400,000
500,000
600,000
T
s
h
s
,

m
i
I
I
i
o
n
1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

Source:TanzaniaRevenueAuthority(variousyears)
65 Report on the Study of Growth and Impact of Investment in Tanzania
Therefore,themainconclusionisthatasdomesticandforeigninvestmentincreases,taxrevenue
alsoshowsatendencytorise.However,theprevalenceoftaxexemptionsthroughtheinvestment
“Certifcate of Incentives”, especially with regard to investments in the mining sector, tends to
reduce this impact. The government is encouraged to revisit the current regime of investment
incentives and offer concessions where there is a clear economic and social justifcation and
where potential for abuse can be kept to a minimum.

5.4 Impact of Investment on Savings Level
5.4.1 Introduction
Another measure of impact relates to the role of investment in assisting the country to overcome
its domestic investment gap. The country’s low income and low savings rates have meant
that there are limited resources within the national economy available for investment. Foreign
investmentcanclosethedomesticgapbyprovidingoutsidesourcesoffnancingforinvestment
and economic growth.
Theorypostulatesthatallcapital,whetherforeignorlocal,respondstoincentivesanddisincentives,
to stability and instability in an economy and to other constraints to development. Foreign Direct
Investment(FDI)however,seemstohaveanaddedadvantageoverlocalinvestmentbecause
of several reasons. First, it allows investors to increase their profts while diversifying the risk
oftheirbusinessesoutsidetheircountries.Second,itisusuallyassociatedwiththeuseofnew
skills technology and increase in competition within the recipient country, thus forcing national
investorstoimprovetheirperformancefortheirownsurvival.Third,itisbelievedthatFDIisa
reliable source of capital that is less volatile and non-debt accumulating and can therefore be
expected to complement domestic savings and capital resources to fnance investment where
such resources are limited. Section 5.4.2 provides Tanzania’s experience.
5.4.2 Trends in Government and Private Savings
AsFigure5.8shows,duringtheperiodof1990-94,grossnationalsavingswasessentiallynegative.
This negative saving was associated with the worsening of the recurrent budget position and
cutbacks in donor assistance to the country. National savings turned around beginning in 1996
toabout5percentofGDP,partlybecauseofincreaseddomesticprivatesavingssince1993and
achievement of positive government savings starting in 1997.
66 The United Republic of Tanzania - Tanzania Investment Centre
F|gure 5.8: Tanzan|a 8av|ngs, 1990-2003 [Percentage of C0P}
-6
-4
-Z
0
Z
4
6
8
10
1Z
14
16
1990 1991 199Z 1993 1994 1995 1996 1997 1998 1999 Z000 Z001 Z00Z Z003 Z004
Private savings
Govt. savings
National savings

Source: BasedonNationalBureauofStatisticsData(variousyears).
A close review of Figure 5.8 above shows that gross national savings recovered after 1996 to
about12percentofGDPin2004.Sincesavingsperformanceisinfuencedbydomesticpolicyand
non-policyfactorsaswellasforeignfactors,itappearsthatincreasedForeignDirectInvestment
(FDI)infowsduringthisperiodexertedinfuenceonsavings.Inparticular,duringtheperiod1995
–2000,TanzaniareceivedatotalofUS$1billion(Tshs1,060billion),comparedwithlessthan
US$2million(Tshs2.2billion)during1986-1991.Inaddition,Wuyts(1997)hasshownthatthere
is some correlation between the growth of national savings and investment and high foreign
aidinfows.Duringtheanalysisperiodafter1996,Tanzaniareceivedincreasedaidinfowsfrom
the donor community in part to support the country’s structural adjustment programme. The aid
infows have been pivotal in sustaining Tanzania’s positive real growth for the past decade to
date.
The conclusion we make here is that investments have played a role in reversing the country’s
decliningsavingstrend,especiallyafter1995.However,thesavingslevelisstillinadequateto
foster higher rates of investment and growth. Section 5.4.3 examines what can be done to raise
the savings level.
5.4.3 Improving Savings Mobilisation
Empirical evidence from the past two decades suggests that the best performing developing
countries have had high rates of savings and investment. East Asian countries, which grew
fastest, had rates averaging between 25 and 30 percent. Therefore, for Tanzania to achieve
highgrowthimprovementsinpublicandprivatesavingsmobilisationarenecessary.Inparticular,
itisessentialtoboostprivatesavingsthrougheasieraccesstofnancialinstitutionsandbetter
67 Report on the Study of Growth and Impact of Investment in Tanzania
fnancialintermediation.Thisshouldbeexpectedtoencouragehouseholdstodeterconsumption
infavourofinvestment.Inaddition,fnancialintermediationshouldbeprogressivelydeepened
anddiversifedtodevelopfexiblemoneyandcapitalmarkets.
Equally important is the need to raise public savings by reducing budget defcits, raising tax
revenue and controlling public expenditure. Recent experience shows that Tanzania Revenue
Authorityismakinggoodprogressinraisingrevenue.Whatisneedednowismuchstricterfscal
disciplinetoensurethatspendingrefectsinvestmentanddevelopmentpriorities.
5.5 InvestmentPerformanceandProftability
Anothermeasureofimpactrelatestoperformanceoftheinvestmentsandtheirproftability.In
economicenvironmentswhereinvestmentsperformwellmakeprofts–theprimemotiveformost
investments,someoftheproftscanbeploughedbackintotheinvestmentandsomechannelled
for Research and Development (R&D) – thus improving quality of supply. Additionally, good
performinginvestmentscanregisterintheDaresSalaamStockExchange,invitesharesfrom
thepublic,andifproftablepaydividendstoitsshareholders.
What has been the experience of Tanzania? Most investments in Tanzania perform well compared
with targets established by the frms as attested by the data from a few frms producing beer,
cigarettes,andsoftdrinksandprovidingmobilephoneservices(Table5.8).Investmentsinmobile
phones have performed exceptionally well. Most other investments realise above 80% of their
plannedtargets.Theinvestmentsarenotonlyperformingwell,butarealsoproftableasevident
fromthesampleoffourcompanieswhicharelistedontheDaresSalaamStockExchange(DSE)
(seeTable5.9).EachofthecompaniesshowninTable5.9ismakingprofts,providingdividends
toitsshareholders,increasingmarketcapitalisationandincreasinglycontributingtoGovernment
revenue.
Theconclusionwedrawfromthesewell-performingandproftableinvestmentsisthatTanzania
hascreatedagoodenablingenvironmentforproftableinvestments.Asaconsequence,investors
andthecountryasawholebeneft–notonlyintermsofincreasedfnancialdeepeningofthe
economybutalsoinfosteringfnancialmarketdevelopmentandenhancingeconomicgrowth.
68 The United Republic of Tanzania - Tanzania Investment Centre
Table 5.8: Performance of Large Taxpayers (2003-2004)
5
Item
2003/04 2004/05
Estimate Actual
Performance
(actual % of
estimate)
Estimate Actual
Performance
(actual % of
estimate)
Excise Duty- Local
Beer 49,785 44,587 90 50,538 52,052 103
Cigarettes 31,725 29,886 94 32,923 32,648 99
Soft Drinks 6,243 5,051 81 6,200 6,973 112
Mobile Phone 5,601 6,989 125 1,214 9,731 801
Others 2,799 2,688 96 14,177 4,261 30
Sub-Total 96,152 89,201 93 105,052 105,666 101
VAT-Local
Beer 28,347 26,763 94 34,669 32,978 95
Cigarettes 15,706 12,554 80 17,937 15,298 85
Soft Drinks 3,021 3,035 100 - 3,134 100
Others 74,707 73,628 99 135,456 115,731 85
Stamp duty 407 522 128 530 1,297 245
Sub-Total 122,188 116,501 95 188,592 168,437 89
Corporate Taxes 42,317 68,755 162 79,214 106,736 135
PAYE 43,362 50,582 117 106,904 116,230 109
B.Skills & Dev.Levy 12,301 16,266 132 20,745 19,136 92
Gaming Tax 248 187 75 248 268 108
Rental Tax 3,728 4,502 121 5,659 2,998 53
Other With/ng Taxes 24,580 24,645 100 36,123 23,961 66
Sub-Total 126,537 164,936 130 248,894 269,328 108
GRAND TOTAL 344,877 370,637 107 542,538 543,431 100
Less Transfers to refunds A/C
6,785 5,255 77 5,758 6,309 110
Net collection 338,092 365,382 108 536,781 537,123 100
Source:TanzaniaRevenueAuthority(TRA)
5 LargetaxpayersincludeinvestmentssuchasBreweries(beer),TanzaniaCigarettes
Company,etc.Thedataabovearefor188largetaxpayersasatApril2005.Recentlythe
Government has increased the number to 278.
69 Report on the Study of Growth and Impact of Investment in Tanzania
Table5.9:Proftabilityofsomeinvestments(2002-2004)
Indicator
2002 2003 2004
TBL
2
TCC
3
SIMBA
4
DAHACO
5
TBL TCC SIMBA DAHACO TBL TCC SIMBA DAHACO
Pre-taxproft
(Tshs,billion)
34.2 22.1 7.6 1.9 47.6 24.7 9.9 3.3 57.5 25.6 5.3 3.2
Dividend paid
(Tshs,billion)
25.8 30.7 3.5 0.8 30.8 21.8 1.3 1.0 36.8 15.6 1.8 2.6
Closing price
(Tshs)
1,400 1,725 450 NA 1,600 1,720 700 570 1,300 1,760 1,100 560
Taxes paid to
Govt.(Tshs,
billion)
69.3 41.2 3.0 0.7 88.9 44.4 3.5 1.0 97.8 50.5 2.8 1.0
Market
capitalisation
(Tshs,billion)
330 172.5 28.6 NA 472 172 43.9 20.5 395 176 59.8 20.1
Source: DaresSalaamStockExchangeStatistics;TanzaniaRevenueAuthority(TRA).
5.6 Impact on Employment Generation
5.6.1 Introduction
An important measure of the impact of investment is job creation. Investment plays a key role in
expanding jobs and offering opportunities for young people. This is essential not only for raising
incomesandreducingpoverty,butalsomoreimportantlyforcreatingamoreinclusive,balanced
and peaceful country.
What has been Tanzania’s experience? The assessment conducted during this study revealed
that in Tanzania the qualitative effects of investment on employment has taken place through
several routes:
Directly by setting up new foreign affliates or expanding existing affliates. A study by ♦
UNIDO(2003)showsthatmostFDIinTanzaniaareofthreecategories–newGreenfeld
(51%), joint venture (35%) and merger or acquisition (14%).The feld study undertaken
for this study shows that Greenfeld-type investments generate the largest impact on
employment.
Indirectlybystimulatingadditionalemploymentinsuppliersanddistributors(dependingon ♦
theintensityoflocallinkages).Forexample,KahamaMiningCorporationestimatesthat
about7,500indirectjobswillbecreatedinShinyangaregionduetoitsminingoperations.
This is in part due to revamped activities supported by the company but not directly related
tominingsuchasitsconstructionof87.5kilometreroad,buildingapowerline,construction
70 The United Republic of Tanzania - Tanzania Investment Centre
ofwaterpipeline,strivinglocalinputsuppliers,andthelike.Otherexamplesareoutlined
in Section 4.2.3.
In the medium term, employment can also rise through multiplier effects from the new ♦
income generated by FDI or local investments or through increased demand stimulated by
improvedeffciencyandrestructuringofcompetingfrms.Thisisparticularlyevidentinthe
liberalisedbankingandfnancialsector–especiallyCRDB,StandardChartered,Stanbic
and Akiba Commercial Bank.
WhereFDItakestheformofmergeroracquisitionasobservedinbulletoneabove,the ♦
investmentcanstillincreaseemploymentbyrestructuringfrmsthatmightotherwisehave
becomesickordysfunctionalsuchasthedivestedparastatals(MWATEX,AmboniSisal
Farms,KilomberoSugarandSaoHill).
The qualitative impacts of FDI on employment are:
Wages : Foreign affliates generally pay higher wages than domestic frms do in similar ♦
activities. The difference is more marked in industries that demand higher levels of
skills, technology and marketing and in export-oriented activities that need to ensure
consistentqualityandtimelydelivery(StandardCharteredBank,Citibank,WonderFoods,
Abercrombie&KentTanzania,etc).
Job security: Foreign affliates tend to offer greater job security because of their size, ♦
competitive strength and need for a stable workforce (SONGAS, KTM, and Aluminium
Africa). However, “footloose” investment attracted by low wages may move to other
countries so jobs may be insecure over the medium term (defunct Trust Bank and
GreenlandBank).
Working conditions: In foreign affliates working conditions are generally better than in ♦
localfrms.Inparticular,largeandvisibleTransnationalNationalCorporations(TNCs)tend
to comply with local and international standards and even with the labour standards in their
homecountries(UnileverTeaTanzania).
Skills: FDI often has to upgrade employee skills by investing in training so as to meet ♦
their quality standards. Sometimes TNCs react to the availability of skills by raising the
technologicalcontentoftheirinvestments,contributingtofurtherlearningandskillcreation.
This subject is discussed further in Section 6.5.
5.6.2 Investment and employment creation
Experience shows that economic growth as measured by real GDP growth per capita is necessary
butnotsuffcientconditionforachievingimprovementsinhumanwell-beingorreducingwidespread
poverty. Investments that lead to employment generation are essential for reducing poverty as
depicted below.
71 Report on the Study of Growth and Impact of Investment in Tanzania

Investment

FDI
Local
Investment


Employment
Creation

Poverty
Reduction
through Income
Growth
Taking the Investments approved by TIC as a unit of analysis, we fnd that if all investments
approvedbytheinvestmentpromotioncentre(foreignandlocal)werecarriedouttocompletion
between1990and2004,over463,703newjobswouldhavebeencreatedintheeconomy.This
is an average of about 33,122 new jobs annually for a period of 14 years (Table 5.10). When
comparedwiththeexistingdemandforformalemployment,thisfgureisnegligible.ThePoverty
andHumanDevelopmentReport(2003)andtheSMEpolicy(2002)reportthatabout700,000
new job seekers enter the labour market annually in search of employment.About 500,000 of
these are school leavers with few employable skills.
Thepublicsectoremploysabout40,000newjobseekersannually.Therestisexpectedtobe
employed by the private sector. This means that projects approved by TIC on the whole can be
expected to generate about 5 percent of the country’s annual employment requirements. This
in essence is an optimistic outlook in part because the actual jobs created by all investments
approved by TIC are lower than the estimated potential out-turn because some approved
investment projects either never started or started but ended up employing fewer personnel than
it had been projected.
Table 5.10: Actual Investment Created Employment by Sector and Categorisation for
Mainland Tanzania (2001-2003)
Sector Gender
Foreigners Sub -Total Tanzanians Sub -Total
Grand
-Total
Management
Non-Management
Management
Non-Management
Skilled Other Total Skilled Other Total
Arusha
Female 46 33 0 79 136 2,177 2,775 5,088 5,167
Male 196 89 6 291 457 3,263 4,058 7,778 8,069
Sub -Total 242 122 6 370 593 5,440 6,833 12,866 13,236
Dar es
Salaam
Female 85 32 4 121 520 3,566 5,109 9,195 9,316
Male 925 524 24 1473 2155 13,611 16,633 32,399 33,872
Sub -Total 1,010 556 28 1594 2,675 17,177 21,742 41,594 43,188
Iringa
Female 2 0 0 2 29 125 3,966 4,120 4,122
Male 16 1 0 17 160 714 5,023 5,897 5,914
Sub -Total 18 1 0 19 189 839 8,989 10,017 10,036
72 The United Republic of Tanzania - Tanzania Investment Centre
Sector Gender
Foreigners Sub -Total Tanzanians Sub -Total
Grand
-Total
Management
Non-Management
Management
Non-Management
Skilled Other Total Skilled Other Total
Kagera
Female 0 0 0 0 6 35 35 76 76
Male 7 2 0 9 50 96 104 250 259
Sub -Total 7 2 0 9 56 131 139 326 335
Kigoma
Female 0 0 0 0 0 8 6 14 14
Male 1 0 0 1 5 123 25 153 154
Sub -Total 1 0 0 1 5 131 31 167 168
K i l i m a -
njaro
Female 27 1 0 28 36 1,131 760 1,927 1,955
Male 61 3 0 64 175 2,199 2,191 4,565 4,629
Sub -Total 88 4 0 92 211 3,330 2,951 6,492 6,584
Mara
Female 0 0 0 0 8 80 124 212 212
Male 24 20 2 46 41 267 489 797 843
Sub -Total 24 20 2 46 49 347 613 1,009 1,055
Mbeya
Female 0 0 0 0 4 184 316 504 504
Male 14 2 0 16 77 528 642 1,247 1,263
Sub -Total 14 2 0 16 81 712 958 1,751 1,767
Morogoro
Female 2 0 0 2 22 230 401 653 655
Male 48 13 4 65 206 1,170 3,435 4,811 4,876
Sub -Total 50 13 4 67 228 1,400 3,836 5,464 5,531
Mwanza
Female 9 0 0 9 111 673 549 1,333 1,342
Male 104 95 2 201 391 1,955 2,371 4,717 4,918
Sub -Total 113 95 2 210 502 2,628 2,920 6,050 6,260
Pwani
Female 4 0 0 4 9 76 45 130 134
Male 15 0 0 15 12 152 61 225 240
Sub -Total 19 0 0 19 21 228 106 355 374
Ruvuma
Female 0 0 0 0 1 16 35 52 52
Male 1 0 0 1 8 54 36 98 99
Sub -Total 1 0 0 1 9 70 71 150 151
73 Report on the Study of Growth and Impact of Investment in Tanzania
Sector Gender
Foreigners Sub -Total Tanzanians Sub -Total
Grand
-Total
Management
Non-Management
Management
Non-Management
Skilled Other Total Skilled Other Total
Shinyanga
Female 6 0 0 6 14 159 180 353 359
Male 201 1 0 202 112 1,199 495 1,806 2,008
Sub -Total 207 1 0 208 126 1,358 675 2,159 2,367
Tanga
Female 3 0 0 3 9 145 1,895 2,049 2,052
Male 44 9 0 53 158 1,422 3,674 5,254 5,307
Sub -Total 47 9 0 56 167 1,567 5,569 7,303 7,359
Total 1,841 825 42 2708 4,912 35,358 55,433 95,703 98,411
Source: Tanzania Investment Centre
One explanation for the low contribution to employment generation is that major investment
projects in Tanzania have favoured capital-intensive techniques, especially in the mining,
construction and banking sectors. Figure 5.9 illustrates employment generation by industrial
categoryfortheperiodof2001-2003.Thedatashowsthatminingandfnancewiththehighest
capital intensity have the lowest employment generation – about 1 percent each. Agriculture
andfshinghavethehighestemploymenteffectalthoughlessthan7percentofallinvestments
have gone to these sectors. Field assessment conducted for this study provides data to support
this assertion. Actual direct employment in mineral related investments were as follows: Mobela
Gems(7),SarajevoMining(140),PapaKingS.MollelMining(150),GemsandRockVentures
(130), TanzaniteAfrica (250), TANCAN Mining (81), Major Drilling (13), and Meremeta Mining
(230). In contrast, agricultural related investments provided a greater number of employment
opportunities: Unilever Tea Tanzania (5,330), Kilombero Sugar (4,377), Tchibo Estate (1,550),
DIMONMorogoroTobacco(780),APCLyamungoCoffee(400)andSAOHill(360).Onaverage,
manufacturing and services sectors were next from agriculture in terms of employment generation:
Sunfag(2,100),NyanzaBottling(442),ImpalaHotel(192),Interchempharmacy(171),Sunkist
(167),MorogoroPlastics(98),andPrintcare(23).
Table5.11showstrendsintotalemploymentforsampledfrmsemployingover100workers.
74 The United Republic of Tanzania - Tanzania Investment Centre
F|gure 5.9: Actua| emp|oyment of T|6 approved fore|gn aff|||ates |n Tanzan|a, by |ndustry, 2001-2004

Agricult ure and Iishing
Ot her manuIact uring
Food and beverages
Ot her Services
Text iles
Transport and Communicat ions
Hot els and rest aurant s
Const ruct ion
Mining
Finance
Source: Based on Tanzania Investment Centre Data Bank.
Table 5.11: Trends in Total Actual Employment of Selected Firms
Firm 1999 2000 2001 2002 2003 Average
% change
from 1999
UTT M 25 35 36 37 48 36 44.8
F 5,875 4,465 5,564 5,616 4,933 5,291 (9.9)
Foreign 2 2 2 2 2 2 -
ST M 600 640 790 855 1,154 808 34.6
F 1,100 1,210 1,210 1,245 1,246 1,202 9.3
Foreign 30 35 40 45 50 40 33.3
DIMON M 37 67 68 68 69 62 67.0
F 443 403 772 542 821 596 34.6
Foreign 5 5 5 5 5 5 -
NBC M 582 570 484 444 427 501 (13.8)
F 12 12 10 10 9 11 (11.7)
Foreign 18 18 16 16 15 17 (7.8)
TE M - 70 100 350 750 254 262.9
F - 80 150 500 800 306 282.5
Foreign - 3 3 3 3 2 -
75 Report on the Study of Growth and Impact of Investment in Tanzania
Firm 1999 2000 2001 2002 2003 Average
% change
from 1999
SHI M 360 366 270 350 285 326 (9.4)
F 52 54 46 58 47 51 (1.2)
Foreign 2 2 2 3 2 2 -
TPM M 225 276 209 112 142 193 (14.3)
F 192 226 184 153 133 178 (7.5)
Foreign 2 2 4 4 2 3 40.0
APC M 40 100 100 100 200 108 170.0
F 60 100 150 150 100 112 86.7
Foreign 1 1 1 1 1 1 -
PKM M 130 120 140 100 150 128 (1.5)
F - - - - - -
Foreign - - - - - -
TATEPA M 45 55 65 90 104 72 59.6
F 55 65 70 85 96 74 34.9
Foreign 2 2 2 3 3 2 -
Source:ESRF(2004)SurveyforTIC
UTT = Unilever Tea Tanzania Ltd.
ST=SunfagTanzaniaLtd
DIMON = DIMON Morogoro Tobacco Processors Ltd
NBC = Nyanza Bottling Company
TE = Tchibo Coffee Estate
SHI = Sao Hill Industries Ltd.
TPM = TPM(1998) Ltd
APC = APC Lyamungo Coffee Estate
PKM = Papa King S. Mollel
Overall,asTable5.11illustrates,thetrendintotalactualemploymentduringthepastfveyearshas
beenpositive.However,therearemarkedinter-yearvariationsandgenderspecifcemployment
trends.Forexample,UnileverTeaTanzaniareducedfemaleemploymentbynearly10percent
(584workers)butincreasedmaleemploymentbyabout45percent(11workers)–signifyinga
large net reduction in employment. Similarly, TPM (1998) reduced male employment by 14.3
percent(32workers)andby7.5percentforfemales(14workers).However,formostotherfrms,
overall total employment shows an upward trend.AsTable 5.11 illustrates, foreign employees
form an insignifcant number (typically less than 5 in most frms) within the total employment
framework.However,theforeignemployeesplayacriticalroleintraininglocalstaff,management
and technological operation of the enterprises.
76 The United Republic of Tanzania - Tanzania Investment Centre
The conclusion we make from the analysis above is that although jobs being created through
investmentsarefewerthannationalrequirements,thesituationwouldhavebeenworsewithout
these investments. Continuing to entice more investments through making further improvements
in the investment climate, undertaking more active promotion and facilitation and providing
specifcincentivesforluringinvestmentsinagricultureandindustryshouldcreatemorejobsin
the economy.
5.6.3 Employment Impacts through Linkages with the Rest of the Economy
Another measure of impact is fostering linkages with the rest of the economy. These linkages
are important because apart from creating jobs also help in the growth of small and medium
enterprises(SMEs).
Tanzania’sexperienceshowsthatthereareinvestmentsthatappeartocreatejobs,bothdirectly
and indirectly, through forward and backward linkages to the economy. For example, Kahama
Mining Corporation employs high-tech mining techniques but during construction it employed over
2,000people.Currentlythemineemploys900localpersonneland200expatriates.Inaddition,
the mine provides indirect employment to over 600 people as contractors for various services.
Other job-related activities include efforts by the company to improve community roads, water
systems,electricityandthrivingsmallbusinessessurroundingthemine.
AnotherexampleistheUS$2.6millioninvestmentbyAEFHorticultureFarms&ExportLtd.in
Arusha.Thiscompany,whichgrowsfowersforexport,employsover200peoplebutthrough
traininganddemonstrationeffectstothelocalcommunity,over230farmersarenowundertaking
thefowerbusiness.
Otherfeldexamplesofemploymentcreationthroughinputsupplylinkagesare:760directand
1,400indirectemployeeswhosupplytobaccotoDIMONMorogoroTobaccoProcessors85direct
and 2,500 indirect employees who grow and supply pyrethrum fowers toTanzania Pyrethrum
Company 360 direct and 800 indirect employees who support Sao Hill on a temporary employment
basis its tree plantations. 5,330 direct and 1,500 indirect employees who supply tealeaves to
UnileverTeaTanzania,and192direct,and87indirectemployeeswhosupplyvariousinputssuch
as meat and fruits vegetables to Impala Hotel.
The conclusion we make is that the question of promoting linkages in the economy is gaining
momentum.Inthecaseofmining,forinstance,ithasbeenpointedoutthattheTanzanianbusiness
communityandgovernmentoffcialshaveexpressedthewishtoimprovethemanagementofthe
linkagesbetweenlargeandsmallscaleminerswithaviewtogeneratingmorejobs,transferring
technology and realising balanced sustainable growth. The Mining Trust Fund could have been
usedtothebeneftofsmall-scalemining.
77 Report on the Study of Growth and Impact of Investment in Tanzania
Analysing and promoting supply chains is one way of maximising value addition, employment
andtechnologytransfer.Forinstance,theminingsectorcanbeinducedtoforgelinkageswith
themanufacturingsectorwithaviewtoenhancingvalueadditionthroughcuttinglapidary,setting
and creating ornaments. In addition, the mining sector has the potential of developing basic
industries for fabrication of parts used for mining equipment and machinery. Incentives should
be designed to attract investments in linkages and value adding activities.
5.7 Impact on Human Resources Development
5.7.1 Introduction
Another measure of impact is the effect of investments on fostering skills development. Skill
inadequacies and shortages have been for a long time a development challenge of the country
(ESRF,2002;UNCTAD,2001;WorldBank,2001;Wangwe,1995).Althoughliteracyrateshave
recordedslightimprovementfromanestimated67percentin1999to82percentin2003,much
remainstobedone(URT,2003).SomeotherstudiesonTanzanianexperiencearelessoptimistic
(URT, 2003) unless more efforts are made to ensure that the education system generates
competencies required in the current labour market and globalisation.
Withskillshortagelimitingproductivitygrowth,FDImaybelookedupon,atleastintheshortand
medium term, as a prime source of human capital development and new technology diffusion
forthecountry.JenkinsandThomas(2002)forinstance,positsthatiftechnical,entrepreneurial
andmanagerialskillsarescarceinacountry,trainingoflocalpersonnelbyforeignsubsidiaries
established in the country could bring about an important diffusion of these skills. These would
only help in multiplying jobs and raising wages but also in encouraging investment in human
capital through the transfer of skills and knowledge to the local workforce. Section 5.7.2 examines
Tanzania’s experience in fostering skills development.
5.7.2 Development of Human Resources
In this section we provide several examples where investments undertaken in Tanzania are
fosteringhumanresourcedevelopment.First,weexaminethebankingsector.Alllocalandforeign
bankshavetrainingprogramstoupgradeskillsoftheirworkforce.Theseinclude:Citibank,Stanbic,
StandardChartered,CRDB,NBC,Barclays,KenyaCommercial,PostalBank,InternationalBank
ofMalaysia,tomentionbutafew.Thestrategyofallthebanksinvolvestrainingin-house,internal
mentoringincludinguseofvisitingpersonnelexpatriates,in-countryandinternationaltrainingto
buildapoolofprofessionalswithinternationalexposure.Somebanks(CRDB,Stanbic,PostalBank)
providefnancialassistance(paysfortuition)andencouragesitsstafftoundertakeprofessional
bankingcoursesonpart-timebasisfromtheTanzaniaInstituteofBankers(TIOB).
Mining is another sector where investments are having valuable impact on human resource
78 The United Republic of Tanzania - Tanzania Investment Centre
development. All large mining companies have training of their staff. These include: Kahama
Mining,Geita,GoldenPride,AfricaMashariki,Mwadui,tomention,butafew.Skillsbeingimparted
relate to geology, mining, electrical and mechanical engineering related to mining operations,
underground mining techniques and safety measures, processing, fnance and management.
Forexample,KahamaMineshasalreadyspentoverUS$6.3milliontoconducton-jobtraining
for its 900 local staff. TANCAN Mining Company spent Tshs. 5 million between 2002 and 2004
to train 43 workers. In 2001 to 2003 Gem & Rock Ventures Company incurred Tshs 1.4 million in
upgrading skills of its professional workers.
ThetransferofskillsandknowledgeisalsoevidentinthemanufacturingSector.Forexample,
WonderFoodsTanzaniaLtd,asubsidiaryofcowbellInternational(UK)hasofferedtrainingtoits
staffinfoodprocessing,blending,packaginganddistribution.Thecompanyconductsin-house
trainingandalsosendsitstechnicalstaffforadvancedtrainingabroad.SunfagTanzania–an
FDIinvestmentthatisoneofthelargestverticallyintegratedtextilemillsinEastAfrica,conducts
in-house and external training for its 2,450 workers. Workforce skills have been upgraded in
theareasofspinning,knittinganddyeing.Thiscompany,whichexportsqualitygarments,yarn,
woven and knitted fabric to the USA, European Union and SouthAfrica, spends overTshs 17
million annually in training of its staff. TPM (1998) Limited, a local company that has been
manufacturing gunny bags since 1998 also trains its staff to upgrade skills. During the past
two years the company spent Tshs 9 million to upgrade skills of its 100 workers. Another local
company,DabagaVegetablesandFoodCanningCompanyalsotrainsits18employeesatan
annual cost of Tshs 3.5 million to upgrade skills and improve the quality of its products. The
Company has 3 expatriates that provides regular in-house training to its staff.
In agricultural-related investments both local and foreign investors also provide training and
skills development to employees. For example, DIMON – an FDI that has been processing
tobacco for the export market since 1997 has incurred Tshs 20 million to upgrade the skills
of its 30 professional workers. An additional Tshs 60 million has been spent to train 200 semi-
skilled workers in order to raise their productivity. Tanzania Pyrethrum Processing and Marketing
Company – an FDI that started operations inTanzania in 1998, also trains its staff to improve
thequalityofitsthreeproducts:pyrethrumcrudeextract,pyrethrumpowder,andpyrethrumdry
marc. The company has spent Tshs 37 million to upgrade skills of its 60 professional staff and
an additional Tshs 43 million to upgrade the skills of its semi-skilled and unskilled workers. SAO
Hill, a company that was divested to foreign ownership in 2000, also trains in-house its 360
employees to improve the quality of its timber and pole products. The company has 3 expatriate
staff that conducts the training at about an annual cost of Tshs 25 million. Another example is
UnileverTeaTanzania Ltd, an FDI that produces tea for the domestic and export market.The
companyhas2expatriatefemalestaffthatconductsin-housetrainingforover5,330employees,
ofwhom85percentarewomen.Similarly,TchiboEstate,anFDIthathasbeenproducingcoffee
fortheexportmarketsince2000,providesin-housetraining.In2003,thecompanyincurredTshs
79 Report on the Study of Growth and Impact of Investment in Tanzania
10.5milliontoupgradeskillsof34employees.VasoAgroVentures,ajointventurebetweenlocal
and foreign investors (25:75% share split) has expatriate staffs that offer training to over 100
employees at about Tshs 5 million per year.
Based on the above experiential fndings, the conclusion we draw is that there are no doubts
that human skill development is taking place and being undertaken by both domestic and foreign
investors in Tanzania. Incentives should thus be developed to entice investors to undertake more
human skills development to their employees.
5.8 Impact of Investment on Technology Transfer
5.8.1 Introduction
An important measure of impact is the transfer of technology. Tanzania, like other developing
countries, contributes little to modern science and technology. A study by Mohamed (2000)
show that Less Developing Countries account for only 4 percent of the world’s application and
development of modern science and technology. Tanzania, in recognition of the importance
of science and technology established the “National Science and Technology Policy” in 1986,
whichwaslaterrevisedin1996.Overthepastfourdecades,Tanzaniaestablishedanumberof
institutionsaimedatimprovingthecountry’stechnologicaldevelopment.Themainonesare:i)
Tanzania National Scientifc Research Council (TNSRC) in 1969. ii) Tanzania Commission for
ScienceandTechnology(COSTECH)in1986todetermine“ResearchandDevelopment(R&D)
priorities.iii)CentrefortheDevelopmentandTransferofTechnology(CDTT)formonitoringand
regulatingtechnologicalfows.iv)TanzaniaIndustrialResearchandDevelopmentOrganisation
(TIRDO) in 1979 to monitor services related to technology. v) Small Industrial Development
Organisation(SIDO)toprovidetheinstitutionalsupportincludingmarketingskillinformation.vi)
InstituteofProductionInnovation(IPI)forproduction-relatedinnovations.Alltheseins-titutions
and organisations have played some role in enhancing Tanzania’s technological base although
therearefewtangibleachievementstodate.However,ForeignDirectInvestment(FDI)appears
to have had a greater impact on fostering the country’s technological capacity, although the
country has a long way to go.
FDIisgreatlyaccreditedasasourceofnewtechnologies,knowledgeandinnovationandother
intangibleassetstocapitaldefcientdevelopingcountries.However,asTambunan(2003)points
out,theultimateimpactofinvestmentintheeconomydependsnotonlyontheperformanceof
foreign frms, but also on the diffusion of new technologies, innovations, knowledge, new best
practicesandotherintangibleassetsfromFDItolocalfrmsthroughoutthecountry.Inprinciple
thediffusionofalltheseintangibleassetsshouldleadtoincreasedeffciencyandproductivityper
worker.
Ingeneral,bestpracticesininvestmentcanbetransferredinseveralways,including:
80 The United Republic of Tanzania - Tanzania Investment Centre
Purchaseofexportsfromdevelopedcountries, 
Importationofcapitalgoodsembodyingimprovedtechnology, 
Technologylicensingbydevelopedcountriestofrmsindevelopingcountriesthusallowing 
acquisitionofknowledge,and
Employment of expatriates from developed countries that would transmit knowledge to 
developing countries.
Apart from the above channels, experience shows that FDI remains the most effective mode
of transferring knowledge and best practices to developing countries. This is because FDI
embodiesandintegratestechnologicalelementsfromvariousmethods(Tambunanop cit,Klein
etal2000).Similarly,Borenzsteinetal(1998)inatestoftheeffectofFDIoneconomicgrowth
using cross country regression framework found that FDI is an important vehicle for the transfer
of technology. The results show that FDI contributes relatively more to economic growth than
domestic investment but the result holds only when there is some threshold of stock of human
capital.
Technologytransferanddiffusionbetweenlocalandforeignfrmsworksthroughsubcontracting
arrangementsbetweenforeignandlocalfrms,throughemployersponsoredandotherprofessional
training locally and abroad and through between job movements of experienced personnel. Batra
andTan(2000)inastudyoninterfrmproductionlinkagesandproductivitygrowthinMalaysia
foundthatlocalfrmsthatenteredintosubcontractingarrangementswiththeirforeigncounterparts
becamemoreeffcient.InanearlierstudyBatraandTan(1997)establishedfoundthatfrmsthat
invest in training and upgrading of their employees’ skills and in new technology grow faster
thanthose,whichdonot.Investmentsmadeinskilldevelopmentandtechnologyintheirstudy
explains much of the difference in productivity between local and foreign frms. Foreign frms
turnedouttobemoreeffcientcomparedwiththeirlocalcounterpartsbyvirtueoftheinvestment
undertakeninskilldevelopmentandnewtechnologycomparedwithlocalfrms.
5.8.2 Tanzania’ Experience
In the particular case of Tanzania, technology transfer, both tangible and intangible has been
weak despite many support institutions as discussed above. Before 1990, Tanzania’s efforts
aimed at improving her low technological base was hampered by its almost closed nature of the
socialisteconomy(UNCTAD,2001).Signifcantliberalisationoftheeconomythereaftertriggered
considerable private domestic and foreign investment that has opened doors to acquisition of
modern technology. This section will provide illustrations on lessons learned in new working
stylesandculture,transferoftechnologyandtechnical/managerialskills.
5.8.3 Transferring Business Skills and Working Styles
In the past, customer-focus was virtually absent. Public enterprise workers were oblivious to
81 Report on the Study of Growth and Impact of Investment in Tanzania
customers. Civil servants were no exception. Files went missing without explanation. Long queues
symbolisedpervasiveineffciencies.Thenmid-eightiesthingsbegantochange.Economy-wide
reformsusheredincompetition.InvestorsfromSouthAfrica,Mauritius,Malaysia,Britain,China,
India,tomention,butafewcamein.WalkintoaShoprite(Supermarket),orNandos(Restaurant)
orWoolworth(Clothes),youngwomenandmengreetcustomerswithasmile,flltheirorderswith
dispatch,andsay“thankyou”astheyreceivepayment.Thisbusinessstylehasspreadquicklyto
almost all sectors of the economy. Walk into an Indian or indigenous Tanzanian shop and smiles
greet you – others even offer a soft drink while the customer waits for service. Government
executiveagenciesprovidingpublicservicessuchastheBusinessLicensingAgency(BRELA),
TanzaniaCivilAviationAuthority,tomentionafew,arenowcustomer-focused.Civilservantsare
also emulating these business skills and offering better services. Foreign investment is paving
wayforanewcultureofhardwork,customerfocusandnewwaysofdoingbusinessusingstate-
of-the art technology – based especially on computers and telecommunication linkages.
5.8.4 Examples of Technology Transfer in Selected Sectors
In the mining sector there are a number of examples related to technology transfer. For
example, between 2000 and 2003,Afgem (a SouthAfrican Mining Company) invested about
US$ 20 million in Tanzanite felds in Merelani. The company managed to pioneer a branding
andcertifcationprocessforitsgermqualityTanzaniteproduction.Otherminingcompaniesare
expected to emulate this example by adding value to minerals produced through processing
in-country and branding their products. Another example relates to leasing mining equipment.
DalnickMetalLtdleasesminingequipmenttosmallandmediumscaleminers.Thistechnology,
apart from increasing productivity, it has facilitated the manufacture of spare parts within the
country – thus enhancing technological skills in the mining sector. Mobela Gems Limited provides
another example of technological transfer. The joint venture between local and foreign investors
(50:50%sharesplit)startedoperationsin1999cutting,polishing,shapingandsellinggemstones.
Theforeignpartnershavemanagedtotrainlocalemployeesingemstoneprocessing,andthe
companynowexportsqualitygemstonestoIndia,NorthKorea,USAandThailand.
In the cement business quality has improved through the injection of foreign investment
partnerships. Wazo Hill cement factory has eliminated the dust that in the past polluted the
environment. Tanga Cement invested US$ 12 million for improving operational effciency,
reducing costs and maintaining high and consistent product quality. In addition, the company
hasintroduced“just-in-time”productionsystemsthataremoreeffcient.MbeyaCementhasalso
improved product quality to remain competitive.
Inthemanufacturingsector,SeaungukTradingCompany’sprocessingandfruit-canningplantis
exemplary. The company processes and cans fruit for export and the local market. The company
has transferred fruit production technology to small-scale farmers who now supply fruit of a
uniform size and quality. Similarly there appears to be considerable spill over of tyre retreading
82 The United Republic of Tanzania - Tanzania Investment Centre
activitiesusheredinbyTredcor(T)Ltd.Theproductionofsignboardsandoutdooradvertising
facilities pioneered by Afrigavix Ltd. and Global Outdoor Systems Ltd appear to be emulated by
manyotherlocalproducers.Linlan(T)Ltdhasintroducedproductionofconfectioneries,sweets
and cool drink powder technology in Tanzania that has a high chance of being emulated by others
in this category.
Although less than 7 percent of FDI has gone into agriculture, the investment made so far
appearstoimpactonagriculturaldevelopmentthroughtechnologicaltransfer.Forexample,the
InternationalChemicalProductsLtdthatacquiredMufndiPyrethrumExtractionPlantin1997has
introducednewtechnologyinpyrethrumfowerproductionandfacilitatedtrainingoflocalstaffto
improve quality. Another example is Wonder Foods Tanzania Ltd. The company established a
new agro-processing plant to pack, market and distribute milk power in the country. In order
to ensure good quality and hygienic conditions, the company has helped local milk producers
acquire the technology for raising high producing milk cows and equipment for hygienic sanitary
storageandtransportation.In1998,thecompanyexpandeditsoperationsintoteaprocessing,
blending, packaging and distribution. Small-scale farmers cultivating tea have benefted from
extensionservicesprovidedbythiscompany.Similarly,Morogorosmall-scalefarmerscultivating
tobaccohavebeneftedfromnewcultivationtechniquesextendedbyGoldenLeafGrowersCo.
Ltdthatgrowsfue-curedtobacco.VasoAgroVentures,ajointventurebetweenlocalandforeign
investors (25:75% share split) started operations in 2003 growing fowers, cutting fowers and
growing fresh beans, largely for the export market. The company conducts seminars to out
growersonvegetableproduction,growingfowersandsimplebookkeepingandaccounting.The
simple technology transferred to outgrowers has enabled the producers to use less water in
production and supply to the company of uniform quality products that are competitive in the
international market.
Perhapsthelargestimpacthasbeenintelecommunication.Sinceit’sestablishmentinTanzania,
Vodacom – a mobile operator company, has invested about US$142 million. This company,
together with Celtel, Mobitel and TTCL have revolutionised telecommunication linkages in the
country.Apartfromfacilitatingcommunicationthathasimpactedpositivelyonbusinesseffciency,
smalllocalentrepreneurshavesprunguptoproviderepair,rechargeandhook-upservices.
5.8.5 Technology Transfer-through Imports of Capital Goods
Another route through which investments can foster technology transfer is through imports of
capitalgoods.StudiesbyDamijanetal,2001;EatonandKortum1996;OlarreagaandSchiff2001
haveidentifedapositiverelationshipbetweenimportsofcapitalgoodsandrelatedtechnology
diffusion and productivity growth. According to UNCTAD (2000),Tanzania has benefted from
capital imports with technology-embodying products (machinery, equipment and tools). Figure
5.10providesbroadcategoriesofimportsaccordingtoBankofTanzaniaclassifcation.Overall,
capital goods imports have averaged over US$ 500 million per year, slightly higher than
intermediate and consumer goods.
83 Report on the Study of Growth and Impact of Investment in Tanzania
F|gure 5.10: Trends and 8tructure of Tanzan|a |mports [6|F}
0
Z00
400
600
800
1000
1Z00
1400
1600
1800
Z000
199Z 1993 1994 1995 1996 1997 1998 1999 Z000 Z001 Z00Z Z003 Z004
Total Capital goods Consumer goods Ìntermediate goods

Source:BasedonBankofTanzaniaEconomicandOperationsReports(variousyears).
Theconclusionwemakehereisthatinvestmentsarefosteringthetransferoftechnology,albeit
slowly. Further incentives are needed to entice more transfer of technology especially through
FDI investors training SMEs to supply to them inputs that meet requirements of quality and
standards. The Government, through its institutions such as SIDO should also become more
active in upgrading the capacity of SMEs to supply inputs to FDIs through training in skills
development.
5.9 Impact of Investment on Entrepreneurial Growth
5.9.1 Entrepreneurship Growth
Another measure of investment impact relates to fostering entrepreneurship growth.
Entrepreneurship–orattitudestowardinnovation,pro-activity,andrisktakingplaysakeyrole
in fostering investment and economic growth. The literature on the impact of investment on
entrepreneurshipgrowthislimited(UNCTAD2004).Rodriquez-Clare(1996)forexampleshows
thatthroughnetworksandlinkageswithlocalfrms,foreigndirectinvestments(FDI)canleadto
considerable growth in a country’s entrepreneurship. The study illustrates how FDI spillovers
from production networks and linkages may work: affliates increase a host country’s access
to specialised varieties of intermediate inputs and technologies, the improved knowledge and
skills raises productivity of domestic producers and in some cases leads to growth of a country’s
number of entrepreneurs. The UNCTAD study cited above provides examples of where domestic
frms acquire soft technologies from foreign affliates through contact with experts, information
84 The United Republic of Tanzania - Tanzania Investment Centre
fowsandobservation.Theextentofinvestmentimpactonentrepreneurshipgrowthdependson
thestrengthandbreadthofthenetworksandlinkagesestablished.Inthefeldstudyconducted
forthisassignment,themaintypesofnetworksandlinkagesrelatetolocalsourcingandpurchase
of inputs, components and services. The investor’s choice of suppliers depends on several
attributes,including:
Cost, quality and reliability of local supplies – where these were inadequate, investors ♦
tendedtotransferrequisiteskillsandknowledgetothelocalfrms/individualssoastomeet
standards.
Access to local information and business practices – a network of suppliers of raw materials ♦
andotherinputsfourishedwellwherelocalinformationwasreadilyavailableandthelocal
frms/individualsshowedbusiness-likeacumen.
Ability to develop relations of trust. Often this aspect was found to be important in part ♦
because of assurance of reliability of supplies and more so because some of these local
suppliers had to be advanced inputs and working capital to facilitate production and regular
supplies.
Tanzania’s experience with regard to facilitation of entrepreneurial growth through a network
of suppliers’ linkages is shown on Table 5.12 and further illustrated in Box 5.1. Overall, local
sourcing of inputs was the largest contributor to the growth of entrepreneurship.
Table 5.12: Network of Suppliers of Raw Materials and Other Inputs
Sector
FDI Non-FDI (Local) Joint Venture
Local Sourcing
(%)
Import
(%)
Local
Sourcing (%)
Import
(%)
Local Sourcing
(%)
Import
(%)
Agriculture 87.5 12.5 90 10 80 20
Manufacturing 80.0 20 70 30 73 27
Services 60 40 80 20 90 10
Mining 10 90 23 77 12.5 87.5
Source:ESRF(2004)SurveyforTIC
In agriculture investors sourced over 80 percent of their raw materials and inputs locally. Next
wasmanufacturingfrmsthatsourcedover70percent.Servicesdidnotrevealdiscerniblepattern.
Whileservice-relatedjointventurefrmssourced90percentlocally,FDIfrmssourcedonly60
percentlocally.Inmining,over80percentweresourcedthroughimports–apatternthatwouldbe
expected in a country where nearly all mining machinery and equipment have to be imported. The
studylearnedthatovertimecompaniestendtodevelopmorelocalinputnetworkandlinkages,
thus fostering entrepreneurship growth.
85 Report on the Study of Growth and Impact of Investment in Tanzania
LinkagesrelatedtoResearchandDevelopment(R&D)wasnegligibleamonglocalinvestorsbut
foreignbasedfrmstendedtohaveconsiderableinvestmentinthisarea.Forexample,DIMON
TobaccoProcessorsisanFDIthathascontractedalocallybasedfrmcalledTORITOtoresearch
onissuesrelatedtoimprovementintobaccofavour.Thecompanypaysanequivalentof5percent
of its annual sales on R&D. Blue Mountain Coffee Farm is also an FDI that produces quality coffee
for the export market. This company has contracted a locally based international agency called
Utzkapeh to provide strategic R&D and to check the company’s compliance with environmental
standardssetbyinternationalorganisations.UnileverTeaTanzania,alsoanFDI,conductsR&D
onimprovementsinthequalityandcareoftea.APCLyamungoCoffeeEstate,anotherFDIthat
growscoffeefortheexportmarket,hasastrategictechnologypartnershipintheareaofR&Dwith
TACRI–alocalfrmthatdoesexperimentandimprovementofcoffeeseedlings.
The conclusion we make from the above experiential analysis is that investments are fostering
entrepreneurialgrowth,albeitslowly.Thereisneedtodevelopincentivestoenticeinvestorsto
source more locally as well as increase their network of suppliers of raw materials and other inputs.
Box 5.1: Tanzania: Investments are Fostering Entrepreneurship Growth – Albeit Slowly
Dabaga Vegetables and Food Canning Company is a local company that started operations in 1976 in Iringa
town.Itproducestomatosauce,juices,jam,pickles,vinegar,bakedbeansandT/pureeforthedomesticmarket.
Only 1% of its products are for exports. The three company expatriate staffs have played a key role in fostering
entrepreneurship growth through subcontracts and out-sourcing almost all its input supplies. Suppliers are trained
on their own farm to produce and supply quality fruits and vegetables. To date the company has trained the
following entrepreneurs (their numbers in bracket): pineapples (66), mangoes and oranges (4), tomatoes (20),
onions (5), cinnamon (1), and chilly powder (3). The company plans to train more input suppliers as capacity
utilisation rises from the current 73% to 95% by 2007.
VasoAgroVenturesisajointventurebetweendomesticandforeigninvestors(25:75%sharesplit).Thecompany
startedoperationsinMoshi,Kilimanjaroin2003.Itsmainproductsarefowers,fowercuttingsandfreshbeans.
Thecompanyhastrainedover35localsupplierstogrowfowers,toundertakefowercuttingandproducequality
seeds.
TANCAN Mining Company (TMCL) is a joint venture between domestic and foreign investors (40:60 % share
split). Since 1999 the company has been involved in mineral exploration of gold and diamonds in Mwanza
Region. The company assisted in the establishment of a local company - Humac Laboratory to conduct test and
experimentationofsamplesanddrilledrocksfromTMCL.Throughanelaborateskillstransfermechanism,TMCL
appointed SGS laboratory to counter-check and verify the work of Humac while providing them with advisory
services. Africa Mashariki Gold Mine has established similar arrangements. This company which deals with gold
mininginTarime,Mararegionassistedintheestablishmentofalocalfrm,StanleyMiningServices,thathasbeen
contractedtoprovidedrilling,quarryingandcivilworksforthecompany.
Vegetable Oil Industries Ltd (VOIL) is a joint venture between domestic and foreign investors (20:80 % share
split).Thecompany,whichstartedoperationsin1966inMwanza,manufacturesdoublerefnedcottonseedoil,
margarine,cookingfacts(Pride),anddrinkingwater(AQUA).Thecompanyusesanetworkofinputsuppliers–
cottonseeds. The new local frms established to supply cottonseed to VOIL are:Alliance Ginneries, COPCOT
Ginneries(Geita)andLINTEXGinneries(Shinyanga).
86 The United Republic of Tanzania - Tanzania Investment Centre
Tanzania Pyrethrum Processing and Marketing Company provide another example of networking to obtain
qualitypyrethrumfowers.ThisFDIcompanywhichstartedoperationsinTanzaniain1998producespyrethrum
crudeextract,pyrethrumpowderandpyrethrumdrymarc,largelyfortheexportmarket.Thecompanyestimates
ithasbroughtabout300,000farmfamiliestogrowpyrethrumthatissuppliedtothecompany.Thecompany’s
extension service transfers skills and knowledge to the farmers that have enabled the supply of uniform quality
pyrethrum fowers to the company. Similar extension services undertaken by Kilombero Sugar Company has
resultedintogrowthofsugarcaneout-growersfrom2,000to5,000deliveringabout600,000tonsofcaneor50
percent of the company’s requirement.
Kilimanjaro Industrial Development Trust (KIDT) is a typical success story in entrepreneurship growth in
Tanzania.WithtechnicalandfnancialassistancefromtheJapaneseGovernment,KIDTthatwasincorporated
in 2001produces oil expellers, spare parts for industrial and agricultural machinery, coffee husk pulpier, sugar
canesqueezer,groundnutsheller,trainweatherplates,earthenwareproducts,tomention,butafewproducts.
WhileKIDTis100%localfrm,thetechnicalassistancegivenbyJapaneseexpertshastransformedKIDTintoa
powerful dynamic entrepreneurial powerhouse capable of producing internationally competitive products. Over
30 entrepreneurs have graduated from KIDT training and have established their own machine/foundry or forging
workshops.
Source:ESRFSurvey(2004)forTIC.
5.10 Community and Neighbourhood Impact
Another measure of impact is the contribution of investments in fostering community development.
Domestic and foreign investment has community level impact that is not well documented in
the literature. Field studies conducted for this assignment revealed two kinds of impacts. Those
that improve the socio-economic well being of the communities within the investment area and
beyond,thusfosteringpovertyreductionandthosethathavenegativeeffects–especiallyonthe
environment. This later aspect is discussed separately in Section 5.12.
Tanzania’s experience shows that investments are making a commendable contribution towards
community development. For example, at the national level, the investment made to exploit
Songo Songo gas has brought to the people of Tanzania a reliable supply of safe, clean and
effcientenergywithfarreachingsocio-economicimpact(seeBox5.2).
Box 5.2: Developing a resource out of reach: Songas natural gas
Whendiscussinginvestmentimpact,theSongasstoryisexemplary.IthasbroughttothepeopleofTanzaniaa
reliable supply of safe, clean and effcient energy. Ever since 1974, when natural gas was discovered on and
around Songo Songo Island, (about 225 kilometres from Dar es Salaam), the development of this resource
remained a dream. Then in 1994 a powerful public/private investor partnership turned the dream into reality. The
Government of Tanzania provided policy and logistical support. The Commonwealth Development Corporation
(CDC)madeaninitialUS$6millioninvestmentinSongasin1997andprogressivelyincreaseditsstake,including
additional capital committed to the expansion of Ubungo generating capacity. The World Bank played a key role in
Songas,approvingaUS$183million,interest-freeloaninOctober2001.WorldBank’stechnicalrepresentatives
provided expertise and oversight for more than 12 years to see the Songas project through completion in 2004.
87 Report on the Study of Growth and Impact of Investment in Tanzania
The major user of natural gas from Songo Songo is Ubungo Power Plant in Dar es Salaam. Originally built
to run on imported liquid fuel, the plant was refurbished and converted to use the country’s own natural gas
resources.SinceJuly2004Ubungoplant,whichiscapableofproducing45percentofTanzania’stotalelectricity
requirements,hasbeenusingnaturalgasinplaceoftheexpensiveimportedfuel.Theplantprovidessafe,reliable,
effcientcleanelectricitytoDaresSalaamandthenationalgrid.
Source:ESRF(2004)surveyforTIC.
Othermorespecifcexamplesofcommunitylevelimpactwereobtainedfromthisstudy’sfeldwork.
Thesampleof30investorsinterviewed,bothdomesticandforeign,feelobligedtocontributepart
of their earnings for some social course – especially in reducing problems related to access to
social amenities. Overall, as Figures 5.11 and 5.12 illustrate, 69 percent of the donations or
nearly Tshs 4.7 billion incurred by the 30 sampled investors between 1998 and 2004 were for
rural roads rehabilitation or maintenance. Others expenditures with their value in brackets are:
education12percent(Tshs862million),Health11percent(Tshs773million),Water6percent
(Tshs418million),Electricity1percent(Tshs87million)andothers1percent(Tshs63million).
Box5.3provideselaborationofsomemainphilanthropicfrmsinthesurvey.
Road
69%
Education
12%
Health
11%
Water
6%
Electricity
1%
Other
1%
F|gure 5.11: Percentage 0|str|but|on of |nvestor 0onat|ons to 6ommun|t|es- 1998-2004
Source:ESRFSurvey(2004)forTIC.
88 The United Republic of Tanzania - Tanzania Investment Centre
F|gure 5.12: Va|ue of |nvestor 0onat|ons to 6ommun|t|es -1998-2004
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
Tshs, MiIIion
Road
Education
Health
Water
Electricity
Other
Source:ESRFSurvey(2004)forTIC.
Box 5.3: Investors are becoming charitable and generous
AfrikaMasharikiGoldMine,anFDIthatbegangoldminingin2002,isexemplarywhenonetalksofphilanthropy.
Since inception the company has contributed Tshs 400 million for construction and equipping village health
facilities,Tshs550millionforprimaryandsecondaryschoolimprovementefforts,Tshs100millionforruralwater
supply,Tshs600millionforruralroadsconstructionandTshs30millionfortheconstructionofwardoffce.Over
3,500householdshavebeneftedfromthecompany’ssocio-economicassistance.
Kilombero Sugar Company, another FDI that began operations in 1998, considers social responsibility part of
the company’s vision. To this effect, the company has contributed Tshs 106 million in support of community
primaryandsecondaryschools,Tshs250millionforimprovingcommunityhealthfacilities,Tshs100millionfor
watersupply,andTshs4billionforruralroadsimprovementaspartofsugarout-growerssupport.Over10,000
householdshavebenefteddirectlyorindirectlyinthissocio-economicassistance.
SaoHillIndustries,anFDIthatproducestimberforthedomesticandexportmarket,providesantherexampleof
commendablephilanthropy.Since2000whenthecompanybeganoperations,Tshs.18millionhavebeendonated
forprimaryandsecondaryschoolimprovement,Tshs20millionforimprovingcommunityhealthfacilities,Tshs
2 million for water supply and Tshs 6 million for improving community rural roads. Over 700 households have
beneftedfromthesesocio-economicactivities.
NyanzaBottlingCompany,ajointventurebetweenforeign(64%oftheshares)andlocalinvestorsthatproduces
soft drinks for the domestic market has also made valuable socio-economic contributions. The company that
started operations in 1984, has contributed Tshs 30 million is support of community primary and secondary
schools,Tshs30millionforimprovingcommunityhealthfacilities,andTshs10millionforimprovingruralroads.
Thecompanyestimatesover1,000householdshavebeneftedfromthesecharitableactivities.
89 Report on the Study of Growth and Impact of Investment in Tanzania
VasoAgroVentures,anotherjointventurebetweenforeign(75%oftheshares)andlocalinvestorsthatstarted
operations in 2003, is also among food philanthropic frms. The company has contributed Tshs 15 million in
support of primary and secondary schools and Tshs 140 million to provide reliable water supply to the surrounding
communities.
Local investors are also good philanthropists as shown inAnnex B. For example, Meremeta Mining Company,
a wholly owned local gold mining company that started operations in 2002 has shown commendable social
responsibility. The company has contributed Tshs 89 million is support of community primary and secondary
schools,Tshs20millionforhealthimprovements,Tshs27millionforwatersupplyandTshs40millionforimproving
ruralroads.Over1,000householdshavebeneftedfromthesecharitableactivities.
Source:ESRF(2004)SurveyforTIC
The considerable investment channelled to improve rural roads appears to have been made to
facilitate access to local supplies critical for investor requirements. For example, rehabilitation
of community roads in pyrethrum growing areas was meant to assist out-grower farmers to
supply pyrethrum fowers throughout the year. Similarly, improvement of roads in large sugar
cane plantations such as Kilombero are meant to facilitate transport of cane by out-growers
to ensure regular supply rather than fostering a charity of giving to the communities. Even
improvement of roads by mining companies such as Kahama Mines appear to have self-interest
inmindtoimproveinputaccessandotheramenities.However,despiteownfrm-levelinterests,
improvementsinruralroadsarehavingvaluablebeneftstocommunities.Upgradedroadsare
usable all year round, causing less damage to the vehicles using them. The improved roads
allow farming households and the frms to move their goods more often and more cheaply. In
some cases, as in Kilombero, some farmers have shifted from low value maize production to
sugar cane production – thus earning higher income. Investors also show a high degree of social
responsibilitythroughassistingintheprovisionofeducation,healthandwaterfacilities.Annex
4.1 provides a breakdown of the social-economic contribution provided by 30 sampled domestic
and foreign investors that have high impact on the recipient communities.
TheconclusionisthatavailablefelddatarevealsthatFDIinvestorstendtomakelargersocial
contributionstocommunitiesaroundtheirinvestment(Annex4.1)comparedwithlocalinvestors.
However,mostoftheseFDIhave“CertifcateofIncentives”thatprovidemorebusinessadvantage
compared with local investors.Thus, in the absence of an “equal playing feld”, it is diffcult to
makeanydefnitiveconclusiononthecontributionofFDIandNon-FDItothesociowellbeing
of local communities. A policy should be developed to encourage greater contribution to local
economiesinfghtingpovertyandenhancingequitabledevelopment.
5.11 Illustrative Cases of Some of the Performing Investments
Clearly, although most investment enterprises have performed well as a result of a better
investment climate and favourable policy regime, some have achieved better and at times
signifcant performance than others. Below we describe a few case studies to give supportive
evidence of the performance of some large investment enterprises. As time and resources could
not allow sampling many frms, we limited our case study of investment performance only on
thoseuponwhichinformationwasavailable,andusedforillustrativepurposes.
90 The United Republic of Tanzania - Tanzania Investment Centre
5.11.1 Tanzania Cigarette Company (TCC)
TCC is a joint venture between foreign (75% of the shares) and local investors. The British
AmericanTobacco initially started the company in 1961. In 2000, its shares were listed in the
DaresSalaamStockExchange.Thecompany’smainproductsare:Sportsman,Sweetmenthol,
Camel (flter and lights), Embassy (menthol, lights and kings), Winston (lights and flter), Club
(mentholandflter)andCrescentstar(kali).TCChasthecapacitytoproduce4billionsticksper
annum
TCC is a shining example of the success of Tanzania’s privatisation programme. Since its
privatisation in 1995, the company’s production effciency has improved due to investment in
newtechnology,plantandmachineryandtraining.Proftshavemorethandoubled,enablingthe
companytopayhigherdividendstoitsshareholders,payinggreatertaxestothegovernmentand
providingbetterremunerationsandtrainingtoemployees(Table5.13).Over250ofthenearly
700employees(35.7%)havereceivedtrainingtoupgradeskills.Between2002and2004,the
dividend paid to shareholders averaged Tshs 22.8 billion and taxes paid to government averaged
Tshs 48.6 billion.
Table 5.13: TCC Performance
2002 2003 2004
Employment
Male(Local) 345 345 325
Female(Local 344 344 344
Foreigners 11 11 8
Skills Development
Number of those trained in
house
295 295 200
Number of those trained
abroad
50 50 50
Dividend paid to shareholders TZS,Million 22,174 24,160 22,362
Share Capital or Market Capitalisation TZS,Million 170,000 172,000 176,000
Taxes and other charges paid to
government
TZS,Million 42,213 45,533 58,316
Source:TCCdatabank(Canthisinformationbeupdated?)
TCC has also contributed importantly in the transfer of technology through a network of suppliers.
Thecompanyestimatesthatover40,000tobaccofarmershavebeneftedfromthecompany’s
improved crop husbandry skills transfer. Similarly, over 200,000 dealers and retailers have
benefteddirectlythroughthemarketingofthecompany’sproducts.
91 Report on the Study of Growth and Impact of Investment in Tanzania
The company management believes that its success lies in adoption of sound investment
core values: high quality culture (excellence, simplicity and satisfaction); innovation (dynamic,
enthusiastic and fast); commitment (respectful, responsible and transparent) and synergy
(diversity,engagementandteamwork).Thesevaluesareimportantnotonlytoenablecompanies
improveeffciency,butalsotofostercompetitivenessinaglobalisedworld.
5.11.2 Kioo Limited Company (KLC)
Kioo limited is another success story. This wholly private owned local company started production
in 1966 producing glass and bottles for nearly all types of requirements. KLC current (2004)
productioncapacityis55,000tonsperannum.
The company is a good example of investment that has high forward and backward linkages
with the economy. Over 80 percent of the company’s raw materials are sourced locally (sand,
dolomite, and feldspar). The company has strong linkages with other industries that use its
products. Foremost are beverage and liquor frms such as Tanzania Breweries, Serengeti
Breweries,TanzaniaDistilleries,CocaCola,andPepsi.Thecompanyalsosuppliespackaging
materials to the pharmaceutical and food industry. Overall, KLC exports about 60 percent of
its products to Sub-Saharan countries – earning the country foreign exchange. As Table 5.14
illustrates, KLC employs an average of 267 people, of whom 8 percent are foreign technical
experts. All employees have been trained locally and in-house to upgrade skills and knowledge.
The company also paid taxes and other charges that reached Tshs 2.5 billion in 2004. The
company is expected to contribute higher tax revenue to the government when its Tanzania
InvestmentCentrecertifcateofincentivesexpires.
Table 5.14: Kioo Limited Performance
2002 2003 2004
Employment
Male(Local) 251 233 189
Female(Local 15 15 15
Foreign 22 22 21
Skills Development
Number of those trained
in house
251 233 189
Number of those trained
abroad
1
Share Capital or Market Capitalization TZS Million 12,000 12,000 12,000
Taxes and other charges paid to the
Government
TZS,Million 1,200 2,000 2,500
Source: Kioo Limited database
Overall,thecompanyadoptsbestpracticesinitsmanufacturingprocessthatareenvironmentally
92 The United Republic of Tanzania - Tanzania Investment Centre
friendly, recycling used bottles and adhering with hygienic conditions on all its packaging
materials.
5.11.3 Mission Mikocheni Health and Education Network (MMHEN)
MikocheniMissionHealthandEducationNetwork(MMHEN)thatprovidesmedicalandacademic
services to the country is another investment success story. The investment comprises Mikocheni
Mission Hospital,The Hubert Kariuki Memorial University and the holding company that deals
with administrative matters.
The re-known hospital provides medical services to an increasing number of patients (Table
5.15).Thenumberofpatientstreatedinthishospitalhasrisenfromanannualrateof6percentin
2002to21percentin2003/04.Themainreasontosuccessisrelatedtoreducedtreatmentfees,
in part due to reliance on medical doctor interns – making their services more affordable.
Table 5.15: Number of patients treated between 2002-2004
Year
Children Adults
Male Female Male Female Total
2002 2,877 4,220 3,836 8,247 19,180
2003 3,366 3,776 5,510 7,601 20,253
2004 3,920 4,410 5,390 10,780 24,500
Total 10,163 12,405 14,736 26,629 63,933
Source: MMHEN database
Improved services have resulted into increased recovery rate to between 75- 99 percent and
reduction in the death rate to between 1-5 percent. Enrolment into the medical university has
morethantripledfrom26in2002to88in2004.Similarly,thenumberofmedicalgraduateshas
quadrupled from 15 in 2002 to 60 in 2004. This performance is exemplary taking into account the
acuteshortageofqualifedmedicaldoctorsinthecountry.
Theinvestmentemploysover270medicalandotherprofessionalstaff,ofwhich67percentare
women.Between2002and2004,theinvestmentcontributedtothegovernmentoverTshs670
millioninvarioustaxesandcharges.Inaddition,severalcommunitycontributionsweremade,
including Tshs 2.5 million in 2002 for roads and special illnesses (Open Heart Surgery); Tshs
2.8millionin2003andoverTshs680,000forsupportingvariouscommunityactivitiesin2004.
Inaddition,thecentreprovidescharitablemobileclinicsinMikocheniareathattargetspregnant
women,tropicaldiseases,HIV/AIDSandothercommunicablediseases.
93 Report on the Study of Growth and Impact of Investment in Tanzania
5.11.4 Standard Chartered Bank Tanzania (SCBT)
StandardChartered,withalonghistoryinTanzaniadatingbackfrom1917,ispartofthecompetitive
andeffcientbankingsystemthatisevolvinginTanzaniafollowingthecountry’sfnancialsector
reforms. It is a successful FDI that re-opened in 1993 with branches in Dar es Salaam (3),
Mwanza,ArushaandMoshi.Thebank,beingpartfortheStandardCharteredGroupthathas
950offcesin50countries,hasbroughttoTanzaniathebestofbankingworldwide.Toattestthis
contention,thebankhaswonseveralprestigiousawards,including“BestBankinAfrica”(1998,
1999and2000),“BankoftheYear”forseveralyearsincluding2004,and“EmployeroftheYear”
in 2005 awarded by Association of Tanzania Employers.
To illustrate the contribution this investment is making in Tanzania several pointers are noticeable.
The bank has developed a strong wholesale banking business by establishing relationships with
major international corporations, local businesses, donor agencies, Government and public
enterprise organisations. In addition, the bank has developed business within the agriculture
sector and provides fnancial access to Small and Medium Enterprises (SMEs). Its consumer
business focuses on up scaling individuals and their businesses. SCBT is also expanding the
rangeofproductsandservicesincludingImportandExportFinance,StructuredTradesolutions,
and management of foreign exchange risk. Some examples of the innovative products and
services that SCBT has launched in Tanzania recently include:
Tanzania’sfrstVisaDebitCard •
A revamped SME Banking Business •
A sophisticated Excel Banking Centre •
In terms of making available resources for the country’s development, the bank is the largest
lender to the corporate sector, with loans and advances of over Tshs 200 billion. Its lending
policiessupportinwardinvestment,developmentofdomesticindustriesandmakingfulluseof
Tanzania’s abundant natural resources. Examples of this include:
Providingpre-exportfnancetotheagriculturalsectortoimprovecashfowtofarmers, •
Supporting investment in processing operations to raise the quality and value of export •
cropsandimprovefarmers’earnings,and
Making available term funding for large-scale rehabilitation of recently privatised public •
enterprises.
In terms of skills transfer, training is provided to all 200 plus employees.TheTraining aims at
ensuring high levels of service to customers through quality career planning and skills enhancement
ofnationalstaff.Trainingisbothin-houseandexternal,particularlyincountriessuchasGambia,
Kenya, Ghana, Botswana and the Great Britain. Apart from training, employees are well
remunerated. The bank aims at fostering good performance by providing staff with performance
94 The United Republic of Tanzania - Tanzania Investment Centre
related bonuses as well as other incentives such as subsidised schemes to purchase cars as well
as to provide educational expenses. Salary levels are reviewed regularly to ensure competitive
remuneration packages.
Withregardtocommunitycontribution,thebankrecognisesthatithaswiderresponsibilitiesto
thecountry.Thus,foranumberofyearsithasparticipatedinanumberofcommunityprojects,
including:
DonationofUS$42,000(Tshs48million)in2002fortherehabilitationofChildren’sHomes •
in different areas. The Kurasini Children’s Home in Dar es Salaam received Tshs 27.5 million
while the remaining amount was shared between the Arusha Children for Children’s Future
homeandtheMagudistrictChildren’sHomeinMwanzaregion,
ContributionofUS$90,000(Tshs103million)in2003towaterprojectsintheDaresSalaam •
Bunjuarea,Arusha,KageraMorogoroandSumbawanga.SomefundsalsowenttoaFish
Farming project in Mererani Arusha. This project, to be completed in 2005, will offer an
alternative income-generating source for the commercial sex workers in that region thus
reducingthespreadofHIV/AIDS,
DonationofUS$60,000(Tshs69million)in2004toassistinirrigationprojectsintheMombo •
andSanyaregionswhichareinTangaandKilimanjaroregions,respectively,and
Donation of US$ 140,000 (Tshs 160 million) in 2005 to construct an Orphaned Children’s •
Home in the Kibaha area.
Apart from community contributions, the bank is among the large or corporate taxpayers that
contributeconsiderablerevenuetothegovernmentcoffers.In2004,forexample,thebankpaid
to government the following taxes and other charges:
Table 5.16: Tax paid during the year ending December 31 2004
Category Amount (TShs Millions)
Corporate Income tax 6,257
P A Y E-Local Staffs 679
P A Y E-Expatriates Staffs 383
VAT 135
Skills Levy 263
Withholding tax on goods and services 301
Withholdingtax(intermediatecommodities) 212
Total 8,233
Source:SCBT,September2005.
95 Report on the Study of Growth and Impact of Investment in Tanzania
Thus,indischargingitscorporateresponsibility,in2004theStandardCharteredBankTanzania
contributed over Tshs 8.2 billion in taxes and other charges – revenue resources that are much
neededforacceleratingTanzania’sdevelopmentprospects.Inadditiontotheabove,Table5.17
listsadditionalfrms(otherthanthoselistedinTable5.9)thatcouldalsobeconsideredassome
of the best performing investment enterprises.
Table 5.17: Additional list of some of best performing enterprises
S.No.
Name of the
Enterprise
Location Sector Description of strong case
1 Tanzania
Breweries Ltd.
3 Regions of
Dar,Mwanza,
and Arusha
Manufacturing Useslocallysourcerawmaterials,listed
forpublicshares(leadingindividend
distribution),signifcanttaxrevenue
and a modal of investment in R&D and
technologytransfertolocalfrm(KiooLtd.)
2 Songas Coast Energy Example of energy development from
own Natural resources
3 Vodacom(T)Ltd. All over the
country
Communication Largest mobile phone company with
massiveinvestment(overUS$142
million)andnumberofsubscribers.Cell
phonecompanieshavesignifcantly
reduced transaction costs emanating
frompoorcommunication,andgenerate
income to many retailers country-wide.
4 St Mary’s Schools
Ltd
Dar es Salaam Education Expanded fast to other regions and with
alotofbranches,increasingsignifcant
number of intakes for all levels of
educationladder(nurserytocollege)
5 Simba Plastics Dar es Salaam Manufacturing Localsourceofrawmaterials,with
strong back and forward linkages
(buildingmaterials)
6 Athi River Mining Tanga Mining Strongforwardlinkage,producing
limestone for almost all cement
manufacturing plants in the country
7 Kunduchi Beach
Hotel
Dar es Salaam Tourism Investment that reclaimed over 10
hectorsofland,andamodelof
renovated hotel to a 5 star standards
8 Mining companies Arusha,Mara,
Shinyanga and
Mwanza
Mining Signifcanttaxrevenueandnotable
impact on growth of exports and positive
balance of payments effects; setting
example for others to invest in the sector.
Source:InterviewwithTICoffcials.
96 The United Republic of Tanzania - Tanzania Investment Centre
5.12 Cross-cutting Issues
5.12.1 The Environment
Another measure of impact relates to the effects of investments on the environment. The extent
to which investments have facilitated environmental sustainability is diffcult to discern at the
moment due to lack of adequate information.
The observation above notwithstanding, Tanzania’s experience shows that there is a growing
awareness on the environmental impact of unplanned and unregulated economic and commercial
developments, especially in sensitive coastal and rural areas of the country important to
Tanzania’sgrowingtourismeconomy(UNCTAD2002).Thecurrentregulationforenvironmental
protection requires all investors to undertake Environmental ImpactAssessment (EIA) studies
in advance of their construction, and these are a precondition for construction and planning
permits.FDIprojectsguaranteedbytheMultilateralInvestmentGuaranteeAgency(MIGA)must
undertakeEIAstodemonstratethattheydonotdamagetheenvironmentandaresustainable,
especiallyformining,oilandnaturalgas,andtourismprojectsinthewildlifeparksandcoastal
areas.BothTICandZIPAseektoassessFDIprojectsagainstenvironmentalbeneftandimpact
criteria; and can require EIAs where signifcant capital projects are involved (UNCTAD op cit).
ThefeldstudiesconductedforthisassignmentrevealedthatallFDIinvestorsconductedEIAs
and are making good progress in preserving and conserving the environment. Both domestic and
foreign investors are aware of environmental concerns and are taking mitigation measures as
appropriate(seeBox5.4).
Various initiatives for ensuring environmental sustainability are being implemented by the
government in collaboration with various stakeholders in the country. There are also currently
initiatives to extend impact assessments to domestic SMEs once the necessary resources and
skills are available. For a start in 2003 the government conducted sensitisation training to local
governments on implementation of the national environmental policy. The National Environmental
Management Council also continues to implement various environmental conservation and
managementprogrammesincludingthepreparationofstrategiesforenvironmentalconservation,
education and sensitisation in the country.
Therefore,despiteinadequateinformation,experienceinthefeldshowsthatbothdomesticand
foreign investors are aware of environmental concerns and are taking appropriate mitigation
measures. The Government should continue enforcing its environmental policy to ensure
compliance by all investors – domestic and foreign.
97 Report on the Study of Growth and Impact of Investment in Tanzania
Box 5.4 TIC is fostering environmentally friendly investments in Tanzania
Kilombero Sugar Company – a 1998 privatised company under three shareholders: Illovo (55%), ED & F Man
(20%) and Government ofTanzania (25%) is making commendable progress in environmental protection.The
company that produces over 430,000 tons of sugar per annum, immediately after being privatised, reduced
pollution of Kilombero river water by stopping discharge of raw sewage of molasses into the river. The company
refurbishedasewagetreatmentplant,installedmolassesbindingequipmentandsecuredamarketformolasses.
Thecompanyalsorecyclesthemudfromthefactorybacktothesugarcanefelds.
KahamaMiningCorporation,anFDIthatstartedgoldminingoperationsin1999,providesanothergoodexample
of environmental protection. The company’s policy requires zero discharge that is aimed at minimising its impact
ontheair,water,foraandfaunaaroundthemine.Wastesarerecycledatthemineandwaterconserved.Aunique
paste tailing process is being implemented that uses 50% less water than traditional methods. Over 25% of the
tailingsproducedaremixedwithwasterockanddirectedundergroundtofllandsealminedareas.Thecompany
trains its workers on environmental issues and has established a nursery to propagate native trees for landscaping
andre-vegetationpurposes.Thecompanyhasalsocreatedawildliferefugeformonkeys,mangooses,Nilemonitor
lizards and small antelopes. These efforts are exemplary in Tanzania’s quest for sustainable development.
Africa Mashariki Gold Mine, an FDI that started gold mining operations in 2002, has shown concern on
environmental issues. The company’s use of explosives during blasting causes cracks in nearby houses and
airpollution.Asamitigationmeasure,thecompanycompensatedpeoplearoundthemineandmovedthem100
metres from the mine. New methods are being practised to contain cyanide and mercy that are used in the mining
process.TheNationalEnvironmentalManagementCouncil(NEMC)hasbeeninvitedtoteamupwithmineoffers
to conduct periodic environmental audits.
Wazo Hill, a company that produces cement, stopped the dust that for several years has been polluting the
environment.
DIMONMorogoroTobaccoProcessors,anFDIthatstartedoperationsin1997processingtobaccofortheexport
market, provides another example where environmental conservation is of prime concern.The company’s fue
curedtobaccouseswoodforcuring.Afterassessment,thecompanyfoundoutthatdeforestationwastakingplace
in some villages. Immediate action was taken to mitigate this problem by supporting tree planting.To date, for
every50tonsoftobaccogrown,100treesareplantedunderthesupportofthecompany.Inadditionthecompany
supports Morogoro Prison Tree Planting Project.
Source:ESRFSurvey(2004)forTIC.
5.12.2 The Gender Dimension
Another measure is the extent to which gender is mainstreamed in all investment plans and
strategies. Gender refers to the social relationship between men and women that provides women
and men with different roles and access and control of resources in society. This in turn results in
different needs and opportunities of the two groups.
Tanzania’s experience shows that gender relations in Tanzania are characterised by a patriarchal
system that gives men power and ownership over things of value and over decision-making. To
theextentthatthisistheobservedphenomenon,genderissuesininvestments,bothdomestic
and foreign, requires gender mainstreaming. Gender mainstreaming relates to the process
98 The United Republic of Tanzania - Tanzania Investment Centre
of integrating gender and equality concerns in all investment policies, programme (project)
objectives, activities, and implementation process.The objective is to ensure that investments
undertaken in Tanzania take on board concerns and needs of men and women.
This study revealed that there is no discrimination between men and women in terms of
employment(Table5.10and5.11).Investorstendtoemploymorewomen(e.g.DIMON,Sunfag,
UnileverTea)ormoremen(e.g.SaoHill,TPM)dependingonthenatureandstructureoftheir
production processes. However, the study noticed a lack of guidelines with regard to gender
issues.TICisurgedtoworkwiththerelevantstakeholderstodevelopgender-specifcinvestment
guidelines that will take into consideration the following processes:
Empowering all employees and especially women to fully and effectively participate in ♦
investment decisions, so that the whole investment system becomes truly participatory
andsustainable,
Understanding the needs and concerns of men and women and plan for investment ♦
development accordingly. The needs of men and women differ as a result of the different
rolesthatthesocietyhasplaceduponthem,and
Promoting women in enterprise leadership and management in an attempt to achieve ♦
gender equality.
Addressing gender in all investment aspects provides an opportunity to enhance overall
investment performance by:
Improving investment productivity, accountability and customer service by delivering ♦
productsandservicesaccordingtotheneedsofmaleandfemaleclients,
Making investment policy and strategy more inclusive and representative of the client ♦
base,halfofwhichisfemale,
Increasing individual motivation by understanding why differentials exist in career ♦
advancementbetweenmenandwomen,and
Increasing effectiveness of employees by providing an equitable working environment. ♦
Within this framework, it is important to note that Tanzania has made signifcant progress in
fostering gender equality. In particular, Tanzania is signatory to a number of declarations
concerninggenderequality,includingthefollowing:
Ratifed the convention on elimination of all forms of discrimination against women ♦
(CEDAW),
99 Report on the Study of Growth and Impact of Investment in Tanzania
SignatorytotheBeijingPlatformforAction, ♦
SignatorytotheSADCdeclarationofgenderandequality,and ♦
Unveiling the “Women and Gender Development Policy” that stresses enhancing women’s ♦
legalrights,economicandpoliticalempowermentofwomen,andimprovingwomenaccess
toeducation,trainingandemployment.
Inconclusion,itisimportantthatgenderbemainstreamedinallcomponentsofbothlocaland
foreign investment. Gender mainstreaming is a strategy and a method for achieving equality
objectives. Essentially it entails:
Identifyingthedifferentconditionsandrequirementsformenandwomen, ♦
Examiningeveryquestionwhichconcernsindividualsfromagenderperspective,and ♦
Analysing the expected consequences of changes for women and men respectively. ♦
Toachievetheaboveends,TanzaniaInvestmentCentremayhavetoestablishagenderunitat
its headquarters to provide gender guidance to local and foreign investors.
5.12.3 HIV/AIDS
Another impact related to the spread of HIV/AIDS due in part to the indirect effects associated
with the investment – especially where market towns have developed to supply socio-economic
services.InTanzania,theeffectofHIV/AIDSisincreasinglybecomingabigproblemduetohigh
death rates of the skilled and educated manpower. HIV infection in Tanzania already ranks at
the top of the country’s health problems. Estimates show that by 2004 the country had over 1.5
million productive adults infected with deadly virus. In urban centres the rate of infection exceeds
24percent,andupto10percentinruralareas(wecouldgetupdatesfromtherecentDHSand
THIS).Atthisrate,theimpactofHIV/AIDSepidemicisdevastating.Itstrikesadultsintheirprime
years, including the elite and professionals, which implies that it kills workers of much greater
than average productivity.
Tanzania’sexperienceobtainedfromfeldsurveyduringthisstudyshowsthatover67percent
of the investors regard HIV/AIDS as a major labour-force problem. Loss of experienced workers
due to the HIV/AIDS epidemic implies replacing them with younger less experienced workers.
This has resulted in decline in labour productivity and at times reduced output. According to
Cuddington (1993), unless a decisive action is taken to combat the spread of the pandemic,
Tanzania’s GDP in 2010 could be reduced by 15-25 percent compared with a no-HIV/AIDS
scenario. These estimates do not augur well for the country’s quest for higher investments to
enhance growth and development of the country.
The conclusion we make is that HIV/AIDS is becoming a serious labour-force problem that is
100 The United Republic of Tanzania - Tanzania Investment Centre
likely to affect productivity of investments as experienced workers die and have to be replaced
with younger less experienced workers. Therefore, Tanzania needs to take more decisive
action to combat the spread of HIV/AIDS. The National AIDS Control Programme has to be
intensifedandactivitiesspreadinbothurbanandruralareas.InvestorshavetodevelopHIV/
AIDS workforce guidelines and conduct sensitisation seminars in an effort to reduce the spread
of the pandemic.
5.12.4 Regional Integration Initiatives
Regional integration is expected to facilitate formation of a larger market through trade liberalisation
and harmonisation of policies. The increase in the scale of business operation can also enlarge
proftableinvestmentopportunitiesandattractmoreforeigninvestorsintotheregion.However,
realising an effective and stable regional integration is challenging. The main challenges are
related to socio-political instability, inadequate adherence to the rule of law and cumbersome
andineffcientlegislation–allofwhichincreaseinvestmentuncertaintyandlimitprivateinitiative.
Inaddition,investmentcodeshavetobeharmonisedwithinaframeworkwherememberstates
belong to several other regional groupings.
AccordingtoKwekaandMboya(2004),regionalintegrationhasincreasedintra-regionaltrade
buthasnotledtosignifcantintra-regionalFDIinTanzania.However,severalprocessesareat
variousstagestopromoteintra-regionalfowofinvestmentatregionalandextra-regionallevel.For
instance,theEAChasprovidedforcooperationanddevelopmentofcapitalmarketsofthethree
member countries with the objective that capital market can be one of the important strategies for
achieving higher rates of investment and for attracting FDI. Another important investment provision
under the EAC is the model investment code that is being developed for the EAC as described
inBox5.5.InSADC,thebodyurgesthememberstatestoimplementmacroeconomicpolicies
thatencouragesoundinvestmentfows,enhancesavings,andstimulatetechnologytransferin
theregion.TheRegionalInvestmentFacilitationForum(RIFF)–whichwasformerlyknownas
Cross-BorderInitiativesisaprogramme(establishedin1999)forstimulatingcross-bordertrade
andinvestmentamongstcountriesoftheEastern,CentralandSouthernAfricanregions,withthe
objectiveofacceleratingtheprocessoftradeliberalizationandcurbingfoodinsecurity.However,
the program does no longer exist due to lack of resources for its proper functioning.
At the multilateral level, the traditional focus of the multilateral trading system (MTS) on trade
issueshasalteredtoincludetraderelatedinvestmentmeasures(TRIMs),whichareimportant
for LDCs to increase inward FDI expected to augment their trade competitiveness in the global
setting. The new EU-ACP partnership under the familiar Cotonou Agreement entails much longer-
term cooperation between the ACP and EU countries through the required Economic Partnership
Agreement(EPA).TheEPAshavebothtradeandinvestmentprovisionsinadditiontodevelopment
assistance,whichareyettobeforthcomingforTanzaniaasithasnotyetconcludedanyEPA.
101 Report on the Study of Growth and Impact of Investment in Tanzania
Since member countries are at different stages of development, development of regional
investment policy should be reassuring creation of a “win-win” situation (attracting greater
investmentsandfosteringbenefcialintegration)forallmembers.Exampleofsuchinitiativesin
the case of the EAC include creation of several instruments to promote private investment and
increase the pace of regional integration including:
Acommoncompetitionpolicyandlawtoprotectandpromotefreetradeandfaircompetition, 
and permit harmonisation of trade and investment laws and regulations throughout the
region;
TheEastAfricanBusinessCouncil,aregionalbodyforallofthenationalprivatesectorapex 
organisations in the three member states, to promote cross-border trade and investment
and to infuence policies at the national level, to ensure that they are business friendly;
and
TheEastAfricanDevelopmentBank,whichisbeingrestructuredtostrengthenitsroleasa 
resourcemobilisationorganisation,especiallyforinvestmentprojects,byallowingbroader
purchasing of shares within East Africa and enhancing its capacity to issue international
bonds.
Generally, Tanzania stands to gain from the EAC integration if it becomes better prepared –
especially in the area of human resource development and making further institutional reforms to
make the economic environment more competitive.
5.13 Policy Implications
There is a need to develop further policies and incentives to encourage investments in the domestic
production of complementary goods and services with a view to developing a more integrated
economy. Policies should be reviewed to also encourage more exports of manufactured goods;
especially those that Tanzania has a comparative advantage like garments and processed
agro-products.Thefrstsetofmeasurestoimprovethecountry’sbalanceofpaymentsrequires
gettingtradepolicyright.Thismeanscreatingamorefavourableenvironmentforinvestors(both
domesticandforeign);promotingthecontributionsofcatalyticexport-orientedentrepreneursand
investors; and creating those linkages necessary to maximise the benefts of export-oriented
investments.
The Government can encourage networking and linkages by improving the capabilities of local
suppliersthroughsupply-sidepoliciessuchascost-sharinggrants,establishmentof“incubation”
grantsandloanstoSmallandMediumEnterprises(SMEs).Theassistanceisessentialtoenable
SMEs purchase equipment and acquire training necessary to meet requirements for foreign and
domesticinvestors.Inaddition,assistancetoSMEsisneededtoupgradelocaltechnology.
102 The United Republic of Tanzania - Tanzania Investment Centre
Encouraging domestic investment should be accompanied by promotion of domestic savings
throughimprovedfnancialintermediationthatshouldbeprogressivelydeepenedanddiversifed
to develop fexible money and capital markets. Equally important is the need to raise public
savingsbyreducingbudgetdefcits,raisingtaxrevenueandcontrollingpublicexpenditure.
Although it was noted that as domestic and foreign investment increases, tax revenue also
showsatendencytorise,itwasalsoobservedthattheprevalenceoftaxexemptionsthrough
the investment “Certifcate of Incentives” has eroded revenue sources, suggesting that the
government should revisit the current regime of investment incentives with a view to removing
excessive concessions and minimizing abuse.
Investments are generating employment as well as developing skills and technology transfer.
Policies to enhance further and more deliberately investments in human skill development and
technologytransferareimportant.Forinstance,matchinggrantsfortrainingcouldbeconsidered,
technological networking with local R&D institutions could be encouraged and subcontracting
arrangements between FDI and domestic investors could be encouraged.
FDIhasworkedwellwithsomecommunitiesbutthereareFDIs,whichhavecomeintoconficts
with local communities. For instance, in mining conficts with small miners, local communities
and other stakeholders have brought an outcry leading to the formation of a special Committee
investigate the matter. The Committee has revealed that, among other things, some of these
complaints arise from shortcomings in the implementation of the mining policy while other
complaints arise from poor communication of provisions in the policy and code governing mining.
This suggests that greater effort is needed to improve the implementation of policies.
It is within this framework that TIC’s resolve to establish zonal centres should be commended. The
centres should be expected to become the springboard for information and facilitation support for
small and micro entrepreneurs.
ForInvestmentPolicytobemoreeffective(inenhancingfurthergrowthandimpactofinvestment),
policy reviews should take explicit consideration of such cross cutting issues as environment,
gender,HIV-AIDSandregionalintegrationinitiatives.Inparticular,itisimportantthatgenderbe
mainstreamed in all components of both local and foreign investment as a strategy for ensuring
notonlyhighereconomicgrowth,butalsoequalityobjectiveofdevelopmentpolicy.
103 Report on the Study of Growth and Impact of Investment in Tanzania
Box 5.5: The EAC Model of investment Code (2002)
TheEACModelofinvestmentCode-2002(hereafter“thecode”)isinadvancedstageofpreparationafterthe
consultant(seeRuhindi,F2002)completedthedraftingandworkshoptodiscussitin2002.Thecodeisnow
goingthroughtheusualprocessofadoptionandratifcationwithintheregionalandnationalbureaucracy.The
codeiscomposedoffveparts.Thefrstisthepreliminaryparthighlightingonthetitle,interpretationandscope
ofthecode.Thesecondpartismoresubstantivesectionofthecode,anditdealswiththerightstoestablishand
beneftanenterprisefromthecodeandotheroperationalinvestmentincentivesprocedures.Partthreedescribes
the rationale and objectives for establishing a regional investment promotion agency. Part four covers the
establishment,operationandincentivesforthespecialeconomiczones.Finally,partfvecontainsmiscellaneous
clauses/issues and regulation of the code. From a region trying to hasten its integration process for growth and
povertyreduction,thecodeisaverywelcomeidea,althoughitscontentdoesnotdiffersubstantivelywiththatof
Tanzania/(Tanzaniainvestmentpolicy).
The code outlines some key benefts of establishing the investment code/agency as being: improving the
investment climate in the region by advocating policies and regulations that are favourable to foreign investment;
harmonizingnationalinvestmentpolicies/agenciesinordertoachievetheregionaldevelopmentgoals;andfnally,
the code is envisaged to provide the international best practices in investment promotion and practices that will
enhanceincreasedfowandimpactofforeigninvestmentintheregion.Establishmentoftheregionalinvestment
agency and code do not replace but rather complements the respective national code/agency. It should also be
notedthattheinvestmentcodeisintendedtobealegalinstrument,ratheraguidingdocumentforaparticular
memberstatethat,inturn,maywanttoincorporateintotheirnationalinvestmentpoliciesandlaws.Intheinterim
before harmonisation of investment policies and laws made, investors are obliged to access their respective
incentive packages from national investment agencies.
Thecodeprovidesfornationaltreatmentandnon-discrimination,andavailthefacilitativeservicesofinvestment
agencyofapartnerstatetoanyeligibleinvestors.Eligibleinvestorsfortheinvestmentincentivecertifcatesare
only those meeting the minimum threshold; and those intending to invest in the allowable areas /sectors (see
section5(5)andsection8ofthecode.Theinvestmentlawsoftherespectivepartnerstatescovertheminimum
thresholds for portfolio investment for foreign and local investment.
Furthermore, the code includes several investment provisions relating to eligibility and granting of incentive
certifcates,incorporationandregistrationofinvestment,transferandretentionoffunds,compensationincaseof
expropriation and settlement of disputes etc. The investment allowed to employ only four or less foreigners but can
employ more if deemed necessary and approved by the immigration department. Other incentives for investors
include a uniform corporation tax of 30%, exemption on import duty for all machinery and raw materials, duty
drawbackforallexporters,100%deductionallowanceontraining,researchandmineralexplorationexpenditures
andlosscarriedforwardtobeoffsetagainstfuturetaxableprofts.Thecodealsoprovidesforestablishmentof
(andconditionsthereof)specialeconomiczonesincludingexportprocessingzones,freetradezones,technology
parksandtourismcentresandvirtualzones.Thespecialeconomiczonesaregivenspecifcfscalandnon-fscal
incentivesaccordingtospecifcinvestmentactivities.TheseareshowninAnnexIofthecode.
Source:AdaptedfromKwekaandMboya(2004)
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6.0 ConClusions and reCommendaTions
6.1 Key Conclusions
TIC is a truly “one stop” centre that can greatly beneft foreign as well as domestic
investors.
TheoverarchinggoalofTanzaniaInvestmentCentre(TIC)istofacilitateandpromoteinvestment
inTanzania–thusfacilitatingeconomicgrowthandpovertyalleviation.Toalargeextent,fndings
of this study show that TIC is making commendable progress. Stakeholders interviewed applaud
TIC as a truly “one-stop” centre for investment facilitation and promotion. TIC, apart from
promoting investment, is also offering investor-friendly post-investment services. Despite this
fnding,thereisageneralfeelingamongmanydomesticentrepreneursthatTIC,andinparticular
investmentpromotionserviceshavenotbeenextendedequallytothelocal(comparedtoforeign)
entrepreneurs. While this is often pointed out as criticism against TIC and the Government in
general,itisapublicperceptionthatisbasedonmisinformedopinion.TICmandateandvarious
policy documents contain provisions for promoting both types of investment. In fact the domestic
entrepreneursfacesofterconditions(e.g.lowercapitalthreshold)foraccessingTICinvestment
incentives. Clearly, this perception points to the need for public awareness campaign on the
provisions and role of TIC for domestic as well as foreign investors.
Nevertheless,oneoftheGovernment’sobjectivesinreviewingimplementationofinvestmentpolicy
istoincreasesupportfordomesticinvestment(especiallySMEs).Thatis,donebyformulating
deliberatepolicies(orspecialpackage)forpromotingSMEsandbyreviewingthefscalpolicies
that are currently unfavourable to the growth of domestic investors. An investment policy could
also make explicit to the public its aim to recognise investors who have grown to the threshold
requiringTICcertifcateofincentives.Forthatreason,extendingTICservicesnearertothelocal
areas (such as the establishedTIC zonal offces) is imperative. In addition, the achievements
made by TIC so far should motivate the government and other stakeholders to step up resources
to deliver even more and effectively.
Achievements made in attracting investments are encouraging
Between 1995 and 2007 TIC registered over 2,076 investments, of which 55.3 percent were
foreign.Duringthisperiod,thecountryreceivedhighFDIinfowsthatexceededUS$2.4billion
comparedwithonlyUS$90millionduringtheprecedingsixyears.Thehigherresourcesreversed
thedecliningtrendinGrossFixedCapitalFormation(GFCF),whichrosefrom12percentofGDP
in 1997 to nearly 16 percent in 2003. Sectors that benefted most from the increased infows
are: manufacturing, mining, services and tourism.Agriculture received less than 10 percent of
the investments – in part due to unfavourable infrastructure that continues to retard this sector.
However, the existing FDI in the agriculture sector has made a signifcant transformation both
105 Report on the Study of Growth and Impact of Investment in Tanzania
intermsoftheperformanceoftheparticularcommodity/subsector(suchasFloriculture)andin
economic impact of the neighbouring community.
…but more investment is required as well as increased productivity
Is the current level of investment adequate in realising Tanzania’s Development Vision 2025 goal
of reducing poverty and promoting sustained development through GDP growth of over 8 percent?
Thestudy,usinghistoricaldata,notesainsignifcantrelationshipbetweeninvestmentandgrowth.
The weak link is associated with low productivity of investment and inadequate complementary
factors particularly lack of skilled human resources and poor infrastructure. Studies from other
countriessuchasChina,Japan,SouthKoreaandTaiwanreportthatinvestmentsaveragingover
20 percent of GDP have been pivotal in their country’s fast economic growth. If Tanzania is to
achieveitsdevelopmentgoals,recent(2000-2003)investmenttoGDPratioof17.6percenthas
to be increased to between 20-25 percent to achieve a growth rate of 8 percent or more. This
entailsmakingfurthereconomy-wideimprovements(e.g.inpolicyandinstitutionaleffectiveness)
thatwillattractfurtherinvestmentsbothlocalandforeign.Forinstance,furtherliberalisationof
foreign account may raise funds for investors to invest outside the country.
Robustcriteriaarerequiredtoevaluateimpactofinvestment
However, an important issue is not only the achievements in attracting a desirable level of
investment, but whether such investment unleashes the desirable impact. In evaluating the
impactofinvestmentontheeconomy,differentcriteriashouldbeemployedsoastoknowthe
costs and benefts of investment. In addition to the conventional criteria such as employment
andtaxrevenuegeneration,itisimportanttoemphasisethattheoverallobjectiveofpromoting
investment is to improve productivity and competitiveness of the Tanzanian economy. To achieve
this,oneoftheimportantcriteriaforevaluatingtheimpactofforeigninvestmentistheextentof
linkagesgeneratedtotherestoftheeconomy,andtothedomesticinvestmentsinparticular.The
reporthashighlightedthecurrentstatus,gapsandareasforimprovementintherangeofcriteria’s
used and applied some to analyse the impact of investment in Tanzania. The study proposes use
ofsocialcostbeneftratherthanorinadditiontothestatutorycriteriacurrentlybeingusedbyTIC
in evaluating the impact of investment.
Investments are having desirable impact …
Generally, investment policies being implemented in the country are laying solid foundations
not only for attracting higher levels of foreign and domestic investment, but also for sustained
growthinthefuture.Domesticsavingsarerising,jobsarebeingcreatedandnewskillsarebeing
learnt.Thereisalsoevidenceontransferoftechnologyandinnovation,albeitslowly.Investments
are also fostering entrepreneurial growth through forward and backward linkages, revamping
exports and contributing towards community development and government tax revenue. Together
withthesolidachievementsbeingmadeinfscalandmonetarymanagement,investmentsare
contributingtowards(atleast1%of)thecountry’seconomicgrowth-whichispoisedtogrowby
106 The United Republic of Tanzania - Tanzania Investment Centre
over 6 percent per annum in the foreseeable future. An impressive impact has been apparent in
certainareasandweakinothers.Forinstance,whilemanyoftheFDIsandprivatisedfrmshave
generatedsignifcanttaxrevenuestothegovernmentandmodestemploymentopportunities,but
theimpactonaddingvalue,technologytransfer(includingR&D)andenvironmentalconservation
arerelativelyweak.MoreoverdespitethesignifcantinfowofFDIandimprovementinbusiness
operatingenvironment,themanufacturingsectorisstillstrugglingtoimproveproductivity.
6.2 Recommendations
In order to amplify both the magnitude and impact of investment in Tanzania, a number of
improvements are recommended.
Makefurtherimprovementintheinvestmentclimate
Improve taxation system by eliminating multiplicity of taxes and reducing investor’s transaction
costs and cost of doing business. Review business licensing to eliminate unnecessary licenses
for one line of business. Review labour laws to attract and retain skilled labour, both imported
and local. Make further efforts to improve access to long-tem credit. The government should
emphasise continuous improvement of physical infrastructure. Investment productivity is higher
where a country has skilled workforce and well-developed physical infrastructure. Improve
availabilityandaccesstovitalutilities,especiallywaterandelectricity.Improvefurthertheroads,
harbours,transportandcommunication.
Foster macroeconomic and political stability
MacroeconomicandpoliticalstabilityisoneofthemosteffectivefactorsinattractingFDI,thus,
a need to emphasise the government’s commitment to maintaining favourable level of budget
defcit and money supply and ensuring socio-political harmony. Make further improvements in
fscalandmonetarymanagementinordertomaintainlowlevelofinfation.Hastenreformsthat
willinstilconfdenceininvestorsthatcontractswillbeenforcedandpropertyrightshonoured,and
prioritise good governance by reducing corruption and improving the quality of bureaucracy at all
levels of government.
TargetPromotionofInvestmentinvalue-addingandkeysectorsforgrowth
One major way in which to realise full impact of investment on fastening growth is to stimulate
linkages between different sectors of the economy by ensuring existence of backward and
forward stimuli of the new investment to the rest of the economy. Experience with the promotion
of mining sector reveal that targeting sectors is possible and can be effective. Therefore, the
governmentshouldidentifyandtargetidentifedsectorswhoselinkageandvalueaddingpotential
is substantial in investment promotion activities.
Promoteexcellingdomesticinvestment
Domesticinvestmentformsabout70%ofthetotalinvestmentinTanzania,thusbearingnotable
107 Report on the Study of Growth and Impact of Investment in Tanzania
impactontheeconomy.However,thisinvestmentisyettobeharnessedinastrategicmanner.
First,themultitudeofdomesticinvestmentissubsistenceSMEthatcanhardlybetransformedinto
growthpillars.Second,therelativelylargerdomesticinvestmentshavelowlevelofproductivity
due to structural weaknesses of the economy and low level of technological capacity. Finally,
the synergy between large and small investments, or foreign and local is too modest for the
later to beneft. Nevertheless, the impact of economic reforms has produced a few successful
domestic enterprises. These can be encouraged to excel as demonstration cases of success to
be emulated by others.
Undertaketargetedpromotionofinvestmentsinternallyandabroad
The targeting should be based on thorough research. Market research-driven investment
promotiontendstobemoreeffcientincuttingcostsofpromotionandachievingmoredesirable
investment outcomes.

Makeregularpost-approvalfollow-upofinvestors
This will help in understanding whether the actual investments being undertaken in the country
are in line with those approved and/or benefted fromTIC incentive (certifcate). In this way, it
willbeconvenienttoassessthebenefcialimpactinvestorsbringtothenationasawholeandto
ascertain whether or not the are in accordance with plans and objectives of TIC.
Improveinvestmentafter-careservicesthroughTICzonaloffces
To date TIC has been performing a well job in the area of investment after care services through
itsheadquartersinDaresSalaam.Theseafter-careservicesarebenefcialbothtotheinvestor
and TIC in realising customer-oriented investment promotion and support. It is urged that the
servicesalsobeprovidedthroughTICzonaloffcesinordertocutcostsandincreaseeffciency
in service provision.

ImproveHumancapabilitiesandencouragetechnologytransfer
This will entail making large improvements in all levels of the Tanzanian education system from
primarytohigherlearninginstitutions.Knewskillsarerequired,especiallythoseneededtotake
advantageofglobalisation,comprehendcomplextechnicalknow-how,andfosterbetterattitudes
towards work.
Institute Presidential Investor Awards
Someinvestmentsmakelargecontributionstothesocio-economicdevelopmentofthecountry,
notonlybycreatingmuch-neededjobsbutalsobyhavingnetresourceinfowswhilefostering
high linkages with the rest of the economy. It is urged that outstanding investment performers be
publicly recognised through bi-annual Presidential Awards managed by TIC.
108 The United Republic of Tanzania - Tanzania Investment Centre
Strengthenbalancebetweensocialandprivategoalsofinvestors
This is essential because the public and private interests can diverse and the society may suffer.
One way of balancing is to encourage public-private partnership where each has a vital role to
play in improving the quality of investment and fostering faster socio-economic development. For
instance,itisimperativetoensurethatallinvestorsaddressenvironmentalconcerns.Sustainable
development requires concerted efforts directed at protecting the environment. Thus ensure that
environmental regulations are met and all investors adhere to acceptable standards.
109 Report on the Study of Growth and Impact of Investment in Tanzania
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113 Report on the Study of Growth and Impact of Investment in Tanzania
appendiCes
Appendix A2.1: FDI by Country/Region of Origin, 1998 – 2004 (US$ Mill.)
Notes:1998representFDIstock,andthesubsequentyearsarefows.Percentagetotaldoesnotaddto100%
becauseofrounding-offerrorsandthefactthatourcalculationomittedcountrieswithinsignifcantvalue.Empty
cellsshownoFDIreported,whilezeroimpliesverysmallvalue.
Source:CollatedfromTanzaniaInvestmentReportsanddatabase,2001and2005.
114 The United Republic of Tanzania - Tanzania Investment Centre
Flow of FDI by Source Country for Tanzania, 1999 – 2005
Values in USD
Million
Country 1999 2000 2001 2002 2003 2004 2005
p
Australia 48.5 6.7 3.7 1.5 2.6 0.1 0.1
Austria 0.0 -0.1 0.4 2.1 10.4 5.8 1.8
Bahamas 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Bangledesh 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Barbados 0.3 0.0 0.0 0.0 0.0 0.0 0.0
Belgium 2.5 0.0 -0.1 0.1 0.5 0.0 0.0
Bermuda 5.2 0.0 61.8 0.2 0.7 0.5 0.3
Bosnia 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Botswana 0.0 0.0 0.0 2.0 0.8 2.7 0.0
British Indian Ocean
Territory
0.0 0.0 0.0 0.0 4.5 16.0 15.7
British Virgin Island 0.0 0.0 0.0 0.0 0.4 14.8 19.8
Croatia 0.0 0.0 0.1 0.1 0.0 0.0 0.0
Canada 80.9 0.0 21.5 230.2 59.0 41.0 54.5
Cayman Islands 0.0 0.0 0.0 0.0 44.3 14.2 3.3
Channel Islands 0.0 0.0 0.0 2.5 0.1 0.2 0.2
China 0.0 2.6 1.9 11.4 10.7 10.0 7.9
Cote D’Ivoire 1.3 0.0 0.1 0.0 0.2 0.2 0.0
Cyprus 0.0 0.1 0.5 0.0 0.0 0.0 0.0
Denmark 3.9 0.5 0.2 0.0 11.6 1.4 0.4
Dominica 0.0 0.0 0.0 0.0 0.0 0.0 0.0
EU 0.0 0.0 2.4 0.2 0.3 0.2 0.4
Egypt 1.4 0.0 0.0 0.0 0.0 6.1 0.0
Ethiopia 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Finland 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Foreign-NotSpecifed 4.0 3.5 0.6 0.3 -0.3 25.1 79.3
France 12.7 3.0 2.2 0.3 2.3 -0.5 0.1
115 Report on the Study of Growth and Impact of Investment in Tanzania
Country 1999 2000 2001 2002 2003 2004 2005
p
Ghana 134.2 0.0 1.5 0.8 2.7 0.0 0.0
Germany 8.5 15.1 1.2 2.8 4.5 5.3 19.3
Gibraltar 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Greece 0.4 0.0 0.0 -0.2 0.4 0.1 0.1
Guinea 0.2 0.0 0.0 0.0 0.0 0.0 0.0
Hong Kong 0.1 0.0 0.0 0.0 0.0 0.0 0.0
IFC 1.3 0.0 1.9 -0.4 0.2 0.0 0.0
India 0.6 1.5 1.9 0.0 0.2 6.7 5.3
Indonesia 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Iran 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Ireland 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Isle of Man 0.1 3.2 1.6 0.0 0.0 0.0 0.0
Israel 0.0 0.1 0.6 0.0 0.0 0.0 0.0
Italy 4.1 4.7 2.3 5.7 9.1 9.9 5.4
Japan 0.4 16.8 0.0 0.6 2.6 1.5 3.8
Kenya 20.1 6.0 13.1 6.7 18.5 11.8 10.5
Korea 0.0 0.0 -0.1 0.0 0.0 0.5 0.0
Kuwait 0.0 0.0 0.0 0.0 4.3 0.6 1.3
Lebanon 6.4 0.0 1.0 0.0 0.0 0.0 0.0
Libya 0.0 0.0 0.0 0.0 0.0 0.0 0.5
Liechtenstein 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Luxembourg 0.2 -0.1 2.3 0.0 1.1 0.7 0.1
Macedonia 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Malawi 1.3 0.0 0.0 0.0 0.0 0.0 0.0
Malaysia 3.7 0.1 3.9 -0.2 -0.1 0.5 -0.2
Mauritius 16.5 4.6 3.7 0.8 18.2 3.9 5.8
Nertherlands Antilles 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Netherlands 4.6 1.6 -8.1 1.4 0.8 8.2 0.8
Nigeria 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Norway 5.5 0.0 4.7 3.0 1.2 0.5 0.4
116 The United Republic of Tanzania - Tanzania Investment Centre
Country 1999 2000 2001 2002 2003 2004 2005
p
Oman 0.0 0.0 1.3 0.0 0.5 0.0 0.0
PTA Bank 0.0 0.0 0.0 0.0 10.4 0.0 0.0
Pakistan 3.1 0.0 0.1 0.1 0.2 0.4 0.1
Palestine 0.0 0.0 0.0 0.0 0.0 0.0 0.4
Panama -1.9 -0.1 0.4 1.9 0.1 0.0 0.0
Quatar 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Russia 0.6 -0.1 -0.1 -0.1 0.4 0.0 0.0
Rwanda 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Saudi Arabia 6.1 0.0 0.0 0.0 0.1 0.1 0.0
Sierra Leone 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Singapore 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Somalia 0.0 0.0 0.0 0.0 0.0 0.0 0.0
South Africa 37.9 95.3 141.8 34.9 7.1 91.9 100.4
Spain 0.0 0.0 0.0 6.3 7.3 8.0 10.3
Sri Lanka 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Sudan 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Swaziland 8.0 1.2 2.8 0.0 0.0 0.0 0.0
Sweden 1.8 3.0 5.4 0.8 1.6 1.5 0.0
Switzerland 9.0 29.8 19.5 1.9 7.9 1.6 5.3
Taiwan 0.0 0.0 1.4 0.0 0.0 0.0 0.0
Thailand 0.0 0.0 0.0 0.0 0.0 0.0 0.0
USA 23.5 27.7 32.2 29.9 2.8 1.0 5.0
Uganda 0.0 0.3 0.0 0.2 0.0 0.6 0.5
United Arab Emirate 0.5 2.2 15.1 2.1 14.0 0.7 0.7
United Kingdom 35.0 32.5 42.9 38.3 47.0 36.3 86.8
VirginIslands(U.S) 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Yemen 0.0 0.2 0.6 0.0 0.0 0.1 0.0
Zambia 0.0 0.0 0.0 0.3 0.0 0.0 0.0
Zimbabwe 0.0 0.0 -0.1 0.0 0.0 0.5 0.0
Total 493.0 261.9 390.0 388.6 311.2 330.8 446.6
117 Report on the Study of Growth and Impact of Investment in Tanzania
Appendix A2.2: Inward Foreign Direct Investment and Domestic Capital
Formation: the Theory
Impact on Domestic
Investment
Mechanism Source(s)
(+)IncreaseProftability
buildinfrastructure(roads, o
telecommunicationsetc.)
Cardoso & Dornbusch
1988
supply scarce inputs o Helleiner 1988
demandcreation(localinputsuppliers, o
labourincome,complements
Cardoso & Dornbusch
1988
positiveexternalities(training,managerial o
skills,technology,accesstooverseas
markets,marketinformation)
Blomstrom 1989
addition tax revenue invested in public o
goods
Cordoso & Dornbusch
1988
(-)ReduceProftability
increase wages and/or cost of other locally o
supplied inputs
Lall & Streeten 1977
worsen terms of trade o
BhagwatiBrecher,Findlay
1981,1983
stifedomesticcompetition o Helleiner 1988
negativeexternalities(tariff-jumpingFDI, o
corruption)
Brecher & Diaz-Alejandro
1977
(0)NewFinancing
newprojectsfnancedbyFDIhaveno o
impact on existing domestic
Fry 1993
(-)Replacement
Financing
privatization and/or buyouts replace o
domestic with foreign
Fry 1993
Source: Adopted from Phillips et al.2000:23(Table2.1),fromwhichdetailsofthecited
bibliography can be obtained.
118 The United Republic of Tanzania - Tanzania Investment Centre
Appendix A2.3: Inward Foreign Director Investment and Domestic Capital
Formation: Empirical Evidence (1975 – 2000)
1
Date Author(s) Data Methodology Results
2000 Phillips et al 59 Developing
Countries
(withcasestudies
ofMauritius,
Uganda
andKenya)
Panel econometrics
and 3 Case studies
+
1997 K.K. Mbekeani South Africa
Macro
2SLS
Error Corr. Model
+
1997 Brian Aitken
Ann Harrison
Venezuela
Firm level
Data
Time Series
Panel & Fixed
Effects
+JointVenture
- No local
partner
1997 Maxwell Fry 46 country
panel
Time Series
Structure Model
3SLS
+
1993 Louis T. Wells East Asia Case Studies +
1993 Wells & Warren Indonesia Case Study +
1993/94 Maxwell Fry Macro
16 countries
1966-88
Time Series
Structural Model
3 SLS
+/-depends
on policies
in place
2
1992 Katikati Ghana Time Series
Granger Causality
-
1992 Faroque &
Bougrine
Morocco Structural Model
Time Series
-
1989 Rhee & Belot Asia & Africa
Latin America
11 country
case studies
+
1986 Encarnation &
Wells
Asia Case Studies +/-depends
on policies
in place
2
1977 Matos Venezuela Case Study -
Notes:(1)Foragoodsurveyofotherstudiesandpriorto1975,see(Grieco,1986).
Source: Adopted from Phillips et al.2000:23(Table2.2),fromwhichdetailsofthecitedbibliographycan
be obtained.
119 Report on the Study of Growth and Impact of Investment in Tanzania
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Tanzania Investment Centre

REPORT ON THE STUDY OF GROWTH AND IMPACT OF INVESTMENT IN TANZANIA

2008

......................................................1 Identification of Domestic Direct Investment (DDI) ...............2 Trends and the Structure of Foreign Direct Investment ........... vii LIST OF FIGURES .......................................................................................................................3.......................................... Methodology.... 9 2.................. ix Background and Context ... x 3.............2...............1 Definition of Investment .................................................... 16 2..... 2 1.......... 26 2........ 1 1.........2.............1...................4.... 5 1..............................4 Spatial Distribution of FDI ..................3.....3 Literature Review ..............................1 Background .........................................................................................................2...............0 Trends and Magnitude of Foreign and Domestic Investment in Tanzania ...................................... 11 2......................................................................................1. 7 2............................4....Table of ConTenTs List of Abbreviations and Acronyms ... 23 2...........5 Portfolio Investments into Tanzania ........ 3 1......................................................................................................................... 28 The United Republic of Tanzania ........................................................................................................0 Introduction ...............3 Field Survey .... 23 2.................................................................... 18 2......1 Trends and the Structure of Capital Formation ......4 Capital Formation by Sectors of the Economy.............................5 Organisation of the Report ...... viii Executive Summary ............................................................................Tanzania Investment Centre ii .....................................................4 Methodology.................................................... Scope of the study .................................. 8 2................... 3 1..............2 FDI by Mode of Entry. 20 2....................................................2 Objectives and Rationale ...........3 Capital Formation by Type of Assets .. ix Objectives .........4 Policy Implications.... Key messages from the study ........................................... v LIST OF TABLES.....2..................................................................................... 7 2..................3 FDI by Country/Region of Origin ......3............. xv 1...................................................................................................xiii Acknowledgements .................................2 Relationship between Foreign and Domestic Investment .................................. 16 2..........4......2............................................... Recommendations ................................................................2 Overall Approach ................................................................................................... 5 2.....1 Size and Growth of Foreign Direct Investment in Tanzania ..3 Level of Domestic Direct Investment (DDI) ...4...................................................................................................1.......... 23 2................ 25 2........... 1 1.......................................................... Sectoral Distribution and Ownership ............................. 15 2..3 Scope of Work........................................1 Trends in Total Capital Formation ....... 3 1................ 4 1...... ix 1.... 2 1... 22 2... xi 4.......................... x 2.........................2 Capital Formation by Public and Private Sector ........................................................1.........................................................................................4 Data Analysis ........

..............6.... 49 4.............9 Undertaking more regular follow-up of investors ........... 52 4.................. 32 3...........................................................6...............6............. 41 3...2 Impact on Balance of Payments .............. 29 3............. 38 3....... 53 4.....6..........................6.................. 52 4............................... 37 3..1 Development Goals............3 Taking Advantage of Bilateral Investment Treaties ................ 47 4......... ...1 Impact on Exports/Imports ....................................1 Impact on Economic Growth ...1 Improving the Environment for Investment ........................3..................................2 Raising Investment Productivity and Sustaining Growth ...0 Measures for Evaluating the Cost and Benefits of Investments made in Tanzania .............6............................................................8 Facilitating and Servicing Existing Investors .................................................................1 Social Benefit Measures .........................5 Making Further Progress in Tanzania Investor Roadmap-type Issues ........................ 54 4...................2 Link between Investment and Growth .................................................................... 54 5......... 31 3.............6...........................6 Raising Investment and Growth: What can be done? .............1 Introduction ......3 Diversifying Sources of External Finance and Raising Effectiveness of Official Development Assistance ....6.... 29 3...............................................5.....3 Tanzania’s Historical Experience on Investment and Growth ....................4 Explaining Tanzania’s Insignificant Linkage between Investment and Growth ..................... 47 4................................................. 50 4..... 29 3................. 55 5...4 Improving Prospects for Technology Transfer ...............5. 45 4........2 Current Measures for Investment Approval .............. 52 4.............. 41 4..... 50 4......................3................................5 Investment Adequacy ................................. 51 4.............................................6..........................6.......... 50 4.6.................................................................5 Post Investment Measures...................................... 55 5............ 45 4........... 45 4...............................1 Statutory Measures .. 37 3.4 Calculating the Social Cost-Benefit Measures (Modus Operandi) ...........7 Protecting the Environment..............6.................................6.............................................................5 Improving the linkages between SMEs and existing investors.6 Facilitating the Creation of Employment ...............6.............................................4 Mobilising Domestic Resources ..... 53 4...............3 Cost-benefit Measures .............2 Other Follow-up Measures..6 Recommendations for Addressing the Key Remaining Constraints .........................................................................................0 Investment Impact Analysis .................2 Further Promotion of Foreign Investments ..............0 Investments Adequacy in Relation to Development Goals ............ 35 3.............2..... 57 5...........................1 Becoming more Pro-active in Promoting Local Investments .. 51 4...........3...................... 48 4.......................................... 40 3................ 57 iii Report on the Study of Growth and Impact of Investment in Tanzania ....................................2 Social Cost Measures . 54 4..........

11.1 Introduction ............................................................. 83 5... 79 5.............. 65 5....................................... 96 5............................. 90 5............3 Transferring Business Skills and Working Styles ..................................... 92 5....................................2 Tanzania’ Experience ....................8 Impact of Investment on Technology Transfer ..... 97 5................... 69 5.. 100 R 5.............................................. 113 The United Republic of Tanzania ..... 82 5......................11 Illustrative Cases of Some of the Performing Investments ................ 99 H 5......................... 89 5............... 77 5.........6......... 79 5......5 Technology Transfer-through Imports of Capital Goods ................................................................. 76 5......2...............................1 The Environment .............................. 81 5........2 Impact on the Balance of Payments ....7 Impact on Human Resources Development ............1 Introduction ..............................6 Impact on Employment Generation.............................................. 109 Appendices ...................................8.....................................................................11.......1 Key Conclusions ........................................................................................ 104 6...................................................................... 91 5.............2 Trends in Government and Private Savings .................. 70 5......................12........................................... 83 5.............................................4 Standard Chartered Bank Tanzania (SCBT) .....4 Examples of Technology Transfer in Selected Sectors .................12............................ 106 References ............................................. 96 5.... 101 6..........................................11..............5.................................4.............12........3 IV/AIDS................3 Investment Impact on Government Revenue........ 80 5. 65 5. 80 5.......................4.............................................. 62 5.... 86 5...........13 Policy Implications........................................6....................................3 Improving Savings Mobilisation ........................10 Community and Neighbourhood Impact...............................Tanzania Investment Centre iv ..................................... 66 5................. 61 5...................................................2 Kioo Limited Company (KLC) ...5 Investment Performance and Profitability .......................2 Investment and employment creation ................12.............9......... 93 5.................................................................6......8...7.......................11...................... 77 5.....................................................2 Development of Human Resources .12 Cross-cutting Issues.......... 104 6............................ 65 5..........4 egional Integration Initiatives ................................... 67 5.......0 Conclusions and Recommendations .......................................9 Impact of Investment on Entrepreneurial Growth..............4 Impact of Investment on Savings Level .................................. 69 5.............................1 Introduction ..........................8...............1 Entrepreneurship Growth ...................3 Employment Impacts through Linkages with the Rest of the Economy.1 Tanzania Cigarette Company (TCC) ........8......................................... 77 5.........................................4....1 Introduction ..........2 The Gender Dimension .............................7...........................3 Mission Mikocheni Health and Education Network (MMHEN) .....................................2 Recommendations .........8.

lisT of abbreviaTions and aCronyms AIDS BITS BOT BRELA CAER CDTT CEDAW CEM CGE COMFAR COSTECH CUTS DANIDA DDI EIA ESRF FDI FR STL GDP GFCF HIPC HIV ICOR IDA IFC ILO IMF IPI IIRT KIDT KTM LDC MDGs MIGA MKUKUTA MNEs MWATEX v - - - - Acquired Immune Deficiency Syndrome Bilateral Investment Treaties Bank of Tanzania Business Registration and Licensing Authority Consulting Assistance on Economic Reform Centre for the Development and Transfer of Technology Convention on Elimination of all forms of Discrimination Against Women Country Economic Memorandum Computable General Equilibrium Computer Model for Feasibility Analysis and Reporting Commission for Science and Technology Consumer Unity and Trust Society Danish International Development Agency Domestic Direct Investment Environmental Impact Assessment Economic and Social Research Foundation Foreign Direct Investment Financial Rules Sunflag Tanzania Ltd Gross Domestic Product Gross Fixed Capital Formation Highly Indebted Poor Country Human Immuno-deficiency Virus Incremental Capital Output Ratio International Development Association International Finance Corporation International Labour Organisation International Monetary Fund Institute of Production Innovation International Investors Round Table Kilimanjaro Industrial Development Trust Karibu Textile Mills Least Developed Country Millennium Development Goals Multilateral Investment Guarantee Agency Mkakati wa Kukuza Uchumi na Kupunguza Umasikini Tanzania Multinational Enterprises Mwanza Textile Mills Report on the Study of Growth and Impact of Investment in Tanzania .

NBC NBCL NBS NDC NEMC NSSF ODA ODI OECD PERs PPP PRS R&D SADC SIDO SME TBL TBs TIC TIRDO TNCs TNSRC TRA TTCL UK UNCTAD UNIDO URT USA USAID UTT VAT VOIL - - - National Bank of Commerce Limited Nyanza Bottling Company Limited National Bureau of Statistics National Development Corporation National Environmental Management Commission National Social Security Fund Official Development Assistance Overseas Development Institute Organisation of Economic Cooperation on Development Public Expenditure Reviews Public-Private Partnership Poverty Reduction Strategy Research and Development Southern Africa Development Community Small Industries Development Organisation Small and Medium Enterprises Tanzania Breweries Limited Treasury Bills Tanzania Investment Centre Tanzania Industrial Research and Development Organisation Transnational Corporations Tanzania National Scientific Research Council Tanzania Revenue Authority Tanzania Telecommunication Company Limited United Kingdom United Nations Conference on Trade and Development United Nations Industrial Development Organisation United Republic of Tanzania United States of America United States Agency for International Development Unilever Tea Tanzania Limited Value-Added Tax Vegetable Oil Industries Limited The United Republic of Tanzania .Tanzania Investment Centre vi .

.....16 Stock and flow of FDI by Regional Destination.67 Trends in Total Actual Employment of Selected Firms.................................................14: Table 5..................................5: Table 5..10: Table 5..........1: Table 5..........4: Table 5..................21 Investment and Growth in Selected Countries .....42 Tanzania Exports (US $ Million)....58 Investment-related Value-added tax ......2: Table 5.........................32 Sources of Growth in Tanzania ...92 Tax paid during the year ending December 31 2004 ..13: Table 5..............................................................................................8: Table 5............9: Table 5.................29 Investment and Growth in Tanzania....... 1998 - 2004 (US$ million) ....11: Table 5.............................................................4: Table 5................65 Actual Investment Created Employment by Sector and Categorisation for Mainland Tanzania (2001-2003) .3: Table 5.............................6: Table 5.........................................56 Trends in Import-Export-Ratio for Selected Mining Firms ..............................................................................................15: Table 5....................................................1: Table 3................................................95 vii Report on the Study of Growth and Impact of Investment in Tanzania ....................lisT of Tables Table 2...........................................................3: Table 3.........12: Table 5..........2: Table 3........................32 Roadmap on Institutional Facilitation of Investment ...............................64 Profitability of some investments (2002-2004) ................57 Investment-related Income tax .............................2: Table 3........79 TCC Performance ............................17: FDI stock in Tanzania 1999-2004 ..........94 Additional list of some of best performing enterprises .........................................59 Investment-related revenue from Customs.........1: Table 2.55 Trends in Import-Export Ratio for Selected Agricultural Firms ....16: Table 5.......................7: Table 5........................................91 Number of patients treated between 2002-2004 ...................................................................................................................55 Trends in Export-Import Ratio for Selected Manufacturing Firms ......................................................................60 Performance of Large Taxpayers (2003-2004) ....................90 Kioo Limited Performance ............................70 Network of Suppliers of Raw Materials and Other Inputs ..............................

..........................................................................60 Figure 5.............1: FDI...12: Sectoral Distribution of FDI Projects in Tanzania 1999-2001.......................................................................66 Figure 5............................74 Figure 5.......15: Identification of Domestic Private Investment ..................14 Figure 2........................9: Capital Formation by Kind of Economic Activity as % of Total 1989-2002 ..19 Figure 2.............10: FDI Inflows into Tanzania.........83 Figure 5.......................7: Structure of Capital Formation by Components of Other Works.......................10: Trends and Structure of Tanzania’s Imports (CIF) ................4: Trends in Exports/Imports for Manufacturing Firms ..9 Figure 2..32 Figure 5................16: Trends in the Foreign and Domestic Private Investment .........................................................................21 Figure 2...........11: Percentage Distribution of Investor Donations to Communities..................................8: Capital Formations by Kind of Economic Activity 1989-2002 ...........3: Trends in Exports/Imports of Selected Agricultural Firms (1999-2004) ...........................................................................15 Figure 2.....5: Investment-related Income Tax ...27 Figure 3......................19 Figure 2..1: Capital Formation as a % of GDP (Current Prices) ..........................9: Actual employment of TIC approved foreign affiliates in Tanzania..........12: Value of Investor Donations to Communities -1998-2004..........................................................Tanzania Investment Centre viii ...17 Figure 2..................14 Figure 2.......25 Figure 2......17: FDI as a Share of Total Capital Formation ......11: Foreign Direct Investment Inflows by Sector 1990-2003 ..........................24 Figure 2......................87 Figure 5.............21 Figure 2...................................... 11 Figure 2................7: Revenue from Customs ..2: Relative Importance of Public and Private Investment ............................. Leading countries 1990-2004................16 Figure 2................................ 2001-2004 ... 1990-2004.............lisT of fIGURES Figure 2...8: Tanzania Savings........... DDI and Growth of Real GDP .88 The United Republic of Tanzania ....2: Tanzania Exports (US $ Million)......................................1998-2004 ..........5: Structure of Capital Formation by Components of Building Works ..............................................13: Number of FDI projects in Tanzania 1990-2004 by Country of Origin .....4: Structure of Capital Formation by Types of Assets ......59 Figure 5........57 Figure 5...........................64 Figure 5............6: Structure of Capital Formation by Components of Other Works.........12 Figure 2..6: Investment-related Value-added tax revenue ......................62 Figure 5..........14: Investment by Country of Origin.......................................................................................58 Figure 5................15 Figure 2............12 Figure 2.. by industry.......................3: Value of Capital Formation by Types of Assets...63 Figure 5........................1: Real GDP Growth and Investment (1965-2004) ..... 1990-2003 (Percentage of GDP) ...............................................................................

the study makes three important contributions. Fourth. whether the benefits from promoting FDI outweigh the associated social costs. how to make the investment promotion and facilitation policies more efficient and effective. how best to deploy the benefits of FDI to achieve the country’s development goal. the study reviews the criteria used by TIC in evaluating the impact of investment and makes recommendation on the need for more robust criteria that incorporate the strategic need of promoting investment for enhancing growth and poverty reduction. First. This poses a major challenge in investment promotion programmes. ix Report on the Study of Growth and Impact of Investment in Tanzania . Tanzania has achieved significant progress in attracting the much needed investment especially Foreign Direct Investment (FDI). Addressing these challenges requires reliable information and statistics about the nature. structure and impact of investment on the economy. and recommend measures for enhancing the favourable impact of investment for economic growth and poverty reduction. In this regard. Finally. In response. the study recommends on how the situation could be improved. Although a majority of investment in both developed and developing countries are domestic. the key issue being the lack of accurate information on the magnitude of (particularly domestic) investment in Tanzania. in the last decade. The question is whether the level of investment attained is adequate to achieve the national development goals and what kind of investment is most beneficial and what the most cost-effective and socially harmonious ways to stimulate investment are. many developing countries face the challenge of developing domestic investments in the context of very low levels of domestic savings rates. Third.exeCuTive summary Background and Context In 1996 the government of Tanzania reviewed the investment policy of 1990 and in 1997 a new investment law replaced the previous investment law of 1990 in order to streamline investment incentives and make the TIC a “one-stop-centre” for investment facilitation and promotion. Second. it examines the available data and information to establish the magnitude. the study assesses the actual impact of the growth of investment in Tanzania so far. the report assesses of the adequacy of recent levels of investment for achieving the national development goals relating to growth. on the basis of the identified criteria. Third. Objectives The main objective of this study is to evaluate the growth and impact of investment on the economy. Second. First. Finally. to assess the role played by TIC in investment promotion and facilitation. determining the appropriate balance between efforts to promote foreign as opposed to domestic investment. nature and trend of total investment in Tanzania. Investment policy has a number of challenges to address.

Iringa. Purposive sampling technique was used to obtain sectors and regions for interview. The study team interviewed and administered semi-structured questionnaires to over 75 local and foreign investments in these regions. and (v) Recommending measures for enhancing the impact of investment on Tanzania’s economic growth and poverty reduction. Manufacturing (the future of economic transformation and important destination of FDI). the TIC management to review progress and share valuable information on the study. which were Morogoro. In addition. the study adopted the triangulation approach. the consultants involved a large number of stakeholders in discussions and reviews that aimed at soliciting information and opinions on investment issues. Seven regions were targeted for the survey corresponding to the selected sectors. Mara and Dar es Salaam.e. Methodology The overall approach taken aimed at adding value to the study by evaluating both primary and secondary data. The stakeholders included government ministries and departments. Mwanza. Fieldwork for this study was conducted during the first two weeks of December 2006. The United Republic of Tanzania . extensive consultations were made with the client. The consultants developed semi-structured interviews and questionnaires and made extensive field consultative sessions. i. and the Mining sector (the largest recipient of FDI in Tanzania). Kilimanjaro. (ii) Assessing the adequacy of investment level to meet the goals of Tanzania Development Vision 2025.1. The sectors selected include Agriculture (the mainstay of the economy). research and academic institutions. The actual number of firms that fully responded to the interviews and filled in the questionnaires was 55 (about 75% response rate). (iii) Identifying measures for evaluating the cost and benefits of investments made in Tanzania. the private sector. In addition. Arusha. Data processing and analysis included trend analysis. Scope of the study This study covered five issues: (i) Providing the trends and magnitude of both local and foreign investment in Tanzania. using the combination of the above-mentioned approaches to derive key conclusions. out of which 49 (or about 90%) were based in the up country regions. (iv) Evaluating the impact of investments. The first task involved review of various documents and literature in both developing and developed countries to enrich and inform the study findings. Given the policy nature of the envisaged end product. cost-benefit analysis causal effect analysis and impact assessment. The analysis was extended to policy adequacy and linkage assessment. development partners and the civil society. the Services sector (one of the largest recipient of FDI and SMEs particularly in tourism sectors). 2.Tanzania Investment Centre x . at the macro and sectoral levels.

South Korea and Taiwan show that investments averaging 25-30 percent of GDP have been pivotal in their country’s fast economic growth. (iii) TIC is a truly “one stop” centre that can greatly benefit foreign as well as domestic investors The overarching goal of Tanzania Investment Centre (TIC) is to facilitate and promote investment in Tanzania – thus facilitating economic growth and poverty alleviation.3 million (55. TIC is also offering investor-friendly post-investment services. However. services and tourism. However.785. Agriculture received less than 10 percent of the investments – in part due to unfavourable infrastructure that continues to retard this sector. Japan. For instance.651.3 million (71. xi Report on the Study of Growth and Impact of Investment in Tanzania .921. of which 25. Investors’ confidence in the Tanzanian economy is increasingly getting stronger.6 percent to USD 5.9 percent) in 2005. one major criticism on the way the investment promotion policy has been implemented is that TIC has not given sufficient attention to promoting domestic investment especially the SMEs. growing at an annual average rate of 13. Sectors that benefited most from the increased inflows are: manufacturing. The share of FDI remains the largest in the total stock of FPI as it contributed 88.084 investments.2 million in 2005. This entails making further economic improvements (e. the stock of foreign private investments (FPI) in Tanzania continued to increase. If Tanzania is to achieve its development goals. To a large extent.04 percent were foreign.BOT and NBS survey findings show that during the period 2001-2005. Equity from shareholders remains the major source of financing of FDI. finds insignificant relationship between investment and growth. This type of financing rose from USD 1. findings of this study indicate that TIC is making commendable progress. (ii) …but more investment is required as well as increased productivity The current level of investment is not yet adequate for realising Tanzania’s Development Vision 2025 goal of reducing poverty and promoting sustained development through GDP growth of over 8 percent. further liberalisation of foreign account may raise funds for investors to invest outside the country. recent investment to GDP ratio has to be increased to at least 25 percent to achieve a growth rate of at least 8 percent. The study. Apart from promoting investment. mining. (i) Key messages from the study Achievements made in attracting investments are encouraging Between 1997 and 2007 TIC registered over 4. Studies from other countries such as China.g.1 percent) to USD 3. Stakeholders interviewed applaud TIC as a truly “one-stop” centre for investment facilitation and promotion. TIC. The weak link is associated with low productivity of investment and inadequate complementary factors particularly lack of skilled human resources and poor infrastructure. the study has also established that this situation has changed for the better in recent years.3. using historical data.8 percent. in policy and institutional effectiveness) that will attract further both local and foreign investments. Many domestic stakeholders have the perception that the playing field is tilted in favour of FDI.

there are marked differences between the impact of foreign and that of local investment in terms of corporate responsibility. In addition to the conventional criteria such as employment and tax revenue generation. Investments are also fostering entrepreneurial growth through forward and backward linkages. at a macro level. Existing FDI in the agriculture sector has managed to bring about significant transformation both in terms of the performance of the particular commodity/sub sector (such as Floriculture) and in economic impact of the neighbouring community. and in general terms. The key message is that investment has had favourable impact generally on the economy and in the respective communities. jobs are being created and new skills are being learnt as a result of growth of both domestic and foreign investments.Tanzania Investment Centre xii . For instance. the manufacturing sector is still struggling to improve productivity. technology transfer (including R&D) and environmental conservation is relatively weak. First. one of the important criteria for evaluating the impact of foreign investment is the extent of linkages generated to the rest of the economy. However. and the former has further impacted favourably on the surrounding community. there are weak sectoral linkages in the economy and limited structure The United Republic of Tanzania . especially by improving the supply of public utilities and infrastructure. still impact on adding value. Impressive impact has been apparent in certain areas and weak in others. different criteria should be involved so as to examine the costs and benefits of investment. There is also evidence on transfer of technology and innovation. it is important to emphasise that the overall objective of promoting investment is to improve productivity and competitiveness of the Tanzania’s economy.which is poised to grow by 8-10 percent per annum in the next 2-3 years. Together with the solid achievements being made in fiscal and monetary management. investments are contributing towards the country’s economic growth .(iv) Robust criteria are required to evaluate impact of investment In evaluating the impact of investment on the economy. and to the domestic investments in particular. the impact of investment is less robust given the means through which that impact occurs and the structural constraints that are characteristic of the economy. Despite significant inflow of FDI and improvement in the business operating environment. Foreign investment embraces the practice of corporate responsibility more than the local investment. albeit slowly. However. domestic savings are rising. (v) Investments are having desirable impact … In examining the impact of investments at the community level. while many of FDI and privatised firms have generated significant tax revenues to the government and modest employment opportunities. revamping exports and contributing towards community development and government tax revenue. The report also emphasises use of social cost benefit analysis in evaluating investment proposals so that social and environmental concerns are also mainstreamed in investment decisions. For instance.

The study argues that the domestic investment has undisputable role and potential in enhancing growth and reducing poverty. xiii Report on the Study of Growth and Impact of Investment in Tanzania . Finally. Second. especially in the taxation area (multiplicity of taxes especially at local government level) and provision of infrastructure including competitive public utilities. the impact on the local community is rather ad hoc and voluntary depending on the discretion of large investors. To start with. options for special additional incentives to stimulate the development of SMEs should be explored.of investment distribution. promote domestic investment effectively in order to enhance synergy and complementarity between foreign and domestic investment and in particular between large and small enterprises. type of investment may require selected interventions. communities can arise if no efforts made to promote such linkages. Experience with the promotion of mining sector reveals that targeting sectors is possible and can be effective. Second. 4. Fourth. However. make further improvement in the investment climate. Market research-driven investment promotion tends to be more efficient in cutting costs of promotion and achieving more desirable investment outcomes. it has also revealed that problems of linkages with local suppliers end. but additional incentives could be provided to domestic investors that have demonstrated success particularly in key sectors for growth or and in the economically disadvantaged regions/locations. This is important in order to complement the current achievements on macroeconomic and political stability by greater efforts to improve the investment climate. the weak and rather ad hoc linkages between foreign and local investment demeans the trickle down effect of investment to the domestic economy and to SMEs in particular for broad based growth that is consistent with effective poverty reduction. Third. solicit higher quality investments by targeting investment in value-adding and key sectors for growth. Recommendations In order to amplify both the magnitude and impact of investment in Tanzania. ten important recommendations are made as follows. a level playing field could be attained by extending incentives that are applicable to FDI to domestic and especially SMEs. reduce further the cost of doing business to stimulate supply response at microlevel. Fifth. Promoting SME. In addition. TIC is urged to undertake targeted promotion of investments internally and abroad based on thorough research. First. Greater engagement of TIC in promoting DDI would imply extending TIC services nearer to the local areas.

Sixth, make regular post-approval follow-up of investors. This will help in understanding whether the actual investments being undertaken in the country are in line with those approved and/or benefited from TIC incentives. In this way, it will be convenient to assess the beneficial impact investors bring to the nation as a whole and in accordance with plans and objectives of TIC. Seventh, improve investment after-care services through TIC zonal offices. TIC has been performing well in the area of investment after care services through its headquarters in Dar es Salaam. These after-care services are beneficial both to the investor and TIC in realising customeroriented investment promotion and support. It is suggested that the services be provided through TIC zonal offices in order to cut costs and increase efficiency in service provision. Eighth, improve human capabilities and encourage technology transfer as a precondition for enhancing productivity of investment and attaining the desired level of competitiveness. Ninth, Institute Presidential Investor Awards. Some investments make large contributions to the socio-economic development of the country, not only by creating much-needed jobs but also by having net resource inflows while fostering high linkages with the rest of the economy. It is recommended that outstanding investment performers be publicly recognised through bi-annual Presidential Awards that would be managed by TIC. Tenth, strengthen balance between social and private goals of investors in order to achieve the social goal of promoting investment.

The United Republic of Tanzania - Tanzania Investment Centre

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aCknowledgemenTs
In 2006 TIC commissioned ESRF to conduct Research Study of Growth and Impact of Investment in Tanzania. The purpose of this study was to evaluate the growth and impact of investment on the economy; to assess the role played by TIC in investment promotion and facilitation, and recommend measures for enhancing the favourable impact of investment for economic growth and poverty reduction. While this is the first study of its kind, TIC intends to undertake it after every 5 years. Since the factors and parameters that lead to the conclusions change over time. We wish to thank ESRF for their efforts and time that they devoted to this work. We also wish to thank all stakeholders including MOA’s, individuals and NGO’s who in one way or the other participated in making contributions that led to the production of the final report.

EXECUTIVE DIRECTOR TANZANIA INVESTMENT CENTRE

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Report on the Study of Growth and Impact of Investment in Tanzania

The United Republic of Tanzania - Tanzania Investment Centre

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determining the appropriate balance between efforts to promote foreign as opposed to domestic investment. 2000:5). Addressing these challenges requires important information 1 Report on the Study of Growth and Impact of Investment in Tanzania . facilitation of new technology and enhancement of transparency in the legal framework and deregulation of investment processes. often provoking domestic debates on the balance and relationships between foreign and domestic investors. addressing the balance between the benefits from promoting FDI and the associated social costs. This poses a major challenge in investment promotion programs. Finally. The thrust of the new legislation was to unify all investment incentives under the general financial system. In this regard. Second. The above arguments imply that investment policy has a number of challenges to address. Yet FDI tends to be subjected to political economy concerns when it involves governments making major concessions in order to compete for foreign investment. encourage and promote investment in Tanzania and to advise the Government on investment policy and related matters”.1. 2000). many developing countries face the challenge of developing domestic investments in the context of very low levels of domestic savings rates (Phillips et al. creating a positive climate for private investment. The question is what kind of investment is most beneficial and what are the most cost-effective and socially harmonious ways to stimulate investment? Although a majority of investment in both developed and developing countries are domestic. on how best to deploy the benefits of FDI to achieve the country’s development goals. Third. on how to make the investment promotion and facilitation policies more efficient and effective. The revised policy and code included greater emphasis on promoting domestic capacities and encouragement of domestic entrepreneurship. TIC has transformed itself into a “onestop centre” for investment facilitation and promotion.0 1. The legislation provides the basis for Tanzania Investment Centre (TIC) to become the “primary agency of government to co-ordinate. It further made improvements in providing more competitive incentives with a view to directing investments towards areas that are most crucial for Tanzania’s economic development. export development. The review of the literature shows agreement that investment is critical for the growth process and hence social welfare (see Phillips et al. First.1 inTroduCTion Background The national investment policy of 1990 and Investment Code of 1990 were reviewed in 1996 and 1997 respectively taking into account the new policy developments in the country as well as the experiences of TIC during the 1990-96 period. stimulating and attracting local and foreign investment and providing assistance to all investors.

the specific objectives of the study as provided for in the Terms of Reference correspond to its scope as outlined in section 1. The United Republic of Tanzania . In particular. asses the role played by TIC in investment promotion and facilitation and recommend for measures for enhancing the impact of investment on Tanzania’s economic growth and poverty reduction.and reliable statistics about the nature. two challenges are key for Tanzania in her effort to make investment policy more robust. In the case of domestic investment. what are the viable and effective policies (specific incentives or modalities) for promoting suitable domestic investment? Second. This study seeks out to address these concerns. namely: (i) Providing the trends and magnitude of both local and foreign investment in Tanzania. given the structural features of Tanzanian domestic investment.3 Scope of Work This study identified five areas for analysis. significant progress has been achieved in attracting FDI. To corroborate this concern. structure and impact of investment on the economy. Therefore. That is. The main objective of this study is to evaluate of the growth and impact of investment. These challenges are amplified further by the severe lack of reliable information/statistics about the precise magnitude of domestic investment. 1. more so. the promotion of FDI has not matched expectations of its perceived impact. which requires monitoring and evaluating of FDI. This implies that the current investment (promotion) policy has been effective on the above first challenge. Monitoring and evaluating FDI in Tanzania is constrained by poor data.Tanzania Investment Centre 2 . However. Kabelwa (2003) notes: “…debate on FDI in Tanzania has somehow neglected the role of foreign investment in the country. whether foreign investment has met the country’s expectations and what impact it has on Tanzania’s economic development” (2003:18). However. These efforts should also include establishing an effective mechanism for tracking private foreign investment in all its forms. 1.2 Objectives and Rationale In the case of Tanzania. the issue that lies ahead is to ensure that attracting more FDI goes in tandem with the analysis of costs and benefits of this investment. to what extent has domestic investment benefited from FDI in a way that will augment the formers’ productivity and competitiveness. efforts by the Bank of Tanzania (BOT). and subsequently capital flight. First.3 below. domestic private investment. Tanzania Investment Centre (TIC) and the National Bureau of Statistics (NBS) is commendable in putting together many sources of data and information in order to generate a more plausible data series.

Clearly. In this case. For instance. and (v) Recommending measures for enhancing the impact of investment on Tanzania’s economic growth and poverty reduction. In value terms. Nevertheless. Gross fixed capital formation is usually used as a convenient definition of (or proxy for measuring) total investment. this definition distinguishes investment from trade enterprise. In other words. and the variety of investment (by size. 1. this study proposes a way to estimate the domestic private investment. the wholesale and retail trading enterprises notably preoccupying most enterprises in Urban Tanzania or SMEs that do not involve creation or use of asset to generate output. from the way official statistics are constructed. in section 2.4 1. (iv) Evaluating the impact of investments. income or other assets may not be considered as investment.(ii) Assessing the adequacy of investment level to meet the goals of Tanzania Development Vision 2025. However. 3 Report on the Study of Growth and Impact of Investment in Tanzania . investment can be defined as any use of resources intended to increase future production. the private component is not disaggregated further to make possible a distinction of relative contribution of foreign and local funds to capital formation. investment is money directed toward the purchase. and ownership etc. In the context of this study. (iii) Identifying measures for evaluating the costs and benefits of investments made in Tanzania. road construction is an investment but not a business activity. source. as discussed in section 2. it has to involve creation of output not premium. Gross fixed capital formation is divided into private and public components. output or income. as such it measures assets created or used in generating output (market or public) or income. not all business enterprises are investment (and of course.3.4. not all investments are business enterprises. it is crucial to make the definition of investment clear given difficulties involved in measuring investment. improvement and development of an asset for creation of value in expectation of generating income or profits. which is basically a business dealing with exchange of goods or services at a premium. for a particular asset or money to become an investment.3.) Therefore.1 Methodology Definition of Investment In standard economic conceptualisation.

(ii) The services sector: This was included in the sample. Purposive sampling technique was used to obtain sectors and regions for interview. The stakeholder discussions and evaluations were pivotal in the process of evaluating growth and impact of investment. (iii) The manufacturing sector: This has included to capture the significant share of divested parastatal enterprises that are in this category and some information relevant to the study that lack from reviewed documents. research and academic institutions. Further. The United Republic of Tanzania . These were surveyed to obtain information lacking in most reviewed documents. The consultants developed purposive unstructured and semi-structured interviews and questionnaires and made extensive field consultative sessions. The stakeholders included government ministries and departments. development partners and the civil society. solicit additional information that was considered key in complimenting secondary information and gather contextual information for validating and updating existing investment information. the documentary and literature review enabled the study team to design a purposive semi-structured field survey instruments to collect key information from investors that was considered critical for achieving the study’s goals and objectives.2 Overall Approach The overall approach taken aimed at adding value to the study by evaluating both primary and secondary data. the private sector. services related to the tourism industry.4.e. i.Tanzania Investment Centre 4 . the TIC management to review progress and share valuable information on the study. The first task involved reviews of various documents and literature in both developing and developed countries to enrich and inform the study findings. the consultants involved a large number of stakeholders in discussions and reviews aimed at soliciting information and opinion on investment issues.1. The purpose of the fieldwork was to collect primary data. in part because documents reviewed showed that this sector receives considerable FDI and domestic investment resources in particularly. 1. In addition. extensive consultations were made with the client. In addition. The agricultural sector is particularly important because at the moment it is dominant in terms of contribution to GDP and employment in Tanzania.4.3 Field Survey Fieldwork for this study was conducted in December 2006. The sectors selected were as follows: (i) Agriculture: Information was collected on the magnitude as well as quality of investments in the sector.

Dar es Salaam was selected to provide data on manufacturing and investments in services. the study did not use empirical models to analyse the investment or linkage impacts. The aim is to provide consistent criteria upon which to promote particular investment and recognise its impact in relation to the costs associated with its promotion and operation. and identified the magnitude of investment in Tanzania. Kilimanjaro and Arusha regions were selected to provide information on mining and related mining services.4. The actual number of firms that responded positively to the interviews 55. Data processing and analysis included trend analysis. the next task was to identify regions that could best provide the sector-wide information needed. agro-based industries and services. Chapter 2 examines the trends and structure of total (domestic and foreign) investment. triangulation approach was adopted using the above mentioned study approach to derive key conclusions. The study team envisaged interviewing and administering semistructured questionnaires to over 75 local and foreign investments in these seven regions. causal effect analysis and thus impact assessment. computerised and stored within ESRF data bank. After this introduction. of whom 49 (or 89 percent) of them are located in up country regions. However. cost-benefit analysis. Once the sectors had been selected. This challenge is discussed in Chapter 3. at the macro and sectoral levels. In addition analysis was extended to policy adequacy and linkage assessment. it is not known if the current level of investment is adequate for the desired poverty reducing economic growth rate. mining-related services. manufacturing and services. That is using different (three in this case) approaches: field work information. Mwanza and Mara regions were selected to provide information on mining. literature and secondary data to examine the issue under investigation.(iv) The Mining sectors: Apparently given its notable the special position of mining in having its own policy and code in addition to general investment policy and code. 1. The impact of investment 5 Report on the Study of Growth and Impact of Investment in Tanzania . Given the policy nature of the envisaged end product.5 Organisation of the Report The report is organised as follows. agriculture and agro-based industries and tourism-related services.4 Data Analysis The study team collected a wide array of primary (through the interviews and questionnaires) and secondary (published and unpublished from TIC) data on investment that has been tabulated. As Tanzania has made significant progress in attracting FDI flows. Morogoro and Iringa regions were selected largely to provide information on agricultural-related investments in farming. 1. Chapter 4 presents the proposed measures for evaluating the cost and benefits of (particularly foreign) investment in Tanzania.

Finally.on the Tanzanian economy using some of the suggested criteria and various other economic dimensions of investment is discussed in Chapter 5. Given unreliable and often insufficient data. The United Republic of Tanzania . Chapter 6 provides the main conclusions and recommendations. the problem is not to identify the net impact of investment in ways suggested in Chapter 4 rather attenuate the policy inquiry on the general impact of investment in the country.Tanzania Investment Centre 6 .

2.0

Trends and magniTude of foreign and domesTiC invesTmenT in Tanzania

One of the main objectives of this study was to identify the precise magnitude and structure of total investment in Tanzania. Although there are obvious data limitations in achieving this objective, in this section we attempt to put together and use the available data to show the revealed structure and trends in investment while discussing some existing data gaps/limitation. This is important since any observed limitation does impair a full assessment of the beneficial impact and cost of investment, hence the leverage to formulate or regulate credible investment policies. The chapter begins in section 2.1 by utilising data on the familiar Gross Fixed Capital Formation (GFCF) to show, at least for general and convenient purposes, the revealed trends and structure of investment in Tanzania. In section 2.2 the chapter presents trends and structure of FDI, data of which are widely available from the TIC. In this section, we also reiterate the key findings from the various joint surveys on FDI by the Bank of Tanzania, TIC and NBS (see BOT, relevant years). Identification and trends of domestic direct investment (DDI) is made in section 2.3 while discussing evidence on the empirical relationship between FDI and DDI. The key issue is that, the data on DDI is undeveloped, yet it is important in distinguishing the impact of investment policy from the perspectives of local versus foreign investment. With such limitation, this chapter may contribute to the debate on the need to develop such a database. Finally in section 2.4 the chapter concludes by bringing to the fore key policy issues arising from the trends and structure of investment in Tanzania.

2.1

Trends and the Structure of Capital Formation

Total investment includes foreign and domestic investment. However, the two components are different in many aspects, a fact that poses challenge in estimating total investment for Tanzania, but also showing the imperative of knowing the exact structure of each. Domestic investment may also be distinguished into private and public investment. On the one hand, domestic private investment or for convenience, Domestic Direct Investment (DDI), despite being the largest component of total investment, its investment activities are mainly characterised by (i) predominance of small and micro-enterprises (SME) mostly supplying low technology products and services in the largest section of the market; (ii) existence of few large scale firms mainly in light manufacturing activities. Moreover, the public domestic investment is characterised by significant share of infrastructure and construction activities, mainly the buildings and physical infrastructures. On the other hand, FDI has become an important component of private investment in the last decade in terms of its economic significance (tax revenue, technological capacity and export performance) despite of its relatively smaller size compared to DDI. FDI is also a major player in the privatisation of the former state-owned enterprises and boosts development of some sectors such as mining and tourism.
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Report on the Study of Growth and Impact of Investment in Tanzania

Nevertheless, statistics on the magnitude and structure of domestic and foreign investment are necessary in formulating policies for increasing the value (benefits) and flow of investment. However, such statistics are not readily available. First, data on FDI has been available only from 1992 (and revised in 1998), so that comparable trend with domestic investment is not possible for the earlier period. Second, domestic investment varies widely in size and nature of activities, which makes it difficult to define, compared to FDI that is easier to trace through the investment promotion agency (TIC) and has almost universal definition. Third, unlike FDI, domestic investment is composed of public and private components – whereas most of the former is also undergoing divestiture and privatisation, information which is difficult to access. Therefore, Gross Fixed Capital Formation (GFCF) is used for convenience as a proxy for total investment in the country. 2.1.1 Trends in Total Capital Formation

In aggregate terms, GFCF has fluctuated over time, with some years showing growth and others a decline. This is divided into private and public components. Nevertheless, from the way official statistics are constructed, the private component is not disaggregated further to make possible a distinction of relative contribution of foreign and local funds to capital formation.1 Capital formation in Tanzania as a percent of GDP is still too low relative to its desired role of fostering the economic growth at levels that are adequate for sustainable per capita income growth and therefore poverty reduction (CUTS, 2002). The GFCF declined from the peak of nearly 30% of GDP in 1992 to only 12% in 1997. Although a recovery was observed in the years that followed, it has not been able to go back to the rate achieved in the early 1990s. In 2003, GFCF as a proportion of GDP was nearly 19%. As Figure 2.1 clearly shows, the recovery in overall investment since 1997 is entirely driven by a recovery in investment by the public sector, while the investment by the private sector continued its downward trend. This gives reason for concern, since much of the literature on economic growth suggests that private investment is closely associated with economic growth, while the linkage between public investment and growth is much weaker (Utz, 2005). The relationship between public investment and growth is influenced considerably by the nature of public investment and whether it has a crowding in or crowding out effect on private investment. Previous decline in investment starting from 1992 has been mainly associated with a marked decline in public investment as a result of parastatal sector restructuring and privatisation of the former state-owned enterprises as well as cuts in public expenditure that was not matched by a proportional growth of private investment. The notable increase in the share of GFCF by public sector may also wrongly imply expansion of the public sector. More than anything else, we presume the growth in the share of public GFCF
1 The joint survey on FDI by BOT, TIC and NBS found that local/domestic investment share an average 14% of the joint venture FDI’s. 8

The United Republic of Tanzania - Tanzania Investment Centre

to arise from the surge in foreign aid mostly used in developing infrastructure. Surprisingly, in the same period, private GFCF has stagnated at less than 15% of GDP. Since FDI (considered to be part of the private GFCF) has been increasing dramatically in the same period of time, this stagnation implies that Domestic Private GFCF (DDI) has been declining at a more than proportional increase in FDI – a claim that is difficult to establish in the absence of reliable data on domestic private investment. In addition, it is not clear if and to what extent the value of private GFCF data includes that of FDI. Nevertheless, we proceed with these shortcomings in mind to examine trends in each of the two (public and private) components of the GFCF.

Source: Calculated using data from the Economic Survey and National Accounts (various years).

2.1.2

Capital Formation by Public and Private Sector

As a proportion of total capital formation, the relative importance of public and private investment has also varied in the last decade. Until 1999, the relative contribution of public investment in total investment declined continuously. This may be attributed to the changing role of the government and the decision to shift from direct production of goods and services by the state to facilitating growth of the private sector2. Nonetheless, since 2000 the relative importance of
2 The role of the state is now attuned to maintenance of law and order, provision of basic infrastructural and social services and building of a suitable environment for the private sector to take control of production activities.
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Note that the real exchange rate depreciation between 1990 and 1994 increased the price of (mostly imported) capital goods over this period. but has since then been a decline gradually to just 10% in 2003 (which is close to international average. development budget was the most affected (Utz.public investment in total investment has since been increasing (See Figure 2. private investment doubled between 1989 and 1995 from 40% to 80% (See Figure 2. In 2000 the proportion of public investment as a percent of GDP grew to about 6% and although a recovery has been observed since then. about 90% of the development budget in Tanzania is financed by foreign aid. Nonetheless. the share of public sector in total capital formation has been increasing gradually to about 50% in 2003. there was a marked increase in private investment as a proportion of GDP from 7% in 1989 to 19% in 19944.2).9% in 1997 and did not grow much until 2000. which peaked in 2000 exceeding 5% of GDP. Growth of total fixed capital formation as a percent of GDP has also been modest. World Bank. financed heavily by foreign aid. having declined from 65% in 1989 to 20% in 1995. according to World Bank draft CEM for 2005). Inadequacies of the institutional reforms that remained as liberalisation efforts started limited the ability of the system to redress the high transaction costs experienced by the private sector.2). 2005:24). recovering to about 7% in 2003.3 The percentage of GDP capital formation by the public sector declined steadily until 1997 reaching its lowest level of 2. Another source of information on investment trends are data on imports of capital goods. hence a limited share in total capital formation. 3 4 It is worth noting that the share of foreign aid in total government expenditure has increased tremendously.Tanzania Investment Centre . Interestingly. currently accounting for close to 50% of total spending. However. For instance. which declined dramatically from 14% of GDP in 1992 to about 4% in 1997. As it has been shown in various PERs (e. The unsatisfactory performance of the private investment from 1995 after peaking in 1994 could also be linked to persistent high interest rates and shortage of credit facilities following the relatively tighter fiscal stance by the government.1). This could be attributed to increased investment in infrastructural and social services for poverty reduction. The decline in private investment coincided with the dramatic increase in FDI since the mid 1990s. during the decade of fiscal adjustment in Tanzania (1985-1995). but has returned to the previous level of about 3% of GDP (See Figure 5. 10 The United Republic of Tanzania . The reversal experienced at this time could be attributed to inadequacies of the institutional reforms for which more rigorous measures started to feature only in mid 1990s. according to Figure 2. 2003). As a share of total capital formation. the relative decline in the share of the public sector experienced in the 1990s is likely to reverse in the near future. private investment in Tanzania is currently an important contributor to overall investment since public sector has withdrawn from productive and commercial activities. Nevertheless.g. the increase has not been able to match the levels experienced in the early 1990. A World Bank CEM study established a close relationship between central government capital formation and inflows of development assistance.2.

1. The value of capital formation has been increasing in real terms from 280 billion Tshs in 1997 to about 500 billion Tshs in 2003 after it declined from around 400 billion Tshs in 1991.5 respectively.3 Capital Formation by Type of Assets It is not sufficient to examine the component of capital formation by private and public sector.4 and 2. and whether public funds should be used to fund public expenditures and public investment. 11 Report on the Study of Growth and Impact of Investment in Tanzania . Trends in the value and structure of the three broad types of assets that constitute capital formation in Tanzania namely buildings. Official data on national accounts and economic surveys consistently report statistics on the composition of capital formation by different assets. the share of directly productive investment in total investment has been declining during the past decade by 10 percentage points from 63% in 1993 to 53% in 2003. Except for Equipments. This raises the question about the appropriate balance between public and private sector investment. it may be important to only examine the major sources of capital formation because such results will inform on the differential impact of adopted (hence the prospects for alternative) investment/economic policies that could have influenced such composition. One other structural feature of capital formation is the type of assets that constitute fixed capital formation either in the public or private sector. the value of other assets (Buildings and Works) is shown to be increasing over time. These expenditures are not productive in themselves but complements private investment activities to flourish. 2. equipment and other Works are shown in Figures 2. Although these sources of information do not report such composition for separately public and private sector.Source: Calculated using data from the Economic Survey and National Accounts (various years). Capital formation includes residential and rural own-account buildings and various public expenditure mainly on infrastructure. According to Utz (2005). Examining this can unveil important insights about the relationship between capital formation and economic growth.

Source: Calculated using data from the Economic Survey and National Accounts (various years).

Equipment that include transport, machinery and other equipments constitute the largest share (about 50% on average) of total capital formation, while works (development of physical infrastructure) constitute the smallest (about 20% on average), hence buildings occupy about 30% on average. There have also been some marked changes in the trend of capital formation by assets. The composition of Buildings and Works has both been increasing notably from 2000. One clear explanation for this trend is the relative importance of infrastructured development before and after 1995. As noted earlier, significant share of donor aid money has gone into
The United Republic of Tanzania - Tanzania Investment Centre

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developing of infrastructure. In addition, the share of building is increasing much faster from 1998 onwards – in part reflecting the boom in the construction industry evidenced by existence of large buildings and ‘own home’ construction throughout the country especially in Dar es Salaam. Equipment share of total capital formation increased notably in 1998, perhaps indicating a purchase of particular high value equipment in that year, most probably, mining equipment. From above trends, it seems that in the near future, buildings and works are likely to increase even faster in composition than equipments, as the government development policy as outlined in vision 2025 and in the MKUKUTA, place continued emphasis on infrastructural development. And most equipments (including transport) are not replaceable in the short run. Further decomposition of capital formation by specific type of assets is shown in Figure 2.5 for Building works, Figure 2.6 for other Works and in Figure 2.7 for Equipment. The purpose of this decomposition is to bring on the surface information that may be useful in explaining the changing structure of capital formation and which may not be easy to pursue using only broad categories of assets. Overall, each type of asset has experienced differential growth of its major constituents with a more consistent and structured trends in the case of Buildings and equipment compared to somewhat sharp and erratic trends in the case of Works. The major items in Building works is rural own account (for obvious reasons of the subsistence character of rural sector), but the rest of the items: residential and non-residential buildings have variably changed in importance until from 2000 when the importance of non-residential building increased sharply surpassing residential and rural dwellings whose share continue to fall. In the case of other Works, we observe rather erratic trends is various items. The largest item in this type of asset has alternated between roads and bridges on the one hand, and other infrastructure works on the other. The former has risen sharply since 1997 to become the largest component, as opposed to the latter whose share of total has fallen from 90% in 1990 to less than 5% in 2003. Overall, the importance of water supply in capital formation has also increased – its share has doubled from an average of 10% between 1990-1997 period to about 20% in the later period. There are indications that roads and bridges construction and water supply will continue to increase in share reflecting government policy emphasis on poverty reduction5. The structure of Equipment is much more clearer and steady. Equipment is composed of two major items: transport and other (including machinery and electrical) equipment where the latter constitute close to 60% and 40% for the former.

5

One of the HIPC condition is that the money resulting from debt forgiveness be spent on social services and infrastructure development for poverty reduction. These services include education, health, water and sanitation.
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Source: Calculated using data from the Economic Survey and National Accounts (various years).

Source: Calculated using data from the Economic Survey and National Accounts (various years).
The United Republic of Tanzania - Tanzania Investment Centre

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Notes: Data for 2002-2004 could not be availed as the most recent series of National Accounts by economic sectors are for year 2001. capital formation in the agricultural sector has been around 3. Investment in the agricultural sectors has been very small throughout the last decade.12. before which their contribution to total capital formation was only modest.9). Similar note apply for Figures 2. The highest level recorded as a percentage of total investment was 4. Construction and mining grew in importance considerably starting in 1998. Source: Calculated using data National Accounts (various years).7% in 1991. On average. capital formation in Tanzania between 1989 and 1998 was mainly concentrated in manufacturing.4 Capital Formation by Sectors of the Economy In terms of sectoral distribution. and storage. Between 1989 and 1997 manufacturing and transport communication and storage activities contributed more than 56% of total capital formation of the economy while the remaining seven sectors contributed only 44% in total.4% between 1989 and 2002 (Figure 2.1.9 and 2. 15 Report on the Study of Growth and Impact of Investment in Tanzania . transport and communication. 2.Source: Calculated using data from the Economic Survey and National Accounts (various years).

which triggered the positive response from prizvate investors from abroad. reaching $ 150 Million in 1996. The year 1999 and 2000 experienced the highest record of FDI inflows into Tanzania most of which came forth with the proliferation of mineral prospecting activities in the country. The United Republic of Tanzania . Below we examine the structure and trends of FDI in Tanzania. First.1 Size and Growth of Foreign Direct Investment in Tanzania Foreign direct investment flows into Tanzania grew considerably in the second half of 1990s. the investment policy (promotion and facilitation) has given significant policy emphasis on attracting foreign investment as one “sure” ways of financing growth and development.2. rigorous reform efforts to improve the investment environment and beginning of the privatisation programme.Notes: Data for 2002-2004 could not be availed as the most recent series of National Accounts are for year 2003. Although the growth rate slowed between 1996 and 1998 the achieved rates of FDI inflows were remarkable. from 1992 FDI inflows into Tanzania increased faster. Secondly. UNCTAD (2002) notes that the market oriented reforms reached a critical mass and sound foundations for an enabling framework for FDI were put in place. we proceed to distinguish the foreign and domestic component of investment for two basic reasons. Source: Calculated using data National Accounts (various years). Total FDI into Tanzania between 1995 and 2004 totalled US$ 2476. On an annual basis. This is also the period that was marked by improvements in the economic situation.2 Trends and the Structure of Foreign Direct Investment Having discussed total investment (GFCF) by various aspects.Tanzania Investment Centre 16 . 2. 2.4 million compared to less than $ 2 million between 1986 and 1991. there has been concern by various stakeholders (especially the private sector) that domestic (local) investors have not been facilitated to access the kinds of incentives that FDI is accessing despite the dominant share of DDI in total investment.

637.637. However.0 31.3%. the BOT/TIC/NBS survey of foreign firms establishments between 1998 and 1999 and in 2001 revealed that the stock of FDI had grown considerably.5 15.220.385.833.125.3 11.Source: Tanzania Investment Centre.7 Million Report on the Study of Growth and Impact of Investment in Tanzania 17 .167.99 34.1: FDI stock in Tanzania 1999-2007 1998 1999 2000 2001 2002 2003 2004 4.0 3.3 FDI stock as % of GDP 19.4 8.0 FDI Stock Millions US$ 1. Data from local sources on FDI stocks for years before 1998 is not available.201.6 9. FDI stock as a proportion of GDP has almost doubled between 1998 and 2001 from close to 20% in 1998 to 38% in 2001 (Table 2.820.1 14.093.9 9.1 percent.9 10.4 4.2 16.399. Economic Survey The inward stock of FDI in Tanzania has also grown considerably and was revised (upwards) by the information collected in the BOT/TIC/NBS survey for 2001. In 1998 for instance UNCTAD reported FDI stocks to stand at US$803 Million.49 Source: FDI stock up to 2001 are from Tanzania Investment Centre and from 2002 –2007 are own computation by adding flows to previous years stock using data from Economic Survey (2007).2% (UNCTAD. while the census estimated the stocks to stand US$ 1637.0 2. For the period 1990-1998 the stock of FDI as a proportion of GDP in Tanzania averaged 1.8 38.2 33.99 35.1 41.660.1).7 9.6 3. In 1999 FDI stock as a percent of GDP had reached 11. it recovered with the growth of FDI inflows and in 1998 it had reached 2.891.637.476.047. As a percent of GDP. UNCTAD (2002) estimates that the stock of FDI in Tanzania in 1980 was around 0% of GDP.4 40.307.5 22.5 2007 5.903.4 2005 4.0 2006 5.877. Table 2.7 1. 6 While indicative of the growth trend of FDI flows and stocks TIC/BOT/NBS census of foreign establishments reveals that the UNCTAD reports and many other sources may seriously underestimate the FDI inflows into the country.1 39.382.2 GDP (mp) Millions US$ 8. Nevertheless. 2002)6.

Overall. For instance. According to UNCTAD (2001). Given the relative importance of the agricultural sector on economic growth and development in Tanzania. But another reason could be that the efforts to promote local manufacturing and tourism activities are paying off and encouraging firms to invest in the sectors. In some cases. The same study notes that Mining accounts for the largest share (47%) of all South African investment during that period. evidence by Kabelwa (2003) indicates that services sector accounts for over 85% of all employment generated by South African businesses (excluding mining) in Tanzania.11). it has the most significant employment generation potential compared to others. The rest of the 15% is contributed by three sectors: manufacturing (10%). will still need to be addressed to ensure adequacy of investment particularly in food crop production. Sectoral Distribution and Ownership The main channel of FDI entry into Tanzania has been Greenfield investments (Figure 2.11) one can observe that the manufacturing and tourism sectors seems to have attracted more establishments compared to other sectors of the economy.2 FDI by Mode of Entry. Analysis of sectoral structure of FDI distribution has important policy implications. tourism (2%) and others (3%). followed by telecommunication (21%) and manufacturing (16%). while tourism contribute 5% and services 6%.g. most projects have gone to cut flower sub sectors leaving food crop and traditional cash crop sub sectors lagging behind. However in terms of stock of FDI in Tanzania the picture is different. although the services sector accounts for a relatively smaller share of total South African investment. etc) it is nevertheless too early to assess the direction of progress. lack of credit facilities for both long term investment and working capital and the general lack of incentives specifically designed to attract investment into the sector.Tanzania Investment Centre 18 . acquisitions of companies by foreign investors have been few in numbers but have nevertheless given a significant push to annual FDI inflows. and Participatory Agricultural Development Programme.2. the number of projects attracted to the agricultural sector is still to small to make a major impact. Various risks associated with the sector. At the moment however. This implies that. Although it is encouraging to note that efforts to counter the bottlenecks of investment in the sector are underway (e.2. the share of foreign acquisitions in FDI inflows until 2003 was about 28% while new investment establishments accounted for 72% of total number of projects into Tanzania. sectoral distribution of FDI has not matched the corresponding sectoral economic impact. Based on the number of approved projects by sector (Figure 2. The manufacturing sector The United Republic of Tanzania . Cumulative data on foreign investment projects approved by TIC between 1990 and 2003 thus points to the dominance of interest in Greenfield investments by foreign investors. example the Agricultural Marketing systems Development Programme. This may be attributed to a number of reasons one being that establishments in these sectors have been mainly small in size and therefore do not require high initial capital.

Concentration of FDI in the mining sector is possibly due to expensive equipment given the small number of projects attracted to the sector.continues to lead. it is followed by mining and quarrying and service sectors such as trade (wholesale and retail trade). Source: Tanzania Investment Centre. and financial sector insurance and real estate. Report of Census of Foreign investment in Tanzania 2001 Examination of the key sectors for growth (namely agriculture. manufacturing and services) and 19 Report on the Study of Growth and Impact of Investment in Tanzania .

insufficient domestic markets and other supply side and institutional bottlenecks). The revealed structure of FDI inflow is more a testimony of FDI preferences and opportunities available in the high concentration sectors than promotion efforts by the TIC in such sectors.13. A study by ESRF (forthcoming) analysed the factors constraining significant inflow of FDI into the Agricultural sector as being lack of favourable agricultural infrastructure and slow privatisation of existing state owned parastatals. expediting land ownership reforms and addressing the infrastructure and other supply side bottlenecks to rural enterprises. thus encouraging faster development of human capital through learning by doing. The United Republic of Tanzania . UK has been the largest single source of investment projects coming to Tanzania (35%) followed by Kenya (13%). Of foreign investment projects that were registered in the country between 1990 and 2003. In numbers. Morrissey and Blake.2. 2004). That is. United States (10%) and India and South Africa (7%) as shown in Figure 2. 2003). The small share of FDI into the agricultural sector in total FDI is also attributed to the adverse conditions in the agricultural sector (including adverse weather condition. there is a growing trend towards formation of joint ventures. This implies that the impact of FDI on poverty in Tanzania is not consequential. sufficient policy efforts have not been made to attract FDI into the agricultural sector. social sectors identified as key for poverty reduction (in the first PRS) have attracted disappointedly smaller share of total FDI. For instance. The government needs to make deliberate efforts to attract more FDI to the agricultural sector as a way of enhancing its efforts to alleviate poverty by among other things. about 52% were joint ventured while foreigners wholly owned projects accounted for the remaining 42%. This tendency is encouraging especially because formation of joint ventures is associated with transfer of proprietary knowledge and skills. However. 2. the share of local investment in joint ventures has remained low (on average 14%) especially in service sectors. In addition. low prices of agricultural products in the world market.3 FDI by Country/Region of Origin Data from TIC on approved projects by country of origin between1990 and 2002 shows that investment from Western Europe (both in value and in numbers) dominated the scene.the priority sectors for poverty reduction shows that the types of FDI inflow to Tanzania are less poverty focused (Kweka and Mboya. the mining sector has very insignificant sectoral linkage and multiplier effects compared to the agricultural cash crop sector such as cotton or a service sector such as tourism (Kweka.Tanzania Investment Centre 20 . In terms of ownership structure.

thus changing the structure.Source: Tanzania Investment Centre The large number of projects from UK may be attributed to the long established relationship between Tanzania and UK. which until 2001 was dominated by investments from UK. Most projects with Indian interests were established between 2000 and 2002. In terms of value however. Data Source: Tanzania Investment Centre 21 Report on the Study of Growth and Impact of Investment in Tanzania .14). projects from India though few in numbers (accounting for 7% only of all projects with foreign interests established in Tanzania between 1990 and 2002). account for the largest share in value terms of all the projects established since early 1990s (see Figure 2. which dates back to the colonial era.

4 12.6 3.1 4.5 0.1 22.90 44.7 12.6 2.0 0.7 122.5 122.742.2 13.7 38.184.80 332.6 3 0.3 0.1 4.0 0.1 2.5 49.4 1.8 0.7 13.125.2.9 The United Republic of Tanzania .5 151 145 179.8 7.3 0.8 8.7 125.128.134.844.3 42.3 0.3 90 70.8 180.9 8.4 0.9 2.90 1. The government is urged to enhance the efforts that are already in place to improve infrastructure and utilities especially in the regions that have attracted less FDI.2 55.5 1.3 128.4 0.7 135.9 10 14 8.1 0. Apart from its commercial and infrastructure advantage.0 96.3 124.1 0.20 1.40 1.2.1 18 11.8 14.604.9 2005p % of total for 2005 2.021.8 1.1 4.1 8.2 13.7 0.90 652. concentration of FDI in Dar es Salaam is partly attributable to the location of headquarters of some companies.2 17.4 0.7 percent).2 0.5 percent).1 0.10 43. 1998 - 2005 (US$ million) REGIONS1 Dar es Salaam Mwanza Shinyanga Arusha Morogoro Mara Iringa Kilimanjaro Kagera Mbeya Manyara Tanga Pwani Tabora Ruvuma Singida Total for Mainland North Unguja 2001 2002 2003 1.5 693.3 0.8 134.2 0.6 206.5 166.8 22 1.6 49 35. North Unguja received largest amount of FDI. which have reported consolidated data that includes upcountry investments.2 10.1 50.8 2.70 92.2: Stock and flow of FDI by Regional Destination.5 3.6 123.4 1.7 3.30 75.4 percent) and Shinyanga (12.2 400.6 27.7 37.6 13.2 53.30 3. Large share of investments in Shinyanga and Mwanza is on account of the regions’ richness in diamond and gold deposits.6 0.5 26.Tanzania Investment Centre .762. Mwanza (26. Table 2.1 193.4 Spatial Distribution of FDI Concentration of FDI remains in the same regions namely Dar es Salaam (42.973.354.90 657.3 465.3 52.4 183.6 2004 2.5 2.40 770.1 22.9 54. In Zanzibar.6 0.6 0.956.

5 100.3. The Capital Markets and Securities Authority was established in 1994 but wasn’t until 1998 that the first Stock Exchange market.138.2.60 52. Since FDI is basically private foreign investment.2 0. we can obtain the value of DDI by netting FDI from the private GFCF.Urban West South Unguja South Pemba North Pemba Total for Zanzibar Total for Tanzania 38.4 0.1 Level of Domestic Direct Investment (DDI) Identification of Domestic Direct Investment (DDI) Except for the generous series on the Gross Fixed Capital Formation (GFCF).9 5.0 0.1 1.758.2 1. started operations with only one company listed—the Tanzania Oxygen Limited (TOL).3 1. below we describe a methodology for identifying DDI using the available information data on FDI and GFCF.4 22.3 27. 2001 and 2005.15 describes the major components of investment to identify DDI. The level of activity in the market is nevertheless still low.8 47. In the absence of a better alternative.2 154. The Dar es Salaam Stock Exchange Market (DSE).242.1 1. 2. and flows for subsequent years.6 1. it can also take other different forms including portfolio investment.70 3.50 61.2 117.7 1. Figures for 1998 are FDI in Stock.5 Portfolio Investments into Tanzania Although most of the foreign investment flow is popularly considered as FDI. 2. there are no systematic data on private domestic investment in Tanzania.959. Source: Collated from Tanzania Investment Reports and database. Until the opening up of the Dar stock Exchange Market for Equity participation by foreign firms.4 23.0 2.3 4.3 0.141.1 1.5 4.2 107. The number of companies listed to participate in the market has since then increased to seven and 3 cross listed companies and the opening up of the market for participation by foreign firms has opened the way for portfolio investment funds to flow into Tanzania with more ease. portfolio investment into Tanzania was close to absent. 23 Report on the Study of Growth and Impact of Investment in Tanzania .3 2.4 40. which makes a complete analysis of domestic private investment difficult.1 1.4 115.70 *Notes: Cells containing zero values means that the FDI value was insignificant.0 3.1 178.2 31 0.8 1.5 24. Figure 2. empty cells (-) means there was no FDI flow.

Figure 2. the two figures show that although public policy has tended to be more favourable to the FDI. we consider this weakness less serious since its effect can be cancelled out with the value of domestic investments that has foreign joint ventures. Domestic investment is the significant part of the economy unlike foreign investment whose importance in economy has been recognised only since the last decade. it is only in the recent years (since 2000) that domestic investment has become a consistent contributor to economic growth (see Figure 5. However. some sectors such as manufacturing and finance/insurance had as greater share of local investment as about 50% and 20% respectively. However. The United Republic of Tanzania . The published data on FDI are those produced by the TIC – and reflect investments that pass the TIC threshold/definition. It should be noted that we use the above approach as a second best alternative while recognising as usual. and those not captured by TIC will be largely left out. the TIC/NBS/BOT surveys estimate the share of local private investment in joint venture FDI to be on average 14%. In general. this approach may not effectively distinguish the foreign versus domestic component in the joint ventures FDIs.Tanzania Investment Centre 24 .17 and 5. Nevertheless. but three are notable.This approach may have various snags. hence undervalue the true magnitude of foreign investment.16 shows the resulting trends of DDI relative to FDI. However.1. A clearer trend in the relative significance of domestic and foreign investment is shown in Figures 2. not all foreign investment is captured in the FDI data. domestic private investment (or DDI) has been a significant component of total investment in Tanzania. unreliability of the information on the value of domestic investment and the severe lack of statistics on the number of domestic establishments. Secondly. Foreign investment flows in a non-FDI form. First.1 in section 5).

weak production base on the side of local enterprises (poor quality. First. This is because FDI is expected. however. Third. Finally. It may require deliberate public intervention to steer the relationships in the direction that is consistent with achieving the national development goals. Such supply side problems as underdeveloped markets in some sectors. Second. there can be mismatch between foreign and domestic investors in terms of the sectors 25 Report on the Study of Growth and Impact of Investment in Tanzania . the relationship between the two may not be as automatic and useful.Source: Own computation based on data from TIC and National Accounts of Tanzania 2. where the latter is expected to learn and grow from the relationship with the former. the institutional framework guiding promotion and facilitation of FDI does not provide policy leverage for enticing foreign investors to relate to local investors. existing initial conditions do not readily enhance substantive linkages between foreign and local investments. to provide linkage and stimuli to local enterprises. In practice.3. many FDI develop from or/and have already developed international linkages (for supply chain) that may further limit the extent of collaborating with locals that cannot compete on similar footing unless deliberate effort is made to support their development. The relationship between the two has not been developing according to existing market requirements and opportunities.2 Relationship between Foreign and Domestic Investment One of major concerns by most developing countries’ appraisal of policy on FDI is the extent to which FDI has had a positive externality to domestic investment. lack of standards and poor infrastructures) and weak market institutions demean prospective collaboration between the two. at least in theory.

In all the cases. as mining is the biggest recipient of FDI for Tanzania in the last decade. is foreignness that important) and the third issue is. First. The learning/adaptation by local firms of the advanced technology/skills of the foreign enterprises may be compromised if the strategic motive of the latter is export market opportunities (i. policies that intend to better the overall investment environment as these are most beneficial.2 and A2.e. trade. that the analyses investigating the statistical relationship between FDI and DDI aim at determining which of the two investments lead the other. our purpose here is to focus on the last two questions. The first question has received a lot of emphasis in policy debates and analysis compared to the last two questions. Appendice A2. in countries where DDI growth is financed from domestic financial sector. tax revenue. what is the impact of FDI on the domestic investment (DDI). it implies little room for any substantial linkages. 26 The United Republic of Tanzania . Since. they are mostly undertaking artisan mining using rudimentary technology. FDI theory suggests that FDI can promote economic growth through increases in the capital stock. but more specifically on the last one7. If this mismatch is significant. Such literature recommend in view of these facts. products which are exported indirectly through dealers from neighbouring countries. Our aim in the last question is to find out whether and to what extent FDI is beneficial to DDI. wage levels and employment. there seems to be firm agreement on the affirmative side of the equation (that FDI is generally beneficial). The debate has included three issues. what is the statistical relationship between FDI and domestic investment or DDI (i. 2. 2000). hence limited participation of the local enterprises. if growth and market size are key determinants of FDI.3 Literature Review One controversial area in which FDI has received critical examination in the literature is its impact and relationship with domestic investment. but controversies on the negative side. That is. then DDI is the leader of FDI. the prime source of capital formation and which is expected to contribute to GDP growth. 7 In its simplest formation.3. this question has been treated in chapter 3 in several dimensions. is the FDI the leader or follower of the DDI? Various studies conclude that the relationship can go either way (blurred). Second. For instance. Even when the latter are engaged in this sector. but noting like the stylised fact that DDI is in principle. Another finding from empirical studies suggests that. products are not sold in the domestic market thereby learning or adopting). Subsequently. how beneficial is FDI to growth.Tanzania Investment Centre . Note however.e. The opposite is true when DDI has to learn and adopt a more advanced (or new) technology and export markets. it has feeble sectoral linkage with other sectors of the economy. in addition. The literature is unfortunately inconclusive on this matter (for detailed literature review see Phillips et al.3 summarise key findings from the theoretical and empirical literature.of interests or strategic interests of their respective establishment. FDI tend to participate more substantially (hence follow DDI). Technical composition of many FDI activities is too advanced for the local enterprises to learn/adopt in the short run.

since one of the principle and theoretical objectives of promoting FDI is to enhance its positive externality to and for the growth of domestic firms. Secondly. such that the more restrictive are the TBs and FR. FDI may alter the ownership structure of total investment in the host country thereby easing availability of investment funds through. This negative effect is amplified if the domestic investment is not associated with joint ventures with FDI. In addition. for instance. Other studies (See Appendix A2. road and other productive amenities). 27 Report on the Study of Growth and Impact of Investment in Tanzania . This is true in the case of Tanzania. As expected.3) have shown that FDI can have a positive or a negative impact on domestic investment depending on the level of trade barriers (TBs) and financial regulation (FR) imposed by the host country. many FDI companies have developed infrastructure in the local communities surrounding them (electricity. However. privatisation sales (that can be used to increase public domestic investment or offer finance to DDI). improving infrastructure. Although the share of FDI to total capital formation has been declining since 1999 after a sharp rise in 1998. FDI is unambiguously beneficial in a joint venture type of ownership. the less beneficial FDI are to DDI. water. FDI has been contributing to the growth of capital formation (Figure 2. First. However. there are prospects that it will increase in the medium term. it is important to note the fact that FDI can crowd out DDI by demeaning profitability of the DDI. Source: Own computation based on data from TIC and National Accounts of Tanzania In addition. where. economic theory points to at least two ways through which FDI may affect DDI. the country enjoys substantial improvement in her telecom sector as a result of foreign investment in that sector (establishment of world-class telecommunication systems and availability of mobile phones). for instance. FDI may have an impact on the profitability of domestic investment by.17). as discussed in chapter 3.

However. The government should design policies that will enhance possible benefits of FDI on DDI not only those that maximize inflows of investment. Yet another conclusion from literature suggests that. according to the FDI promotion policies have short-term benefits to the domestic investment in Tanzania. The impact should be assessed in a dynamic context as impact can change as policies/investment environment changes over time. the empirical work seems to suggest that FDI has a positive impact on domestic investment (Phillips et al. more than impact on domestic investment that actually drives their quest for FDI. To corroborate this concern. Monitoring and evaluating FDI in Tanzania is constrained by poor data. 2000). That is. In general. as Nyoni (2000) notes. For developing countries such as Tanzania.The above discussion plus information in Appendix A2. while the benefits of FDI for MNEs are easily quantifiable. Tanzania has acknowledged and recognized the importance of attracting FDI in order to attain a desirable economic growth rate and improve living standards. according to Mashindano (2004:70). 2004:61).2 and 2. FDI’s importance for domestic investment may also be demeaned by structural weaknesses characterizing both the economy at large and specific firms in particular. On balance. Kabelwa (2003) notes “…Debate on FDI in Tanzania has somehow neglected the role of foreign investment in the country. and subsequently capital flight since. Tanzania’s investment incentives structure lends itself to capital flight (Mashindano. For instance.Tanzania Investment Centre 28 . 2000:24). The question is about what kind of investment is most beneficial and what the most cost-effective and socially harmonious ways to stimulate investment. Critics of FDI argue that the profit seeking motives of MNEs are often inconsistent with the objectives of developing countries.3 implies that the precise impact of FDI on DDI can vary by country and time – such that each country case can provide a different experience. 2.4 Policy Implications The review of literature shows agreement that investment is critical for the growth process and hence social welfare (see Phillips et al. The issue that lies ahead is to ensure that the attracting more FDI gores in tandem with the analysis of costs and benefits of this investment…” (2003:18). efforts by the Bank of Tanzania (BOT). However. the potential host country benefits are less apparent. however. Tanzania Investment Centre (TIC) and the National Bureau of Statistics (NBS) is commendable in putting together many sources of data and information in order to generate a more plausible data series. It is the economic deficiencies in poor country’s thrive for development. The United Republic of Tanzania . These efforts should also include establishing an effective mechanism for tracking private foreign investment in all its forms. the studies make clear the fact that neither the theoretical work nor the empirical evidence provides a definitive answer regarding the impact of the FDI on domestic investment. especially when those policies are targeted at regional level. whether foreign investment has met the country’s expectations and what impact it has on Tanzania’s economic development.

These are also ambitious: eradicate extreme poverty and hunger by 2015.2 Link between Investment and Growth Experience in other countries shows that there is a strong link between investment and economic growth. To attain these goals it requires an increasing amount of quality domestic and foreign investments. To achieve these targets. reveals that for China. Kwan’s findings are summarised in Table 3. Malaria and other diseases. economic growth is highly linked with investment in new capital and increases in productivity that is associated with investment in new technology. Then we discuss Tanzania’s historical experience in relation to investment and growth.0 percent or more per year. Japan. South Korea and Taiwan. the strategy is to create a sustained export-led growth of 8. achieve universal primary education by 2015.1 invesTmenTs adequaCy in relaTion To developmenT goals Development Goals Tanzania’s Development Vision 2025 provides a statement of hope in the country’s quest for socio-economic development. Empirically. create a base for sustained development of the economy. sustained over a long period. This section answers the question: “Is Tanzania’s investment adequate to attain its development goals?” To answer this question. market economy. combat HIV/AIDS. promote gender equality and empower women. Finally. investment was the engine of economic growth in those countries. Research and Development (R&D) and training.1: 29 Report on the Study of Growth and Impact of Investment in Tanzania . we examine what should be done to make investment more productive in support of growth. and fashion a diversified.0 3. most growth regressions. In order to progress in achieving the above development goals. it has ambitious targets: half abject poverty. improve maternal health. Nevertheless. reduce child mortality.3. Tanzania is also party to the Millennium Development Goals (MDGs). Empirical work by Chi Hung Kwan (2004). ensure environmental sustainability. 3. we first establish the link between investment and growth. show that investment is the largest and most robust determinant of economic growth. and develop global partnership for development. middle-income. economic growth is necessary. through judiciously exploiting the country’s rich natural resource base and fostering domestic and foreign investment. including those that focus on Sub-Saharan Africa. In the long run.

Several factors have been cited as being important in facilitating high investment and growth in the countries shown is Table 3.2003 1961 . The study tested several theories by examining the relationship between the change in investment ratios and the change in growth per capita. Private investment had a significant positive impact on growth but once Botswana was factored out. et al (2001) also concluded that physical capital accumulation (investment) is crucial for long-run growth in Tanzania. A study on Tanzania by Wangwe. The study on 29 African countries did not establish significant association between increases in investment in Africa and changes in growth from 1960-79 to 1980-1999.2 3.5 percent real per capita growth. Barro and Lee (1994). Easterly and Pack (2002) show little correlation between investment and growth. Romer.Tanzania Investment Centre . One of the most famous predictions in development economics.2 2. For example.1 32.1: Investment and Growth in selected countries Country 1 2 3 4 China Japan South Korea Taiwan Year 1991 . there are also studies that show negligible linkage between investment and growth.7 Source: Kwan (2004). 1996). Similarly.4 3. Only Botswana had high investment and high growth. Weil (1993). and Mankiw.1 above. is that increases in investment ratios lead to growth accelerations. the inflation rate. social and political stability in a country is almost a sine qua non for investment. William and Levine.6 29. Ross. ICOR = Incremental Capital Output Ratio With regard to Sub-Saharan Africa. the effect of private investment on growth became relatively small. life expectancy. These are: • Economic and political stability and transparency: According to Olivia Jensen (2001).4 percent per capita growth (Easterly. dating back to Sir Arthur Lewis and Walt Rostov. Analysis based on official statistics of each country. political stability and geography variables. Despite the above empirical evidence.6 10.2 8. cross-country analysis linking investment to growth in Africa conducted by Devarajan.Table 3. 1 Other explanatory variables include school enrolment rates.1990 Investment Ratio (% of GDP) a 39.1990 1981 . Collier and Cunning (1999) and Calamitsis et al (1999) using growth regressions have all shown that investment is one of the main determinants of growth1. between 1960-75 Zambia had an average investment rate of over 35 percent of GDP but achieved only 0.9 GDP Growth (%) b 11.6 percent of GDP but achieved only 0.0 ICOR a/b 3. macroeconomic policy variables.6 21.2 9. 1997).1970 1981 . Similar findings were obtained by Young (1994. 30 The United Republic of Tanzania . During 1960-94 Africa invested 9.

A steady policy-making environment is conducive for both investment and economic growth. The upshot of this is that in order for Tanzania to accelerate investment and achieve higher growth. between 1960-79 an investment ratio that averaged 16. human and institutional infrastructure is essential in facilitating investment and growth. focus should be on continued and sustained economic and political stability.8 percent between 1991-94.8 percent between 1995-2002 coincides with a growth of 4. Good roads. The period of highest investment 1980-83 when the investment ratio as percentage of GDP averaged 24. • Stable macroeconomic policies: The size and growth rate of the market and low cost of production are important for investment. hard-working labourforce was found to be crucial for investors in the above-mentioned countries. well functioning and efficient harbours. Similarly. et all (1997) indicate that good physical. were all ingredients for attracting high investment and fostering high growth. (1997) amply shows. An educated. • • As the study by Easterly et al. countries that have marked inadequacies of the attributes outlined above have experienced low growth despite high investments in some of these countries. 3.6 percent. an investment that averaged 16. Low inflation and commitment by government to pursue non-inflationary policies.1) shows that investment and growth hardly seem to correlate. Similarly.5 percent achieved a growth of 3. when Tanzania achieved an investment ratio of 25. financial. average growth of GDP was only 1. relentless efforts must be made in improving the enabling environment. including following appropriate monetary policy are valuable for investors. Olivia Jensen (2001) observes that there was significant active participation by government in facilitating investment through extensive programmes aimed at creating a conducive environment for investment and growth. stable and reliable electricity supply and supportive financial institutions. enhanced transparency in all aspects of economic and social management.6 percent coincides with the lowest growth that averaged only 0. Similarly.8 percent. Investors seeking sites for long-term investment attach great importance to the predictability of the operating environment.5 percent. Supportive conducive infrastructure: Studies conducted by Amar Bhattacharya. Investors also value highly a transparent and reliable legal system. greater improvements in the country’s infrastructure and more pro-active government support for domestic and foreign investments.3 Tanzania’s Historical Experience on Investment and Growth Tanzania’s experience (Figure 3. transparency in decision-making is important for investors. stable macroeconomic policies that foster low inflation. Government resolute commitment and pro-active support for private domestic and foreign investment: In most of these countries. Integral to this issue is the degree of transparency of policy choices and the accountability of policy makers. In particular. In contrast.3 percent. 31 Report on the Study of Growth and Impact of Investment in Tanzania .

et al. This apparent lack of correlation between investment and growth in Tanzania is explained in sub-section 3.1 appear to be confirmed by a recent World Bank study on Tanzania (Devarajan. Both studies cited confirm that the interaction between FDI and secondary educational attainment is statistically significant in explaining growth. and Ndung’u (1997) and Jaspersen et al. According to Paul Krugman of Princeton University. One reason confirmed by the results of the growth accounting study by Devarajan. indicating that capital growth explains only 10 percent of the variation in growth of output. given that Tanzania has the lowest level of secondary education in the world (about 6 percent of the relevant school age population). the “East Asian Miracle” (called so because of the high rates of growth) was achieved through a rise in productivity and an increase in the The United Republic of Tanzania . the main reasons for low productivity were lack of complementary human skills needed to use complex capital gainfully. Source: Based on Bureau of Statistics and Bank of Tanzania statistics (various years). Easterly. According to the study. Thus. Empirical studies by Elbadawi.Tanzania Investment Centre 32 . (1995) prove that productivity of FDI is higher in countries with a higher educational attainment.The results depicted on Figure 3. while the interaction with primary education is insignificant.10. Value-added in manufacturing sustained a 39 percent decline between 1975 and 1990.4. this could be an explanation of the slower growth rate. Ndulu. and Pack 1999). The R2 was only 0. (1999) relates to low productivity of investment. 3. The study that used “growth accounting” methodology revealed that the correlation between output growth and capital growth was insignificant.4 Explaining Tanzania’s Insignificant Linkage between Investment and Growth There are several reasons why Tanzania’s relatively high investment has not achieved high growth rates.

the high ICOR is a reflection of low productivity of public investments and low rates of industrial capacity utilisation. Report on the Study of Growth and Impact of Investment in Tanzania 33 . For example.C.” Dar es Salaam. during the period 1973-87 and 1987-99.2.0 percent growth respectively. “Tanzania at the Turn of the Century – Background Papers and Statistics.8 20. The data provided in Table 3. implying an ICOR of 3. the more efficient the investment.6 percent of its GDP between 1981 and 1990 and achieved 9.85 1986 .0 17. the “incremental capital-output ratio (ICOR)’ serves as a guide2.5 1. for example. When considering investment efficiency (productivity).79 1980 . What are the reasons for low investment productivity? 2 The “incremental capital – output ratio (ICOR)” is obtained by dividing the ratio of investment as a percentage of GDP with real economic growth (real GDP growth).2 indicate that there is hardly any direct relationship between investment and growth.2. According to Wangwe and Tsikata (1999). Japan. the equivalent of 3.90 1990 .95 1995 .” Washington D. registering an ICOR of 15. Table 3.1 9.1 3. National Bureau of Statistics.2.use of larger amounts of factors of production – especially capital and labour.2 2.4 27. in order to boost growth by one percentage point. For example.6 16.6 GDP growth (%) 5.73 1974 . The smaller the ICOR is.6 16. The efficiency of investment was low.2 percent growth.2 14.8 3. “Economic and Operations Report for the year ended 30th June. “The Economic Survey 2001. it means that in order for Tanzania to achieve a one-percentage point growth it has to invest 20 percent of its GDP – a highly inefficient way to achieve growth.2 percent sustained growth.5 4. Now lets turn to the experience of Tanzania. 2004.6 percent of its GDP between 1961 and 1970 and achieved 10.6 ICOR 4.” Dar es Salaam.0 8. as Table 3. The relationship between investment and growth in Tanzania is shown in Table 3.2 percent of GDP had to be newly invested. In other words. investments were 17 and 20 percent of GDP but registered –1. June 2002. implying an ICOR of 3. Periods of high investment are not automatically translated into high growth.1 5.9 2.3 percent and 1.2: Investment and Growth in Tanzania Investment ratio (% of GDP) 1965 . Similarly South Korea invested 29.7 24.9 3. In the latter case.2000 2000-2004 20.7 and 20 respectively.2 shows. Tanzania’s ICOR for most years are high compared with those of developing countries.9 7. invested 32.2 Source: World Bank (2002). In all these countries sustained growth was achieved through improved productivity. Bank of Tanzania (2004).

while education per worker contributed only 0. output per worker increased by 0. Notice that there is a large decline in total factor productivity between 1960 and 1990. As shown in Table 3. Pritchett (1999) argues that low rates of productivity could also indicate problems in measuring the value of the capital stock.7 percent per year over the period 1960-98.4 0. after 1970.3. From a high 1. and Pack (1999). lack of government efficiency in investment. In particular. total factor productivity growth.According to Devarajan. the low growth in Tanzania is not due to lack of investment but is associated with inefficiency. More generally. the lack of complementary investment (presumably due to adverse initial conditions typical in low income countries such as Tanzania) and especially in service sectors and required skills (that facilitate efficient utilisation of resources) have exacerbated the high ICOR.3 -0. corruption.3 Source: IMF calculations.9 1.4 percent per year.1 0. This finding is also supported by studies by Wangwe et al (2001) using “Growth Accounting” analysis.1 Total factor productivity 1. The main reasons for declining productivity were3:   3 Poor incentives for increasing productivity under the socialist regime. it fell to 0.3 percent per year between 1970-80 and turned negative between 1980-90. 34 The United Republic of Tanzania . The empirical evidence suggests that productivity of public sector investment and industrial capacity utilisation rates were too low to sustain high levels of growth. Country Economic Memorandum (1999).2 percentage points to overall annual growth.3 -0.4 1. This happened despite an increasing level of investment during this period. Table 3.Tanzania Investment Centre . and a variety of many other factors may lead to costs of investment that overstate the actual contribution of investment to capital accumulation.1 -0. The observation made above shows that during 1960-70 increases in total factor productivity were the main driving force behind the relatively high economic growth – contributing 1.2 0. Increases in capital per worker contributed 0.2 -0.3 0. The results of their study are reproduced on Table 3. turning negative between 1980-90. patronage.3 percent of annual growth is attributed to the residual.0 0. Easterly.2 0. total factor productivity began to decline.0 0.2 percent between 1960-70. However.3: Sources of Growth in Tanzania Output per worker Capital per worker Education per worker 1960-1970 1970-1980 1980-1990 1990-1998 1960-1998 1. Weak macro-economic policies that led to foreign exchange shortages.1 percent. The remaining 0.0 0.4 0.3 -0.7 0.3.2 0.

Tanzania’s erratic and unstable electricity supply. inadequate communication infrastructure and the like. Thus. As a consequence. relevance and quality of Tanzania’s education.0 percent growth or more over a period of 10 years. The discussion in Section 5. Poor investment decisions by parastatal organisations that resulted in over-capacities. or improved nutrition is key to faster and sustained economic growth. The reforms initiated in the 1990s reversed the declining factor productivity but have not been sufficient to boost growth to high levels.1. managerial. like Zambia invested over 35 percent of their GDP but achieved only 0. Education. and adaptation of new technology and modern practices.0 percent of GDP) and achieved over 7. learning. the quantity. Others such as Botswana invested about the same level as Tanzania (averaging 17. are among the lowest in Sub-Saharan Africa. The contribution of education to growth is small.2 to 5. Experience in other countries shows that investing in human capital in the form of education. Similarly most Sub-Saharan African countries invested over 9. Tanzania like Zambia achieved a dismal growth as discussed in Section 7. Unfortunately. therefore.1: “Is Tanzania’s investment adequate in relation to her development goals?” As discussed in Section 5.    Inadequate institutions to support high productivity. 3.3). investment in human capital also directly improves the quality of life of the beneficiaries and the society as a whole. Some countries such as Japan.0 percent or more to achieve desired development goals. and Inadequate supportive legal and regulatory framework. Taiwan and China invested over 22 percent of their GDP and achieved a sustained 8. Investment in human capital is particularly important for growth because it affects the development of entrepreneurial. Others. the country’s vision 2025 requires a GDP growth rate of 8. apart from being growth enhancing. and organisational skills.0 percent growth sustained for a period of 10 years or more.5 Investment Adequacy In this section the question posed in Section 5. is an area that requires higher investment to boost growth in the future. health care. tend to reduce the productivity of investment. as well as innovation. especially post-primary.3. The low observed investment productivity is also due to inadequate or weak infrastructure. the expected contribution of education to economic growth has been weak.6 percent of their GDP 35 Report on the Study of Growth and Impact of Investment in Tanzania .4 percent per capita growth for 15 years between 1960-75. South Korea.4 above is not conclusive about the relations between investment and growth. poor roads.4 percent per year between 1960-98 (Table 5. Insufficient availability of inputs and complementary investment into the production process. (2001) illustrates show that investment productivity tends to be higher in countries with well-developed physical infrastructure. inadequate water supply. averaging only 0. training. A study by Deepack et al.

each complementing one another. First. sustained growth requires not only increasing levels of savings and investment. Alternatively. However.between 1960-94 but had the lowest growth in the world (Hoeffler 1999). In addition. “growth of 5 percent requires investment of 20 percent”. This approach uses the Incremental Capital Output Ratio (ICOR) to project growth.0 percent. Other complementary conditions are discussed further below.6 percent – about 8. an increase of direct investment/GDP of 1. We can now conclude. Further. A 1995 World Bank report on Latin America says “enhancing savings and investment by 8 percentage points of GDP would raise annual growth by around 2 percentage points – again implying an ICOR of 4. there is need for greater public-private partnerships in development. Tanzania’s experience with regard to investment efficiency as measured by ICOR varies widely from a high 20. greater facilitation of local investors is needed in tandem with current efforts to promote foreign investments. For example.0 percent or more. as Section 7.3 percentage points results in an increase of one percentage point in growth. investment/GDP needs to rise from the current 17.2 to 7.4.0 percent to 8. we can know how much investment is needed by learning from empirical studies conducted using the Financing Gap approach. If we assume the most recent experience can be sustained.0-10.9%) between 1981-1990 and achieved 8 percent sustained growth over that period. How much more investment is needed? Using empirical studies quoted by William Easterly (1998). Tanzania would need an investment/GDP level of 25.8 percentage points. albeit on the theoretical level.2 between 2000-2004. Table 5.0 percent per annum or more requires higher levels of investment that are channelled to sectors of the country’s highest comparative advantage.6 percent per annum in order to achieve her Vision 2025 of raising GDP growth by 8. The United Republic of Tanzania . The IMF Institute in its training manual for developing countries suggests that investment requirements be calculated as “Target growth * ICOR. This implies an ICOR of 4. However. investment is one of the few most robust variables in cross-country growth regressions (Levine and Renelt. but also the efficiency/productivity of that investment and other complementary growth determinants. We discuss these other growth-enhancing factors in the next section. despite all these observations. In other words. there are a number of lessons that we can draw from the above empirical evidence. we need to raise investment/GDP by 3.4 percent.0 between 1987-97 to a low 3.Tanzania Investment Centre 36 . 1992).4 to 25. This means for Tanzania to increase its growth from the current 5.0 percentage points higher than the current level of investment. The EBRD in its annual 1995 report on ex-Communist economies said. then using the IMF approach.2.” In Section 5. that Tanzania would need to increase her investment/GDP level by between 21.6 percent to 21. This implies to get the Tanzanian economy growing at 8. Taiwan invested about that level (21.4 amply illustrates.

Second. First. is declining – except for priority sectors. Ndulu (1997) also calls for reducing the size of the budget deficits through concerted efforts to raise revenue collection and reduce wasteful expenditures as a way of fostering sustainable price stability.6. First. Reduce the rate of increase in money supply and inflation.6 percent to a country’s annual growth. Thus. Tanzania has to do more to attract more domestic and foreign private investment. Tanzania has made commendable progress in this area but much remains to be done. which provides the financing for a large share of Tanzania’s investment. This is worrisome for two reasons. Case studies on Sub-Saharan Africa cited by Ndulu et al (2000) also show high linkage between sustained macroeconomic stability and rapid economic growth. Therefore.6 3. However. Cut budget deficit. This is well below the ratio attained in developing countries of Latin America (20-22 percent) and Asia (27-29 percent). both public and private investments are needed because these complement one another – especially where the government improves markedly the country’s physical infrastructure. In particular making further improvements to enhance efficiency of the recently established Tanzania’s Commercial Court and Tanzania National Business Council as well as considering possibilities for institutionalising rural property rights.1 Raising Investment and Growth: What can be done? Improving the Environment for Investment Tanzania’s ratio of investment to GDP averaged about 17. An empirical studies by Pritchett (1998) has shown high correlation between adequate macroeconomic policy and rapid growth. official development assistance. J. make continuous improvements in the legal system. there is need to ensure continued macroeconomic stability. the following steps are important. To achieve this noble goal and foster sustained growth. the empirical evidence shows that Tanzania’s ratio of private investment to GDP is low. cross-country studies cited by Ndulu (2000) conclude that improving 37 Report on the Study of Growth and Impact of Investment in Tanzania . Second.3. Investors tend to have greater confidence in countries that have sustainable price stability. Similarly. it is important for Tanzania to strive to raise investment to those levels achieved by other higher growth developing countries. et al (1997) show that improvements in the quality of institutions emphasising the rule of law and security of property as well as more stable political and social environment conducive to higher investment have the potential to add 0. the latter benefiting from increased domestic and foreign investment. Private investment is not likely to take off on a sustained level where investors and lenders lose their capital because of dysfunctional court system that fails to enforce contracts and property rights. Also. Manage more carefully arrears – both domestic and external. private investment has been found to have a significantly stronger effect on growth than government investment – probably because it is more efficient and less associated with corruption. Empirical studies by Sachs.0 percent of GDP between 1965-2004.

Fifth. Tanzania’s basic infrastructure and utilities are poor. findings by Kweka (2003) indicate that improvement in infrastructure has significant influence on growth. That is. Kweka (2004) observes that in the case of Tanzania investments being made to improve transportation infrastructure has reduced tradeThe United Republic of Tanzania . achieving a robust macroeconomic policy environment and favourable investment climate is more fundamental to attracting FDI than just offering tax exemptions. The road network is undergoing major improvements but much more remains to be done to ensure regular maintenance and upgrading.Tanzania Investment Centre 38 .2 Raising Investment Productivity and Sustaining Growth Overall factor productivity in Tanzania is low (Table 5.0 percent. the debt overhang that Tanzania continues to accumulate despite recent HIPC debt reductions discourages private investment by reducing the expected after-tax rate of return on capital. inadequate water supply. This is particularly evident in agriculture where investment is low due to high taxation.6.5 percent and total welfare rises remarkably by about 2. unavailability of power supply. In order to spur growth in productivity and output.3) because of a variety of distortions and institutional deficiencies.7 percent of GDP in public investment in transport and communication can increase growth by one percent. 3. Third. poor telecommunications and a workforce that leaves much to be desired. review the entire taxation system to provide for greater transparency and more equal level playing field between domestic and foreign investors. improving the quality of bureaucracy and adhering to the rule of law). Unfortunately. Similarly in the case of Tanzania. The Government of Botswana refrained from offering tax exemptions to foreign investors but managed to attract more foreign investment in part because of following prudent economic management principles that also assured investors that their property rights would protected. Good infrastructure is key to “crowding in” domestic and foreign investments. has the potential of increasing long-run growth by nearly a third of a percentage point per year. World Bank studies on Sub-Saharan Africa have cited poor infrastructure as a major deterrent to investors. refrain from special “subsidies” (tax exemptions) for foreign investors. Therefore better management of the country’s domestic and external debt is essential. Studies cited by Easterly (1997) show that an increase of 1. The study observes that real GDP growth increases by 0.governance scores (by reducing corruption. inadequate infrastructure support especially poor roads. the following steps have to be taken to reduce those deficiencies: (i) Make concerted efforts to improve the country’s physical infrastructure Empirical studies by Deepak et al (2001) show that productivity gains are high in countries with skilled workforce and well-developed physical infrastructure that complements the investment. High taxes are normally associated with low investment. Forth.

All these and other infrastructure require urgent improvement to spur investment and growth. Primary education had no significant contribution to growth. The tax authority (TRA) needs to make improvements in service delivery and avoid undue harassment of investors. A study by Easterly. However. Water supply for productive activities is irregular and inadequate to support a growing economy. A Study by Parente and Prescott (1999) shows that removing policy and institutional constraints could triple output through more efficient use of existing capital and adoption of new technologies.5 percent. 2000). (iii) Improve work-force skills and knowledge Empirical studies indicate high correlation between a country’s growth and its labour-force skills and knowledge. Progress is evident in telecommunication services but more competitive conditions are needed to lower costs. Attitudes and mindsets need to change.3. Recent projections by the World Bank using cross-country regressions of per capita GDP growth in 1990-97 show that if Tanzania improved its policies and institutions and thus raise its performance rating by 0. As shown in Table 5. Tanzania has made commendable progress in putting in place sound investor-friendly policies. such as the quality of a product. These are:  Knowledge about technology – technical knowledge or know-how. Civil servants are still not customer-focussed and investor-friendly. (1998) indicates that an increase of 1. et al (2001) also revealed that education per work is one of the factors contributing to growth in Tanzania.5 percentage points (World Bank. and expensive and has limited coverage. Much improvement is required in this area to ensure that power supply does not constrain productivity and growth. This also applies to the business licensing authority and immigration which need to speed up service provision.2 years in average schooling of the labour force could raise growth by one percent. In addition to secondary and higher education that have a high contribution to growth.  39 Report on the Study of Growth and Impact of Investment in Tanzania . Power supply is erratic. but these are still high – typically about 5 percent of value. In the context of economic growth. some of the institutions are still plugged with past rigidities and do not fully support the ensuing market economy.related transaction costs. the diligence of a workers. Similarly. the same study shows that an increase in secondary enrolment of 40 percent could raise growth by one percent. unreliable. 2002). per capita growth would increase by 2. or the creditworthiness of a firm – which are all crucial for establishing effective markets. Electricity costs are over 215 percent higher in Tanzania than neighbouring Kenya and nearly seven-fold the charges in South Africa (Musonda. the World Bank (1998b) has identified two sorts of knowledge that are critical in enhancing the productivity of investment and growth. agricultural methods. examples would be knowledge about manufacturing processes. and organisational methods. Knowledge about attributes. Wangwe. (ii) Improve policy and institutions Policies and institutions are important determinants of growth.

and property and land rights. further improvements are needed in corporate and contract law. Diversifying Sources of External Finance and Raising Effectiveness of Official Development Assistance Tanzania needs to put greater efforts at diversifying its sources and composition of external finance. (iv) Improve further the legal and judicial framework Experience shows that investors are enticed to invest in countries that have a well functioning legal system that is capable of protecting property rights. (v) Strengthen public-private partnerships (PPP) Growth comes as a result of a great deal of effort by many people and their government doing the right thing over an extended period. improving investment quality and actively engaging the government in win-win dialogues that foster social-economic development. donor assistance can be expected to play a significant catalytic role in attracting other forms of foreign capital in the future. In this respect there is need to reduce sovereign risk as influenced partly by the ability to service debt and by constraints to cross-border transfer of profits. Helleiner (1993) reiterates that key elements in securing policy credibility are the adequacy of finance and the assurance of its continuation. Studies by Jaspersen et al (1995) and Kharas et al (1991) have shown that creditworthiness is important especially in determining whether or not progression from official to private lending will be smooth. and cost-effective regulatory system that provides a level playing field for both domestic and foreign investors. much needs to be done. competition policy. Thus. bankruptcy law. macroeconomic stability.Based on the above observations. Prime to this effort relates to fostering creditworthiness to attract private investment.Tanzania Investment Centre 40 . transparent. the private sector has to reciprocate by abiding with rules and regulations. This market-friendly government environment should be expected to encourage saving new investment and foster further growth through powerful public-private partnerships (PPP) for development. expedient. In turn.6. Although Tanzania has made progress in reforming its legal and regulatory system. the current government’s efforts to expand secondary education are in the right direction. In particular. labour law. secure property rights and provide for adequate social safety net. This is essential to facilitate the country’s quest to build a transparent. This underscores the critical importance of stability of Official Development Assistance (ODA) in reducing the perceived likelihood of policy reversals in response to sudden resource crunches. well-financed and well-managed government is essential in imposing economy-wide discipline of law.3 The United Republic of Tanzania . policy credibility and sustained efforts to maintain both are important for reducing uncertainty and raising creditworthiness. A credible. It is also important to expand the knowledge base of the workforce through skills upgrading and improvement in the information and communication infrastructure. In addition. 3.

High growth and high savings are interrelated. Severn. The scope for such arrangements is high especially in infrastructure investments (such as IPTL. generation of higher foreign exchange earnings. 3. SONGAS). 1996). Ndulu and Ndung’u.Experience also shows that one way of diversifying sources of finance is to develop co-financing arrangements between ODA and private capital in a way that will permit ODA to leverage private resources. and the investment code must be implemented in fairness within the framework of a level-playing field for both domestic and foreign investment. These efforts are critical because experience shows that own resources form the financial base for sustained development of economies – both in developed and developing countries. 41 Report on the Study of Growth and Impact of Investment in Tanzania . The January 2004 Tanzania Investor Roadmap indicates significant progress in removing investment bottlenecks. In particular. A low tax policy is important for encouraging savings and fostering high growth. Tanzania’s experience shows that the response of private investment to the reforms that were initiated since the mid-1980s has been slow. To reverse this trend. Reforming the country’s taxation system. savings as a share of GDP has to rise from the current 12 percent to over 30 percent – a monumental task unless urgent actions are taken towards encouraging savings. reforms have to be deepened further to create assurances of negligible chances of policy reversal. Thus. and making further improvement in government revenue collection.6.5 Tanzania has made commendable progress in investment facilitation since the first Investor Roadmap assessment was made in 1996. Where response has come-forth. actions are needed in five main areas:  Fostering domestic resource mobilisation including increases in domestic savings. A more conducive environment for progressive and orderly transition to less dependence on external financing of the country’s development is essential. for higher growth to be achieved in accordance with the country’s millennium goals. High taxes and low credibility of banks tend to discourage savings and therefore retard growth. civil and political stability has to be fostered at any cost. In this section we review progress to date and recommend for further actions to improve the process further.6. Promoting private investment to support economic expansion while sustaining on-going economic reforms. Making Further Progress in Tanzania Investor Roadmap-type Issues   3. investments have been dominated by short-term low risk behaviour – especially channelled to trading activities (Elbadawi.4 Mobilising Domestic Resources The current situation where development assistance plays a large role in both recurrent and development expenditure is not sustainable. 1997.

70 Reduce to between 1-2 days Calling abroad: Africa – COMESA Africa Non-COMESA Europe.30 US$ 1. Articles of Association. Memorandum of association. Submission: 5 Photos. Takes 2 days to 2 weeks. Now strive to improve quality of service delivery.0/ $ 3.70 US$ 1. Articles of Association.0/ $ 2. Articles of Association. 42 .0 US$ 3. Ministry of Lands Obtaining phone connection TTCL Maximum time taken 14 days. Curriculum Vitae.70 US$ 1. average 10 days.4: Roadmap on Institutional Facilitation of Investment Practice in 1996 Practice in 2003 to date Recommendations Employing Activity Agency Involved Obtaining Class A Permit Department of Immigration Takes 2 to 6 months Submission: 5 Photos. Caribbean Rates have gone down to competitive levels. Submission: 5 Photos. Memorandum of Association. TIC Certificate Reduce the period to between 2 –5 days Reduce further to 2-3 days The United Republic of Tanzania .Table 3. Memorandum of Association. Birth Certificate.5 US$ 1. TIC Certificate Takes 4 days to 4 weeks Takes 3-4 days Takes 2 to 6 months Takes 1 week Reduce the period to between 2-5 days.2 US$ 4. minimum 3 days Full/economy rate per minute US$ 1.8/$ 3. Curriculum Vitae. Sector approval. Educational degrees.5/$ 3. Business Plan/Feasibility Study.4 US$ 4.Tanzania Investment Centre Obtaining Class B Permit Obtaining Letter of Offer Takes 5 to 6 months Full/economy rate per minute US$ 2. North America & Middle TTCL East Asia Latin America. Curriculum Vitae.6 Commissioner of Lands. IPC Certificate.8 US$ 4.5/$2.

Customs matches approved times to capital goods when imported. Agency Involved Practice in 1996 Practice in 2003 to date Recommendations Names clearance and registering firm Registrar of Companies. Submit IPC verified schedule to Ministry Register with TIC for of Finance for Remission Order. . Prepare import schedule.43 Employing Activity One process. 3-6 months approval. “Certificate of Incentives” Ministry of Finance submits Remission Order to Customs. takes 3 to 6 days Industries and Trade Internal trade section. Forms in Kiswahili and Forms in Kiswahili only. Procedure not Getting trade licence Ministry of Trade and English. Procedure posted publicly available Industries for public review Takes 3-5 days Obtaining Certificate Investment Promotion Threshold US$ 500. 1-2 days Reduce time for obtaining trade licence to below 10 days Maintain 3-5 days for both domestic and foreign investors. Report on the Study of Growth and Impact of Investment in Tanzania To qualify for reduction of duty on capital goods TIC. takes 2-3 days One process.000 if foreign of Incentives Centre (TIC) investor. Ministry of Two processes. Customs Issue “Certificate of Incentives” to both foreign and domestic investors. Submit schedule to TIC for verification based on business plan. Ministry of Finance.

” September 2003 and January 2004.Tanzania Investment Centre Obtaining local trade Dar es Salaam City licence Commission 1. Health inspector collects completes report. Applicant pays fees and receives receipt. Trade officer license. Applicant takes certificate to trade 3. 1.000 per annum for License fee based on US$ 80 per gross License fee is now a flat US$ Ministry of Tourism. Obtaining industrial licence Industrial Licensing Board. Source: Based on DAI (2003 & 2004). and 6. and recommends yes/no on 4. recommends yes/no on license Manufacturer with turnover of Tshs 100 million must register. “Tanzania Investor Roadmap. 2. US$ 20. Applicant hosts health Health inspector collects inspection fee. Trades officer recommends yes/no 4. and receipt information to Trade officer trade officer. 2. fee. Ministry of Trade and Industries Manufacturer with turnover Manufacturers with turnover of Tshs 10 of Tshs 100 million must million must register register. issues receipt.Employing Activity Agency Involved Practice in 1996 Practice in 2003 to date Recommendations The United Republic of Tanzania . issues receipt.000 per annum Natural Resources and registered ton rate is high (Lake Victoria) to Environment discourage over-fishing. officer 5. Health officer forwards receipt information to Health Certificate and trade officer. Applicant picks up Health Certificate 4. Health Certificate and 3. Health officer forwards completes report. 44 . Obtaining Commercial fishing licence Adjust fees to flat rate of Fisheries Division. Applicant hosts health inspection 2. Health inspector complete report. on license Develop timeframe for all these processes to avoid Applicant hosts health undue delays inspection 1. 3. areas where fish depletion 16.

Section two discusses statutory measures that TIC has to implement before investment approval. “Does the investment meet desirable environmental standards?” “Will the net social benefits exceed social costs?” Answers to such questions before investment approval are important. the following minimum 45 Report on the Study of Growth and Impact of Investment in Tanzania . not only to protect the national interest. 1997”. what TIC. Therefore. savings.0 4. investors conduct private cost-benefit analysis to determine profitability of alternative investment options. output. consumption. which aims at providing favourable conditions for investors. Evaluation refers to the determination of the values of project inputs and outputs. before an investor submits request to Tanzania Investment Centre (TIC) for approval. After this introduction. “does the proposed investment contribute towards national goals (Tanzania Vision 2025 and Millennium goals) related to higher employment. Section three focuses on measures related to social benefit-cost assessment. 4.4. needs to do is to subject the investor’s project into social cost-benefit analysis. In the context of cost-benefit analysis. it is expected that the investor has completed initial assessment and has firm ideas that the investment is viable and profitable. foreign exchange earning.2 Current Measures for Investment Approval Current measures for investment approval are stipulated in the “Tanzania Investment Act. Under the Act. investment can be defined as a long-term commitment of economic resources made with the objective of producing and obtaining net gains in the future. Under normal circumstances. Its main objective is to be the primary agency of Government to co-ordinate. Section four is devoted to post-investment that are essential in ensuring that investors “walk the talk” – that is. The main reason for conducting social cost-benefit analysis is to subject project choice to a consistent set of general objectives of national policy. For example.1 measures for evaluaTing The CosT and benefiTs of invesTmenTs made in Tanzania Introduction Tanzania Investment Centre (TIC) was established in 1997 by the Tanzania Investment Act No. income distribution and other important national objectives”. this chapter is divided into three sections.26 of 1997. encourage. but also to ensure that all investments contribute towards higher and sustainable economic growth and poverty alleviation. TIC undertakes various procedures as measures to decide on any investment approval and uses several measures to inform investment decision approval. are in reality implementing projects in accordance with TIC-awarded certificate of investment approval. promote and facilitate investment in Tanzania and advise the Government on investment related matters. In performing these functions. Therefore.

it shall contain: .Evidence of sufficient capital available for investment.How the investment will be financed. Where the application is to rehabilitate or expand an existing enterprise or both. the minimum investment capital is not less than Tanzanian shillings equivalent to three hundred thousand US dollars (US$ 300. nationality and shareholding of each share holder.Financing of the rehabilitation or expansion project. its articles of association and Memorandum of association or partnership agreement. shares or stock in an enterprise. . submission of investment application for approval has to contain the following: . . Where the application is for equity investment.000).The nature of rehabilitation or expansion. and . .The capital structure and projected growth over the next five years. The United Republic of Tanzania . together with evidence of availability of finances. experience and other relevant particulars of the project management.The name of the enterprise in which the equity investment is made or shares held. If locally owned. . . its legal form. . . .The nature of the proposed business activity and the proposed location where that activity is to be carried on. . . For new investments. ♦ If the investment is wholly owned by a foreign investor or if it is a joint venture.The qualifications of the project management. the minimum investment capital is not less than Tanzanian shillings equivalent to one hundred thousand US dollars (US$ 100.The proposed capital structure or the amount of investment and the projected growth over the next five years.The qualifications. .An undertaking that the expansion or rehabilitation shall be implemented as indicated in the projection. the name and address of each director or partner and the name.An undertaking that the project shall be implemented as indicated in the projections of the project.conditions have to be met before an investment is approved.The name of the existing enterprise. address.Tanzania Investment Centre ♦ ♦ 46 .A statement of audited accounts for the three previous years.000). its bankers. the application shall contain: .The name and address for the proposed business enterprise.

equipment. Will proposed investment create jobs. Foreign Direct Investment (FDI) can be an important intermediary between Tanzanian domestic producers and markets abroad. information. Thus.The currency in which the equity investment is made. social benefit-cost analysis has to be applied to each investment. marketing and technical know-how). .).1 1.3. Social Benefit Measures Employment Creation. All these are important measures in evaluating investment applications. but also as an integrated part of a socio-economic and ecological system within which the investment performs. 47 . management.. Transnational companies can help boost the country’s exports through their foreign affiliates. an investment is oriented towards the generation of future net gains. Often FDI can bring into the country both hard technology (e. expertise. Knowledge and Skills Transfer. 3.3 Cost-benefit Measures As stated in the introductory section. Tanzania Vision 2025. etc. it has to serve the needs and development objectives of the Tanzanian socio-economic system (e. both directly and indirectly? Technology. and . 4. Therefore. The measures most commonly used to assess benefits are as follows: 4.Constitution of the enterprise or partnership agreement. One important measure for evaluating investment is whether the proposed project has a chance of enhancing technology. The evaluation team finds these minimum statutory measures to be inadequate because investments are not subjected to social cost-benefit analysis as discussed below. knowledge. Promotion of the country’s exports.The amount of equity investment made. This objective can be achieved only when an investment is properly integrated within the Tanzanian business environment. competitiveness and markets. organisational skills. for the investment to be socially and economically beneficial. Millennium goals. Foreign investors engaged in export-oriented primary manufacturing and service activities can be particularly useful in enhancing the county’s export competitiveness – in part because of their technological superiority and Report on the Study of Growth and Impact of Investment in Tanzania 2. knowledge and skills transfer. Since it is in the public interest that investments make efficient use of scarce resources and contribute as much as possible towards national development. . In general. any proposed application for investment approval should be viewed not only as a part of a system of supply and demand of goods and services that aim at making profits.g. Sometimes some investments are also associated with growth of research and development (R&D) thus increasing the country’s technological capacity.g.The number of shares or stock held by the equity investor.g. industrial processes) and soft technology (e.

Similarly. there are important social costs that have to be evaluated. retarding entrepreneurial development. some FDI investments have squeezed out local producers. Foreign direct investment can inject substantial financial resources into the country beyond those referred to in the statutory requirements.g. Improvement in the country’s financial inflows and balance of payments. the distinction between benefits and costs is simply one of sign. electricity.g.g. A cost is a sacrificed benefit. roads (build-operate principles) can make marked contribution to national development. marketing and distribution. production. quality consciousness. reducing employment. Is the investment likely to source inputs in the local market? Will the investment improve the supply chain of goods and services? Will the investment add value to domestic resources. working capital requirements and decommissioning at the end of the project life).4.Tanzania Investment Centre .2 Generally. whose skills are domestically available. The United Republic of Tanzania . this action could be result in killing local entrepreneurial linkages. Crowding out local investors. If an investment application demands the use of many expatriate managers and professionals. reducing the supply chain of domestic goods and services. In situations where investors cut off an existing domestic supply chain due to sourcing abroad (e. Large foreign banks are known to “crowd out” local banks and due to automation reduce labour considerably. These and other considerations that foster linkages within the economy are important for accelerating economic growth. telecom. (e. Holding back local skills development and reducing entrepreneurial growth. this can be taken as reducing entrepreneurial development. this could be regarded as holding back local skills development. to mention but a few. water and sanitation. TBL import of barley from South Africa). For example. excessive automation by both foreign and local banks has resulted in to reduced employment and lost opportunities for further learning. plant and equipment replacement. Linkages with sectors of the economy. Social Cost Measures 5. Such resources if channelled to new investments (Greenfield-type investments) or infrastructure (e. The rationale for assessing social cost measures relates to the possibility that seemingly profitable investments may have detrimental effects on the economy such as destroying the environment.3. 1. if FDI investors prefer to use foreign suppliers. 4. Under social benefit-cost analysis. investment inflows have to exceed outflows in terms of profit and other remittances). In the financial sector. Due partly to technological superiority. 48 2. Apart from the usual project costs normally submitted during an investment application. a large garment manufacturer that supplies cheap clothes to the domestic market can easily kill local small-scale garment manufacturers. Some of these social costs are discussed below. costs of initial investment.

are included in the analysis where significant. foreign exchange. For example. etc. Some investments may have negative effects on the environment although the project may be financially profitable. for TIC purposes. The Computer Model for Feasibility Analysis and Reporting (COMFAR) developed by UNIDO is a computational tool for the analysis of investment projects. Accounts for social time preferences. UNIDO donated to TIC five computers that have been installed with COMFAR. etc).4 Calculating the Social Cost-Benefit Measures (Modus Operandi) The inclusion of social benefit-cost analysis in investment evaluation is implemented using UNIDO’s software. A typical example is the pollution of air or water by industrial plants. Direct effects on the economy (involving imports. employment. supply and demand. For such projects an Environmental Impact Assessment (EIA) is mandatory. Sometimes an economy can be exposed to significant instability due partly to structural and institutional weaknesses of the economy. it is a good idea to include environmental concerns as one of the measures for investment evaluation. TIC has inhouse competence and access to this software. exports. The discharge is a by-product of the industrial process that results in net disbenefits to the surrounding population. disbenefits associated with skills and entrepreneurship. Project inputs and outputs are valued at shadow prices that reflect their true value to the national economy. COMFAR computational analysis for social benefit-cost analysis works as follows: ♦ ♦ The model assumes tht it is desirable to assess and evaluate the impact of national development projects. as well as indirect effects (affecting the performance in other sectors. (Social time preference reflects the weight that society attaches to the future as opposed to present consumption. 4. time preferences are expressed by the social discount rate. environment and ecological conditions. which differs Report on the Study of Growth and Impact of Investment in Tanzania ♦ ♦ 49 . the entry of foreign financial institutions might undermine the ability of the Bank of Tanzania to exercise control over international capital movements into and out of the country – despite the existence of good regulations. 4. Data for inputting onto the software is derived from the investor’s application as mandated by the 1997 Investment Act and any additional information TIC might request from the investor. For the social benefitcost analysis. TIC staffs have also received training on the COMFAR programme. Social costs related to systemic risk. through reduced under utilisation of installed capacities. both tangible and intangible.3. However.). Environmental Damage. new investment initiatives. In a nutshell. (Shadow prices indicate the value of goods and services assuming no market distortions). The effects may be economic benefits or costs.

both as a way of knowing progress and creating a more friendly business environment.1 Statutory Measures The post investment statutory requirements are stated in the Tanzania Investment Act of 1997. A holder of an investment certificate is required to inform TIC when: . 1997.5.There is an enlargement of or substantial variation in the investment. All investors could complete the 50 The United Republic of Tanzania .from the individual discount rate applied in private benefit-cost analysis). Second. 4.” Vienna. The tracking system could provide minimum information such as: Number of employees disaggregated by gender and local/foreign. This section outlines statutory and non-statutory post investment measures. to provide opportunity for closer co-operation between TIC and investors in resolving problems and fostering greater impact of investments. A simple investor tracking system (ITS) should be developed to monitor progress. taxes/royalties paid to government.5. Annual progress reports. TIC is expected to verify above information and if satisfied amend the certificate. If a holder of investment certificate ceases to operate. or .2 Other Follow-up Measures ♦ ♦ Arms-length tracking of approved investments is considered valuable. Third.Tanzania Investment Centre . to ascertain whether the approved investors are doing what the application said they would do. the investor has to notify TIC in writing. production. investment. These are: ♦ A holder of an investment certificate is required to inform TIC in writing of the date of commencement of investment. and to build strong linkages with all other public and private parties involved in the investment process. The measures most useful in tracking post investment are as follows: 1. to provide feedback on fulfilling investment goals and aspirations. First. Parties that require more details on the COMFAR computational tool should refer to: UNIDO. exports/ imports. TIC is expected to verify the commencement of operations.The name or description of the business or enterprise is changed.A person other than the person to whom the certificate was issued has succeeded to the investment.5 Post Investment Measures Post investment measures have three objectives. “COMFAR 111 Expert Reference Manual. . 4. TIC is resolute in its efforts to establish close client relationship with all investors. 4.

4.6. TIC is urged to develop plans and strategies for supporting SMEs.1 Becoming more Pro-active in Promoting Local Investments TIC is urged to make more efforts at promoting domestic investment at all levels. The investment climate must undergo further improvements – much beyond TIC’s overt control and direction. 4. TIC has made commendable progress in investment promotion and facilitation. simple ITS and e-mail or fax it to TIC. This is an important investor support by TIC to ensure prompt and amicable resolution of investment conflicts. To 51 Report on the Study of Growth and Impact of Investment in Tanzania . and facilitation of SMEs to secure. Organising and participating in investment forums.6 Recommendations for Addressing the Key Remaining Constraints To date. domestic and foreign. In this regard. The forums are expected to provide opportunity for TIC to learn from investor successes and problems. the following recommendations may be considered by TIC as a way forward. The strategies could include sensitisation seminars. entrepreneurship training. Follow-up of investors. The achievements so far have been acknowledged worldwide and over 96 percent of the surveyed firms revealed that TIC is resolute in its commitment to turn Tanzania into a premier investment destination. especially SMEs. TIC needs to know if the investments being undertaken in the country are becoming beneficial to the investors and the nation as a whole. participation in investment forums within the country and outside is important in promoting investment and facilitating investor access to important information concerning Tanzania’s unique investment opportunities. In addition. however. particularly Small and Medium Enterprises (SMEs). TIC could act as matchmaker in facilitating technology and joint venture partnerships with foreign firms. To date investor follow-up by TIC has been inadequate. The aim is to stimulate and facilitate development of entrepreneurship skills and growth of domestic investors. 5. TIC initiative to establish Zonal Offices in Moshi. Nonetheless. TIC could facilitate establishment of SMEs “seed” fund. Establishment of TIC zonal offices in Mwanza and Mbeya to complement that in Moshi is an important step in this direction. is formidable. Facilitation of small and medium enterprise (SMEs). The task ahead. In addition. Mwanza and Mbeya to stimulate domestic investment and entrepreneurship development is to be commended. 4. TIC is also keen to work closely with the Better Regulation Unit and Local Government Authorities to advocate for the removal of legal. regulatory and administrative barriers that face local investors. Through follow-up TIC can also learn if the investments being implemented are in accordance with investors’ original plans as channelled through TIC.2. Monitoring performance of commercial courts to ensure fair play for all businesses. 3. It is urged that TIC develop mechanisms for undertaking investor followup and further streamline current procedures.

900 treaties. Equally important is the urgent need for improving domestic human resources through training. funding investment missions abroad. TIC is urged to pursue this option because BITs play an important role in attracting investors’ attention to a country as well as building the necessary confidence that Tanzania is indeed an investment destination of choice. In particular. However. The United Republic of Tanzania . 4. Investors are generally attracted to countries where the regulatory and administrative requirements are not a hustle. TIC has to work closely with the Better Regulation Unit and Local Government Authorities to ensure the removal of legal. biotechnology and agricultural processing industries. The next steps might be for TIC in collaboration with key stakeholders such as Tanzania Commission for Science and Technology to develop guidelines for technology policy.6. Since SMEs are plugged with insufficient supportive business environment. like most African countries. necessary precautions must be taken prior to signing any BIT treaty to ensure all provisions of such an agreement are beneficial to the country. as a way forward.6. Currently over 158 nations are signatories to almost 1. TIC might make provision for attracting foreign investors that have high technology in sectors important for Tanzania’s development – especially in agriculture. through seminars and conferences. TIC has to work closely with other stakeholders in the private sector and government departments.2 Further Promotion of Foreign Investments Tanzania. using local and international media. albeit slowly. albeit difficult task. This makes the marketing of Tanzania as an attractive investment destination extremely important. participating in International investors Round Table Working Groups (IRT). 4. Image building will require relentless networking efforts. more active use of the TIC and National Websites. suffers from negative image portrayed over decades. All these efforts should sell Tanzania as a premier investment destination and insulate the country from earlier negative perceptions. Thus.Tanzania Investment Centre 52 . networking with International investment consultants. TIC has to continue to improve the functioning of its “one-stop shop” for investment promotion and facilitation. 4. regulatory and administrative barriers that constrain local business establishment and operation. TIC could also assist in speeding up the establishment of industrial parks with high quality infrastructure to attract high technology investors.6. and investment publications of all sorts. These industrial parks could be developed by private investors under appropriate support – especially in acquiring land and other infrastructure.accomplish these noble tasks.4 Improving Prospects for Technology Transfer The survey conducted for this study showed that technology transfer is taking place. In particular.3 Taking Advantage of Bilateral Investment Treaties Bilateral Investment Treaties (BITs) contribute to the establishment of a favourable investment climate between countries by providing assurances and guarantees to investors.

TIC can work with other government departments to attract FDI: . In particular. and .5 Improving the linkages between SMEs and existing investors. Last. TIC can play a role by encouraging existing investors to contract out some of their supplies to SMEs. EPZ and other stakeholders to facilitate the creation of industrial parks and export processing zones as a way of increasing employment. The role of the government in forging these linkages is extremely important not only because of the perceived economy-wide and dynamic benefits to the nation. by providing information on foreign and local sources of technology. The ensuing question is how that linkage can be forged on. Forging linkages between the existing (large scale) investments with SMEs is important for the development of the latter but also in enhancing competitiveness of the former by cutting down costs of importing if supply can be sourced locally at similar standards.In industries that have strong linkages to the local economy (e. research findings. the Government could institute an investor-friendly policy that would encourage and forge such linkages especially through the design of investment incentives. Agro-processing industries). The existing investors can also undertake training of SMEs so as to improve the quality of their supplies to meet the required investor standards. 53 Report on the Study of Growth and Impact of Investment in Tanzania .In industries that are labour intensive (e. Tanzania’s comparative advantages and training facilities that can be used as springboards for technological transfer.  Working closely with NDC.In particular regions with high unemployment or under employment.6. but not least. Another approach would be for TIC to continue improving its efforts in collecting. In this regard. 4. TIC could facilitate improvement of technology access for local enterprises. . organising and disseminating information about technical issues. Additionally. but also because the existing level of linkages between various key sectors of the economy is too low (see Kweka et al.6.g. 2003) to be left to the market forces.TIC might work with relevant government authorities to place a training requirement on investors to raise the quality of the labour force within the firm or provide resources for training outside the firm. the following approaches could be useful:  Targeting employment-intensive FDI through proactive market-friendly policies or selective intervention. garments).6 Facilitating the Creation of Employment The survey conducted for this study showed that both local and foreign investors were having significant impact on employment creation.g. further development of SMEs to become seedbed for industrialisation can become effective. In this way. 4. Further efforts are now needed by TIC to facilitate even higher levels of employment creation.

Further. Further. the follow up will also help to understand whether the investments being undertaken in the country are becoming beneficial to the nation as a whole and are in accordance with the objectives of TIC. 4. TIC is encouraged to follow-up implementation of environmentally friendly investments by ensuring that regulations and standards are being upheld. and build strong linkages with all public and private stakeholders involved in the investment process.Tanzania Investment Centre 54 . In addition. TIC continued to offer after-investment services.7 Protecting the Environment The survey conducted for this study showed that investors were concerned with environmental protection and most of them conducted environmental impact assessment prior to commencement of activities.  Introducing or reforming existing policies to ensure that regulatory and market incentives encourage environmentally sound production and consumption.9 Undertaking more regular follow-up of investors As noted earlier. The use of the recently developed Workflow Management System should be valuable in monitoring investment development and proactively responding to investor’s problems and inquiries. 4. TIC is encouraged to continue facilitatiing and servicing businesses that are already established and operational. TIC is urged to foster closer client relationships with all investors.  Granting accelerated depreciation for clean technology capital goods. Such follow up will also act as a deterrent to unscrupulous investors who aim to abuse the incentive scheme. Providing investment incentives linked to the number of jobs created by the firm.8 Facilitating and Servicing Existing Investors Over 64 percent of the surveyed firms indicated maintaining a link with TIC after becoming fully operational. 4. local and foreign to conduct an Environmental Impact Assessment. The United Republic of Tanzania .6. and construction of sanitary landfills. TIC can employ the following strategies with regard to environmental protection:  Conducting pre-establishment screening of investment on environmental grounds. and  Encouraging investments in industries that involve improvements to the environment such as waste-to-energy plants. especially in areas of investment disputes and acquisition of foreign experts.  Requiring all local and foreign investors to provide their corporate environmental policy statements and records when making an investment application.6. the imperative of conducting regular post-approval follow-up of investors cannot be overemphasised.6.  Requiring all investors.

The period to date is too short to make a definitive assessment of the impact of investment on economic growth. Thus. impacting heavily on poverty reduction. Finally. What has been Tanzania’s experience? As discussed elsewhere in this report (Chapter 1 and 2). Second. improving the country’s balance of payments. technology and entrepreneurial growth. mining activity that may involve years of explorations).5. have mostly been criticized for massive capital drain – which exacerbate their (except for tourism) low level of linkage with the domestic economy. increasing employment. The so called “booming sectors” in Tanzania. Tanzania’s efforts to increase foreign and domestic investment began in mid 1980s. investments being undertaken in Tanzania are laying solid foundation for economic growth and prosperity that should translate into poverty reduction over time. overall. the road to sustained higher levels of impact is long. not all sectors receiving FDI are directly growth enhancing. First. As a result. the country is now more receptive to new ideas and better ways of doing business. education. and for FDI-type investment largely after the establishment of TIC in 1997 (that is about 8 years ago). particularly Mining and Tourism. This chapter reviews the impact of investment to date. economic growth is an outcome of various factors other than investment. In particular. economic growth is highly linked with investment in new capital and increases in productivity that is associated with investment in new technology. However. the net effect of FDI on growth also depends on the way they impact on existing Domestic 55 Report on the Study of Growth and Impact of Investment in Tanzania .g. Investments are also becoming the main source of tax revenue. water and other services.1 Impact on Economic Growth One measure of the impact of investment is its effect on economic growth. Some FDI recipient sectors such as mining have very low employment generation capacity and also poor linkages with the rest of the economy. hence disentangling its separate effect is not straightforward and may require an empirical study. in the long run. and which have subsequently received substantial FDI. Investments are creating jobs and opportunities for people to apply their talents and improve their situations. contributing to public spending for health. especially in the agriculture and small and medium enterprise sectors. Experience shows that there is a strong link between investment and economic growth. research and development (R&D) and training. requiring higher levels of investment inflows. pushing FDI and domestic investment to new frontiers. the pay off of some investments may take several years to occur due to the nature of the investment (e. New facilities are being built and the infrastructure that supports profitable investment is improving. and increasing the scale and scope of the benefits derived from the investments. 5. Third. Availability of goods and services is improving both in urban and rural areas.0 invesTmenT impaCT analysis Tanzania has made progress towards facilitating and promoting domestic and foreign investment. It is observed that progress is being made in raising growth.

it is worth noting that the ratio of FDI flows to capital formation rose steadily. but increased since then to about 40% in 2004. may be too low to have a significant impact on growth. The point is.Tanzania Investment Centre . more public investments were divested. some FDI has led to net job losses – that is the number of jobs lost is higher than the number of jobs created (see detailed discussion on the employment impact of FDI and Privatisation. These trends can be explained not only by the declining level of FDI inflow.e. 56 The United Republic of Tanzania .investment. also see Mkenda. only about 0. i. That is. and increased further to 17. Domestic Investment (DDI) seems to have been declining as GDP grew – implying a negative relationship but one that can be explained presumably by two factors. but also the increase in the efficiency and level of private sector development. despite improving substantially in the last decade. An interesting finding as shown by Figure 5. as many of the FDI were actualised through sale of the former State owned Enterprises (SoE). since 2000 when most of the privatisation (of SoE) had been completed. 1 The share of public in total investment declined drastically from about 70% in 1989 to 20% in 1995. In addition. reaching an average of 14 percent between 1996-2004. Before 2000.6 and 1.6% of average annual growth rates in the respective periods.2 percent and 5. Second. and every dollar of investment contributes equally to GDP growth. out of 4. some of which were divested into new foreign owners (FDI)1. First. such that for those that could not cope exited.0 percentage points would be due to FDI respectively. association with GDP growth by FDI and DDI swapped.1 is that it is the trend in FDI part of the private investment that seems to impact on the GDP growth trend rather than the domestic direct investment (DDI). as the pace of reforms through privatisation increased. FDI positively associated with GDP growth – but causal relationship between the two may be blurred so that it requires a fuller empirical analysis. At the same period. DDI and FDI have associated with Growth of GDP differently in different periods. Assuming that all FDI is “GDP investment” (which is not necessarily the case). However. and a more favourable policy environment resulted that attracted further FDI and increased growth of the economy. the level of FDI inflows. increased FDI might have had a crowding out effect on DDI thereby demeaning its growth prospects. where DDI moved positively with growth and vice versa for FDI. However. as further noted from the Figure. Some FDIs have resulted into undue competitive pressure on domestic investors. the continuation of privatisation of State-owned enterprises (SoE) substantially decreased the public investment associated with such enterprises.6 percent between 2000-2004 period. However. 2005). pre and post 2000.

2 5. Table 5. There is a growing consensus that exports earnings from domestic and foreign investment is rising rapidly. The period since Tanzania began to attract high FDI into the country may be too short to make definitive empirical assessment of the impact of investment on economic growth. Experience shows that FDI plays a big role in revamping a country’s exports.2. (The 57 Report on the Study of Growth and Impact of Investment in Tanzania . However.Source :Own computation using data from TIC. Tanzania’s experience to date shows that there has been some impact on exports earnings emanating from investments.1 and Figure 5. In recent years. Tanzania’s total exports earnings have risen to one half of imports compared with only a third a decade ago. 5. it is useful to address the issue of investment payoff to GDP growth in broader context. Similarly. National Accounts and Economic Surveys (various years) The conclusion we draw is that investments are having favourable impact on the economy.2 provide rough magnitudes of the contribution of investment in the country’s exports earnings. that is. the investment policies being implemented in the country are laying solid foundations for attracting higher levels of foreign and domestic investment that are necessary to spur and sustain higher growth and poverty reduction in the future.1 Impact on Balance of Payments Impact on Exports/Imports Another measure of the impact of investment is its effects on increasing the country’s export earnings – and thus the capacity to import more goods and services. Affiliates of foreign firms in Tanzania often create new trade flows with their parent companies or foreign suppliers and also export to third countries or back to the home country. Overall. some domestic investors are engaged in exportoriented enterprises.

1 shows.1 182.5 697 59. Source: Bank of Tanzania Economic and Operations Report (various years).7 35.4 1736.1 1676.9 42. by 2005 about 50% of Tanzania’s exports were gold – a result of FDI into the mining sector) Table 5.1 2003 2004 2005 2006 2007 753 588.4 731 57.4 328 41.3 812 55.3 illustrate the trends in imports and exports for the agricultural sector.9 37. As Table 5. negative for manufacturing firms and mixed for mineral firms.5 543 663 851.4 979.2 242 371 545. Next has been the manufacturing sector.7 317 232.7 1473.impact on export has been ‘massive’ considering the fact that.5 44.5 299.1 Source: Bank of Tanzania Economic and Operations Report (various years).8 42.9 1210.1: Tanzania Exports (US $ Million) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total Exports (a) 439. which received an average of 16 percent of all investments between 1993-2004. The main reasons are: un conducive environment and lack of complementary public investment to attract domestic and foreign investments into agriculture.3 39.Tanzania Investment Centre 58 .5 percent in 2001 to about 55. which received an average of 47 percent of all investments between 19932004.9 764 o/w Investmentrelated (b) b/a (%) 183.4 682. Table 5. The export earnings from investment have largely come from the mining sector.8 43.0 2006. investment contribution to export earnings has risen from about 37. Analysis of sampled firms shows the trends in the import-export ratio is positive for agricultural investments.8 percent in 2004.2 and Figure 5. The United Republic of Tanzania .6 55.3 519. Less than 7 percent of the investments have been channelled to agriculture – a sector that in the past accounted for over 50 percent of the country’s GDP and export earnings.

159 64 2002 5.2 1.586 195 2004 7.4.7 1. which will encourage greater investment into agriculture – especially through investment in irrigation agriculture.2: Trends in Import-Export Ratio for Selected Agricultural Firms2 1999 Exports (Tshs. Kilimanjaro and Arusha Regions. The picture that emerges in the manufacturing sector is completely different from that in the agricultural Sector. million) Imports/Export (%) 2.4 shows. 2 59 Seven sampled agricultural firms in Morogoro. Report on the Study of Growth and Impact of Investment in Tanzania .5 percent and as Figure 5.1 0. the trend has remained almost the same since 1999.8 3.2 clearly illustrates.3 and Figure 5. introducing modern livestock production systems and importing or manufacturing agricultural equipment and machinery locally. This may imply a need to develop more attractive policies. million) Imports (Tshs.5 3.732 104 2003 5. Iringa. unless the survey was done again sometimes recently) As Table 5. Exports to imports average 4. there is almost a negligible amount of imports going to the agricultural sector compared with revenue generated through exports.778 30 2000 5.524 40 2001 5.Table 5.420 275 1. The conclusion we make here is that investments undertaken so far have had little impact on the agricultural sector.7 Source: ESRF Survey (2004) for TIC (It is doubtful whether this can be updated. Source: ESRF (2004) Survey for TIC The trends in export-import ratio for sampled manufacturing firms are shown in Table 5.

Table 5.4 illustrates the trends in import-export ratio for selected mining firms. amongst other things that policies have to be reviewed to encourage more exports of manufactured goods. This implies. The mineral exports earning.5 2002 38 879 4.Tanzania Investment Centre . The data shows that investment in the mining sector is associated low imports and high exports.1 2001 32 705 4. Arusha. million Exports/Imports 29 620 4.3 2003 47 979 4.7 Source: ESRF (2004) Survey for TIC Source: ESRF (2004) Survey for TIC Table 5. Overall. however.6 2000 29 693 4. million) Imports (Tshs. 60 The United Republic of Tanzania . however. initial capital imports in the mineral sector are high but over time as the initial high investment bear fruit exports tend to rise. Morogoro. The conclusion we draw from the data is that investments in the mineral sector have a high potential for increasing the country’s export earnings. Mwanza. appear to 3 Seven sampled manufacturing firms in Kilimanjaro.3: Trends in Export-Import Ratio for Selected Manufacturing Firms3 1999 Exports (Tshs.The conclusion we arrive at is that the trade impact of investment is essentially negative for the manufacturing sector.8 2004 53 1130 4. especially those that Tanzania has a comparative advantage like garments and processed agro-products. and Iringa Regions.

the contributions of foreign affiliates to export earnings and hard currency from tourism impact positively on the country’s balance of payments.02 0. This level of inflows of about US$ 309 per annum is changing the structure of external financial flows to Tanzania. (I am not sure if mineral exports in Tanzania are low – compared to any other sector – may be.01 0.680 7 0. million) Import-Export ratio 28. 4 61 Four sampled mining firms in Arusha. Despite observations made above.2 Impact on the Balance of Payments Another measure of impact is whether the effect of investments is positive or negative on the country’s balance of payments. the FDI inflows compensated for over half of the decline in ODA. During the former period (1990-94). the impact on the balance of payments will be negative.340 9 2002 41. exports are low compared to what should be the ‘optimal’ level – which has not been established anyway) Table 5.4: Trends in Import-Export-Ratio for Selected Mining Firms4 1999 Exports (Tshs.563 252 2000 44.524 5 2004 39. While during the same period official development assistance (ODA) declined from an annual average of US$ 876 million between 1990-1994. profit remittances on FDI (US$ 151 million) exceeded FDI inflows (US$ 82 million). However. Further policy improvements are needed to entice investors in the mineral sector to contribute more to the export earnings of the country. Mwanza.565 2 2001 68. Report on the Study of Growth and Impact of Investment in Tanzania . to US$ 617 million between 1995-2003. In subsequent years annual profit remittances have averaged US$ 170 million compared with inflows averaging US$ 309 – thus impacting positively on the county’s balance of payments. million) Imports (Tshs.297 10 2003 35. the impact is not conclusive. total FDI into Tanzania between 1995-2004 reached US$ 2. The main reason is that data on the transactions of foreign affiliates and the indirect impact of FDI on consumers and domestic firms (such as those discussed earlier in this report) are not available countrywide. It is often argued that if external outflows exceed inflows.01 0. What has been Tanzania’s experience? As discussed in Chapter 2.2.88 0.4 million compared with only US$ 2 million between 1986-1991.00 0.476.be low .02 Source: ESRF (2004) Survey for TIC 5. and vice versa. and Mara Regions.in part due to under-declaration of production and smuggling through neighbouring countries. This is because it is not possible to make definitive conclusions on the impact of FDI on the balance of payments.

000 million to about Tshs.5: Investment-related Income tax 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Tshs.818 317.403 201.353 170.Tanzania Investment Centre 62 . It is expected that once the incentives provided under the investor’s investment certificate have expired.3 Investment Impact on Government Revenue Another measure of impact is the contribution of investments to government revenue.5 show income tax from TIC –related investments has been fairly stable.340 Source: Tanzania Revenue Authority (various years) Source: Based on TRA Income Tax Databank As Table 5. Table 5.5.000 million per year between The United Republic of Tanzania . 200. Data from Tanzania Revenue Authority (TRA) shows that since the removal of “tax holidays” in 1997 (which were replaced by capital allowance incentive). 170.5 and Figure 5. Table 5. ranging between Tshs. enterprises be obliged to pay taxes. Million 171.541 210. investments have been contributing significantly to government revenue.5 and Figure 5.5 provides a summary of income tax derived from investment-related enterprises.674 224.

when inflation is factored is. Table 5. investments should make greater real contribution in the form of income tax.756 145. In the future. Overall. 300. there has been relatively little increase in income tax revenue since 1999. the conclusion we arrive at is that except for 2003/04.000 million in 2003/04.908 240. Table 5.1998/99 and 2002/03. rising to over Tshs. the data shows that revenue from this source declined by nearly 40 percent from Tshs 232.242 210.925 115.908 million in 1998/99 to just Tshs 176. Laxity in revenue collection coupled with increased tax exemptions is largely responsible for the decline.6: Investment-related Value-added tax Tshs.450 million in 2003/04. Million 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 232. however.450 Source: Tanzania Revenue Authority (various years) Source: Tanzania Revenue Authority (various years) 63 Report on the Study of Growth and Impact of Investment in Tanzania . With regard to the impact of investment on income tax.6 and Figure 5.176 176.6 provide a summary of investment-related Value Added Tax. if the country continues to maintain low inflation.

Based on this estimate.803 million in 1998/99 to over Tshs. Table 5.7: Investment-related revenue from Customs Tshs.Tanzania Investment Centre 64 .With regard to investment contribution to value-added tax.7 provide an estimate of the amount of taxes obtained from investment-related custom revenue. 222. Table 5.940 million in 2003/04. Thus. 516. the data clearly shows there has been positive and rising impact on this source of government budget resources. The data shows that revenue from this source has increased by over 56 percent from Tshs.556 455. there has been a decline between 1998/99 and 2000/01 and a rebound after 2001/02.276 471. although previous levels have not been reached. with regard to customs revenue. however. million 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 222. Tanzania Revenue Authority estimates that nearly 55 percent of the custom revenue is investment related. is encouraging and higher impact is expected in the future.794 412. Another important source of government revenue is derived from customs.803 241.096 516.940 Source: Tanzania Revenue Authority (various years) Source: Tanzania Revenue Authority (various years) The United Republic of Tanzania .7 and Figure 5. The current trend.

to stability and instability in an economy and to other constraints to development. gross national savings was essentially negative. First. tends to reduce this impact. Second. the prevalence of tax exemptions through the investment “Certificate of Incentives”. during the period of 1990-94. The country’s low income and low savings rates have meant that there are limited resources within the national economy available for investment.1 Impact of Investment on Savings Level Introduction Another measure of impact relates to the role of investment in assisting the country to overcome its domestic investment gap. Foreign investment can close the domestic gap by providing outside sources of financing for investment and economic growth. Foreign Direct Investment (FDI) however. Theory postulates that all capital. whether foreign or local. This negative saving was associated with the worsening of the recurrent budget position and cutbacks in donor assistance to the country. the main conclusion is that as domestic and foreign investment increases.2 provides Tanzania’s experience. National savings turned around beginning in 1996 to about 5 percent of GDP.4 5. However. it is believed that FDI is a reliable source of capital that is less volatile and non-debt accumulating and can therefore be expected to complement domestic savings and capital resources to finance investment where such resources are limited.Therefore. especially with regard to investments in the mining sector.4. it allows investors to increase their profits while diversifying the risk of their businesses outside their countries. thus forcing national investors to improve their performance for their own survival. partly because of increased domestic private savings since 1993 and achievement of positive government savings starting in 1997. tax revenue also shows a tendency to rise. 5. Section 5. seems to have an added advantage over local investment because of several reasons.2 Trends in Government and Private Savings As Figure 5. Third.4.8 shows.4. responds to incentives and disincentives. 65 Report on the Study of Growth and Impact of Investment in Tanzania . The government is encouraged to revisit the current regime of investment incentives and offer concessions where there is a clear economic and social justification and where potential for abuse can be kept to a minimum. it is usually associated with the use of new skills technology and increase in competition within the recipient country. 5.

it is essential to boost private savings through easier access to financial institutions and better The United Republic of Tanzania . During the analysis period after 1996.3 examines what can be done to raise the savings level. In particular.3 Improving Savings Mobilisation Empirical evidence from the past two decades suggests that the best performing developing countries have had high rates of savings and investment. Tanzania received increased aid inflows from the donor community in part to support the country’s structural adjustment programme. Since savings performance is influenced by domestic policy and non-policy factors as well as foreign factors. The conclusion we make here is that investments have played a role in reversing the country’s declining savings trend.4. The aid inflows have been pivotal in sustaining Tanzania’s positive real growth for the past decade to date.Source: Based on National Bureau of Statistics Data (various years). compared with less than US$ 2 million (Tshs 2. Section 5. Therefore. which grew fastest. had rates averaging between 25 and 30 percent. Wuyts (1997) has shown that there is some correlation between the growth of national savings and investment and high foreign aid inflows. In particular. especially after 1995. In addition. during the period 1995 –2000. East Asian countries. the savings level is still inadequate to foster higher rates of investment and growth.Tanzania Investment Centre 66 . for Tanzania to achieve high growth improvements in public and private savings mobilisation are necessary.2 billion) during 1986-1991. A close review of Figure 5. it appears that increased Foreign Direct Investment (FDI) inflows during this period exerted influence on savings.060 billion). 5.4. However.8 above shows that gross national savings recovered after 1996 to about 12 percent of GDP in 2004. Tanzania received a total of US$ 1 billion (Tshs 1.

67 Report on the Study of Growth and Impact of Investment in Tanzania . investors and the country as a whole benefit – not only in terms of increased financial deepening of the economy but also in fostering financial market development and enhancing economic growth. increasing market capitalisation and increasingly contributing to Government revenue.9 is making profits. some of the profits can be ploughed back into the investment and some channelled for Research and Development (R&D) – thus improving quality of supply.financial intermediation. providing dividends to its shareholders. The investments are not only performing well. financial intermediation should be progressively deepened and diversified to develop flexible money and capital markets. In economic environments where investments perform well make profits – the prime motive for most investments. What has been the experience of Tanzania? Most investments in Tanzania perform well compared with targets established by the firms as attested by the data from a few firms producing beer.8). What is needed now is much stricter fiscal discipline to ensure that spending reflects investment and development priorities. and if profitable pay dividends to its shareholders. In addition. Each of the companies shown in Table 5. cigarettes. Equally important is the need to raise public savings by reducing budget deficits. raising tax revenue and controlling public expenditure. Most other investments realise above 80% of their planned targets. This should be expected to encourage households to deter consumption in favour of investment.9). invite shares from the public. 5. As a consequence. Recent experience shows that Tanzania Revenue Authority is making good progress in raising revenue. good performing investments can register in the Dar es Salaam Stock Exchange. The conclusion we draw from these well-performing and profitable investments is that Tanzania has created a good enabling environment for profitable investments. and soft drinks and providing mobile phone services (Table 5. Investments in mobile phones have performed exceptionally well.5 Investment Performance and Profitability Another measure of impact relates to performance of the investments and their profitability. Additionally. but are also profitable as evident from the sample of four companies which are listed on the Dar es Salaam Stock Exchange (DSE) (see Table 5.

659 2.728 4.437 95 85 100 85 245 89 135 109 92 108 53 66 108 100 110 100 49.021 3.894 542.243 5.645 126.255 338.538 269.123 Source: Tanzania Revenue Authority (TRA) 5 Large taxpayers include investments such as Breweries (beer).382 5.051 5.706 12.501 94 80 100 99 128 95 162 117 132 75 121 100 130 107 77 108 34.Local Beer Cigarettes Soft Drinks Mobile Phone Others Sub-Total VAT-Local Beer Cigarettes Soft Drinks Others Stamp duty Sub-Total Corporate Taxes PAYE B.637 5.936 370.298 135.648 6.201 90 94 81 125 96 93 50.052 32.328 543.230 20.537 344.092 365.731 1.214 9.998 36.763 15.456 530 188.188 522 116.785 44.502 24. 68 The United Republic of Tanzania . Tanzania Cigarettes Company.628 407 122.688 96.362 50.989 2.Skills & Dev.886 6.904 116.592 3.755 43.177 4.587 31.877 164.134 115.731 14.261 105.785 5.799 2.431 6.923 32.297 168.725 29. etc.Tanzania Investment Centre .301 16.200 6. The data above are for 188 large taxpayers as at April 2005.8: Performance of Large Taxpayers (2003-2004)5 2003/04 Item Estimate Actual Performance (actual % of estimate) Estimate 2004/05 Actual Performance (actual % of estimate) Excise Duty.Levy Gaming Tax Rental Tax Other With/ng Taxes Sub-Total GRAND TOTAL Less Transfers to refunds A/C Net collection 28.582 12.317 68. Recently the Government has increased the number to 278.937 15.052 105.781 537.669 32.580 24.152 89.973 1.309 536.707 73.666 103 99 112 801 30 101 42.035 74.266 248 187 79.758 6.601 6.123 23.347 26.538 52.214 106.Table 5.745 19.978 17.554 3.136 248 268 3.961 248.736 106.

billion) Closing price (Tshs) Taxes paid to Govt.1 30. Tanzania Revenue Authority (TRA).0 0.9 20. For example. building a power line.9: Profitability of some investments (2002-2004) Indicator Pre-tax profit (Tshs.3 700 3.0 570 TBL 57.600 1.3 41.300 TCC 25. Investment plays a key role in expanding jobs and offering opportunities for young people.Table 5.8 50.8 3.9 44.400 1.720 1. joint venture (35%) and merger or acquisition (14%). balanced and peaceful country.7 88.7 7.1 Source: Dar es Salaam Stock Exchange Statistics. billion) 2002 TBL2 34.6 5. 5.5 28.4 3. billion) Dividend paid (Tshs.9 0.8 TCC3 SIMBA4 DAHACO5 22. Indirectly by stimulating additional employment in suppliers and distributors (depending on the intensity of local linkages).6 15.3 1.100 69.2 3.5 36.1 Impact on Employment Generation Introduction An important measure of the impact of investment is job creation.6 2004 SIMBA DAHACO 5.6.5 1.6 3. The field study undertaken for this study shows that Greenfield-type investments generate the largest impact on employment. This is essential not only for raising incomes and reducing poverty.2 25.7 21. but also more importantly for creating a more inclusive.8 2003 SIMBA DAHACO 9.500 indirect jobs will be created in Shinyanga region due to its mining operations.6 NA 472 172 43.760 1.8 1.8 20.5 kilometre road.5 2. construction Report on the Study of Growth and Impact of Investment in Tanzania ♦ 69 .5 395 176 59.8 TCC 24.9 1.0 97.0 330 172.3 1. billion) Market capitalisation (Tshs. A study by UNIDO (2003) shows that most FDI in Tanzania are of three categories – new Greenfield (51%). What has been Tanzania’s experience? The assessment conducted during this study revealed that in Tanzania the qualitative effects of investment on employment has taken place through several routes: ♦ Directly by setting up new foreign affiliates or expanding existing affiliates.725 1. This is in part due to revamped activities supported by the company but not directly related to mining such as its construction of 87.5 450 1.2 2.8 1.8 NA TBL 47. Kahama Mining Corporation estimates that about 7. (Tshs.6 30.6 560 1.

This subject is discussed further in Section 6. However. The United Republic of Tanzania . Sometimes TNCs react to the availability of skills by raising the technological content of their investments. employment can also rise through multiplier effects from the new income generated by FDI or local investments or through increased demand stimulated by improved efficiency and restructuring of competing firms. Wonder Foods. KTM. and Aluminium Africa). competitive strength and need for a stable workforce (SONGAS.2 Experience shows that economic growth as measured by real GDP growth per capita is necessary but not sufficient condition for achieving improvements in human well-being or reducing widespread poverty. Amboni Sisal Farms. Standard Chartered.Tanzania Investment Centre 70 . Citibank. ♦ The qualitative impacts of FDI on employment are: ♦ Wages : Foreign affiliates generally pay higher wages than domestic firms do in similar activities. the investment can still increase employment by restructuring firms that might other wise have become sick or dysfunctional such as the divested parastatals (MWATEX.2. Where FDI takes the form of merger or acquisition as observed in bullet one above. Stanbic and Akiba Commercial Bank.6. large and visible Transnational National Corporations (TNCs) tend to comply with local and international standards and even with the labour standards in their home countries (Unilever Tea Tanzania). striving local input suppliers. ♦ In the medium term. This is particularly evident in the liberalised banking and financial sector – especially CRDB. Investment and employment creation ♦ ♦ ♦ 5. contributing to further learning and skill creation. Abercrombie & Kent Tanzania. etc). Job security: Foreign affiliates tend to offer greater job security because of their size. and the like. Investments that lead to employment generation are essential for reducing poverty as depicted below.of water pipe line. In particular. Kilombero Sugar and Sao Hill). The difference is more marked in industries that demand higher levels of skills.3. Other examples are outlined in Section 4. Skills: FDI often has to upgrade employee skills by investing in training so as to meet their quality standards. “footloose” investment attracted by low wages may move to other countries so jobs may be insecure over the medium term (defunct Trust Bank and Greenland Bank). technology and marketing and in export-oriented activities that need to ensure consistent quality and timely delivery (Standard Chartered Bank. Working conditions: In foreign affiliates working conditions are generally better than in local firms.5.

The rest is expected to be employed by the private sector.703 new jobs would have been created in the economy.177 21. About 500.036 Report on the Study of Growth and Impact of Investment in Tanzania .188 125 714 839 3. The public sector employs about 40.866 13. over 463. This is an average of about 33.088 7. Table 5.316 13.775 4.897 4.633 32.10).566 2. we find that if all investments approved by the investment promotion centre (foreign and local) were carried out to completion between 1990 and 2004.594 43.10: Actual Investment Created Employment by Sector and Categorisation for Mainland Tanzania (2001-2003) Foreigners Sector Gender Management 46 196 242 85 925 1.742 41.000 of these are school leavers with few employable skills.120 5.023 4.000 new job seekers annually.263 5.058 Total 5.167 8.010 2 16 18 Sub -Total Non-Management Skilled Other Total 33 89 122 32 524 556 0 1 1 0 6 6 4 24 28 0 0 0 79 291 370 121 1473 1594 2 17 19 Tanzanians Management 136 457 593 520 2155 2.195 9.778 5.Taking the Investments approved by TIC as a unit of analysis. This means that projects approved by TIC on the whole can be expected to generate about 5 percent of the country’s annual employment requirements. This in essence is an optimistic outlook in part because the actual jobs created by all investments approved by TIC are lower than the estimated potential out-turn because some approved investment projects either never started or started but ended up employing fewer personnel than it had been projected.833 12.611 16.966 5.399 33.177 3.440 3.122 5.236 5.000 new job seekers enter the labour market annually in search of employment.989 10.914 8.069 Grand -Total Female Arusha Male Sub -Total Female Dar es Salaam Male Sub -Total Female Iringa Male Sub -Total 71 6.675 29 160 189 Sub -Total Non-Management Skilled Other 2.872 17. this figure is negligible. When compared with the existing demand for formal employment.122 new jobs annually for a period of 14 years (Table 5. The Poverty and Human Development Report (2003) and the SME policy (2002) report that about 700.109 9.017 10.

918 6.400 673 1.330 80 267 347 184 528 712 230 1.927 4.767 655 4.876 5.464 1.629 6.584 212 843 1.263 1.531 1.955 2.920 45 61 106 35 36 71 Total 76 250 326 14 153 167 1.247 1.717 6.628 76 152 228 16 54 70 35 104 139 6 25 31 760 2.055 504 1.342 4.170 1.131 2.955 4.565 6.Foreigners Sector Gender Management 0 7 7 0 1 1 27 61 88 0 24 24 0 14 14 2 48 50 9 104 113 4 15 19 0 1 1 Sub -Total Non-Management Skilled Other Total 0 2 2 0 0 0 1 3 4 0 20 20 0 2 2 0 13 13 0 95 95 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 0 0 0 0 4 4 0 2 2 0 0 0 0 0 0 0 9 9 0 1 1 28 64 92 0 46 46 0 16 16 2 65 67 9 201 210 4 15 19 0 1 1 Tanzanians Management 6 50 56 0 5 5 36 175 211 8 41 49 4 77 81 22 206 228 111 391 502 9 12 21 1 8 9 Sub -Total Non-Management Skilled Other 35 96 131 8 123 131 1.435 3.Tanzania Investment Centre 72 .951 124 489 613 316 642 958 401 3.811 5.751 653 4.199 3.492 212 797 1.009 504 1.836 549 2.191 2.371 2.050 130 225 355 52 98 150 76 259 335 14 154 168 1.333 4.260 134 240 374 52 99 151 Grand -Total Female Kagera Male Sub -Total Female Kigoma Male Sub -Total Female KilimaMale njaro Sub -Total Female Mara Male Sub -Total Female Mbeya Male Sub -Total Female Morogoro Male Sub -Total Female Mwanza Male Sub -Total Female Pwani Male Sub -Total Female Ruvuma Male Sub -Total The United Republic of Tanzania .

Interchem pharmacy (171). Kilombero Sugar (4. APC Lyamungo Coffee (400) and SAO Hill (360). Sarajevo Mining (140).411 Grand -Total Female Shinyanga Male Sub -Total Female Tanga Male Sub -Total Total 35. Figure 5.674 5. Field assessment conducted for this study provides data to support this assertion. Table 5.008 2.11 shows trends in total employment for sampled firms employing over 100 workers. Morogoro Plastics (98).359 98. and Print care (23). agricultural related investments provided a greater number of employment opportunities: Unilever Tea Tanzania (5.358 55. manufacturing and services sectors were next from agriculture in terms of employment generation: Sun flag (2. Gems and Rock Ventures (130). Tanzanite Africa (250). construction and banking sectors. Agriculture and fishing have the highest employment effect although less than 7 percent of all investments have gone to these sectors. Actual direct employment in mineral related investments were as follows: Mobela Gems (7). Major Drilling (13).307 7. Sunkist (167).433 95. especially in the mining.806 2.9 illustrates employment generation by industrial category for the period of 2001-2003.367 2.912 Sub -Total Non-Management Skilled Other 159 1.550).569 Total 353 1. In contrast.895 3. DIMON Morogoro Tobacco (780). TANCAN Mining (81).841 Sub -Total Non-Management Skilled Other Total 0 1 1 0 9 9 825 0 0 0 0 0 0 42 6 202 208 3 53 56 2708 Tanzanians Management 14 112 126 9 158 167 4.Foreigners Sector Gender Management 6 201 207 3 44 47 1. and Meremeta Mining (230).199 1.330).422 1. The data shows that mining and finance with the highest capital intensity have the lowest employment generation – about 1 percent each.254 7.159 2.100). On average. Tchibo Estate (1. Mollel Mining (150). 73 Report on the Study of Growth and Impact of Investment in Tanzania . Nyanza Bottling (442).049 5.303 359 2.567 180 495 675 1. Impala Hotel (192).703 Source: Tanzania Investment Centre One explanation for the low contribution to employment generation is that major investment projects in Tanzania have favoured capital-intensive techniques.052 5. Papa King S.358 145 1.377).

933 2 1.0 34.8) (11.154 1.8) 262.Source: Based on Tanzania Investment Centre Data Bank.291 2 808 1.8 (9.9) 34.9 282.564 2 790 1. Table 5.11: Trends in Total Actual Employment of Selected Firms Firm UTT M F Foreign ST M F Foreign DIMON M F Foreign NBC M F Foreign TE M F Foreign 1999 25 5.100 30 37 443 5 582 12 18 2000 35 4.210 35 67 403 5 570 12 18 70 80 3 2001 36 5.7) (7.3 67.6 (13.202 40 62 596 5 501 11 17 254 306 2 % change from 1999 44.5 - The United Republic of Tanzania .875 2 600 1.246 50 69 821 5 427 9 15 750 800 3 Average 36 5.3 33.465 2 640 1.6 9.616 2 855 1.Tanzania Investment Centre 74 .210 40 68 772 5 484 10 16 100 150 3 2002 37 5.245 45 68 542 5 444 10 16 350 500 3 2003 48 4.

5) 59.11 illustrates.2) (14.3 percent (32 workers) and by 7.11 illustrates. ST = Sunflag Tanzania Ltd DIMON = DIMON Morogoro Tobacco Processors Ltd NBC = Nyanza Bottling Company TE = Tchibo Coffee Estate SHI TPM APC PKM = Sao Hill Industries Ltd. Unilever Tea Tanzania reduced female employment by nearly 10 percent (584 workers) but increased male employment by about 45 percent (11 workers) – signifying a large net reduction in employment.9 - Source: ESRF (2004) Survey for TIC UTT = Unilever Tea Tanzania Ltd.Firm SHI M F Foreign TPM M F Foreign APC M F Foreign PKM M F Foreign TATEPA M F Foreign 1999 360 52 2 225 192 2 40 60 1 130 45 55 2 2000 366 54 2 276 226 2 100 100 1 120 55 65 2 2001 270 46 2 209 184 4 100 150 1 140 65 70 2 2002 350 58 3 112 153 4 100 150 1 100 90 85 3 2003 285 47 2 142 133 2 200 100 1 150 104 96 3 Average 326 51 2 193 178 3 108 112 1 128 72 74 2 % change from 1999 (9. For example. As Table 5. However. = TPM(1998) Ltd = APC Lyamungo Coffee Estate = Papa King S.4) (1. Similarly. the trend in total actual employment during the past five years has been positive.6 34.0 86. However. there are marked inter-year variations and gender specific employment trends. for most other firms. However. overall total employment shows an upward trend. as Table 5. TPM (1998) reduced male employment by 14.0 170.3) (7.5) 40. foreign employees form an insignificant number (typically less than 5 in most firms) within the total employment framework.7 (1. Mollel Overall. 75 Report on the Study of Growth and Impact of Investment in Tanzania . the foreign employees play a critical role in training local staff. management and technological operation of the enterprises.5 percent for females (14 workers).

for instance. water systems.500 indirect employees who supply tealeaves to Unilever Tea Tanzania. in Arusha. Other field examples of employment creation through input supply linkages are: 760 direct and 1.3 Employment Impacts through Linkages with the Rest of the Economy Another measure of impact is fostering linkages with the rest of the economy. This company. transferring technology and realising balanced sustainable growth. and 192 direct. Tanzania’s experience shows that there are investments that appear to create jobs. and 87 indirect employees who supply various inputs such as meat and fruits vegetables to Impala Hotel.6 million investment by AEF Horticulture Farms & Export Ltd. Kahama Mining Corporation employs high-tech mining techniques but during construction it employed over 2. Other job-related activities include efforts by the company to improve community roads. the mine provides indirect employment to over 600 people as contractors for various services. For example. These linkages are important because apart from creating jobs also help in the growth of small and medium enterprises (SMEs). Another example is the US$ 2. 5. it has been pointed out that the Tanzanian business community and government officials have expressed the wish to improve the management of the linkages between large and small scale miners with a view to generating more jobs. 5.000 people. employs over 200 people but through training and demonstration effects to the local community. The Mining Trust Fund could have been used to the benefit of small-scale mining. through forward and backward linkages to the economy. which grows flowers for export. both directly and indirectly. In addition. the situation would have been worse without these investments.The conclusion we make from the analysis above is that although jobs being created through investments are fewer than national requirements. The conclusion we make is that the question of promoting linkages in the economy is gaining momentum. Currently the mine employs 900 local personnel and 200 expatriates.500 indirect employees who grow and supply pyrethrum flowers to Tanzania Pyrethrum Company 360 direct and 800 indirect employees who support Sao Hill on a temporary employment basis its tree plantations. undertaking more active promotion and facilitation and providing specific incentives for luring investments in agriculture and industry should create more jobs in the economy. In the case of mining.6. electricity and thriving small businesses surrounding the mine.Tanzania Investment Centre 76 .400 indirect employees who supply tobacco to DIMON Morogoro Tobacco Processors 85 direct and 2. over 230 farmers are now undertaking the flower business.330 direct and 1. The United Republic of Tanzania . Continuing to entice more investments through making further improvements in the investment climate.

NBC. Barclays.7. Stanbic. internal mentoring including use of visiting personnel expatriates. the mining sector has the potential of developing basic industries for fabrication of parts used for mining equipment and machinery.1 Impact on Human Resources Development Introduction Another measure of impact is the effect of investments on fostering skills development. 2001. posits that if technical. With skill shortage limiting productivity growth.2 examines Tanzania’s experience in fostering skills development. training of local personnel by foreign subsidiaries established in the country could bring about an important diffusion of these skills. 2002. the mining sector can be induced to forge linkages with the manufacturing sector with a view to enhancing value addition through cutting lapidary. 2003). 5. Although literacy rates have recorded slight improvement from an estimated 67 percent in 1999 to 82 percent in 2003. 5. International Bank of Malaysia. Kenya Commercial. CRDB.Analysing and promoting supply chains is one way of maximising value addition.7 5. These would only help in multiplying jobs and raising wages but also in encouraging investment in human capital through the transfer of skills and knowledge to the local workforce. setting and creating ornaments. as a prime source of human capital development and new technology diffusion for the country. much remains to be done (URT.7. in-country and international training to build a pool of professionals with international exposure. FDI may be looked upon. 2003) unless more efforts are made to ensure that the education system generates competencies required in the current labour market and globalisation. Stanbic. employment and technology transfer. For instance. we examine the banking sector. All local and foreign banks have training programs to upgrade skills of their workforce. entrepreneurial and managerial skills are scarce in a country.2 Development of Human Resources In this section we provide several examples where investments undertaken in Tanzania are fostering human resource development. to mention but a few. UNCTAD. In addition. Postal Bank) provide financial assistance (pays for tuition) and encourages its staff to undertake professional banking courses on part-time basis from the Tanzania Institute of Bankers (TIOB). at least in the short and medium term. Some banks (CRDB. Mining is another sector where investments are having valuable impact on human resource 77 Report on the Study of Growth and Impact of Investment in Tanzania . First.7. The strategy of all the banks involves training in-house. Standard Chartered. World Bank. 2001. Wangwe. 1995). Postal Bank. Jenkins and Thomas (2002) for instance. Incentives should be designed to attract investments in linkages and value adding activities. Section 5. Skill inadequacies and shortages have been for a long time a development challenge of the country (ESRF. These include: Citibank. Some other studies on Tanzanian experience are less optimistic (URT.

finance and management. Golden Pride. For example. The transfer of skills and knowledge is also evident in the manufacturing Sector. Workforce skills have been upgraded in the areas of spinning. All large mining companies have training of their staff.330 employees. underground mining techniques and safety measures. For example. blending. The company has 3 expatriate staff that conducts the training at about an annual cost of Tshs 25 million. a subsidiary of cowbell International (UK) has offered training to its staff in food processing. During the past two years the company spent Tshs 9 million to upgrade skills of its 100 workers.450 workers. provides in-house training. Kahama Mines has already spent over US$ 6. Tchibo Estate. also trains in-house its 360 employees to improve the quality of its timber and pole products. a local company that has been manufacturing gunny bags since 1998 also trains its staff to upgrade skills. electrical and mechanical engineering related to mining operations. packaging and distribution. An additional Tshs 60 million has been spent to train 200 semiskilled workers in order to raise their productivity. Skills being imparted relate to geology. In agricultural-related investments both local and foreign investors also provide training and skills development to employees. but a few. For example.development. Dabaga Vegetables and Food Canning Company also trains its 18 employees at an annual cost of Tshs 3. the company incurred Tshs The United Republic of Tanzania .5 million to upgrade skills and improve the quality of its products. The company conducts in-house training and also sends its technical staff for advanced training abroad. In 2001 to 2003 Gem & Rock Ventures Company incurred Tshs 1. a company that was divested to foreign ownership in 2000. TANCAN Mining Company spent Tshs. mining. also trains its staff to improve the quality of its three products: pyrethrum crude extract. of whom 85 percent are women. conducts in-house and external training for its 2. pyrethrum powder. Wonder Foods Tanzania Ltd. which exports quality garments. The company has 2 expatriate female staff that conducts in-house training for over 5. yarn. Africa Mashariki. an FDI that produces tea for the domestic and export market. 5 million between 2002 and 2004 to train 43 workers. Another local company. woven and knitted fabric to the USA.4 million in upgrading skills of its professional workers. Mwadui. spends over Tshs 17 million annually in training of its staff. knitting and dyeing. Geita. to mention. Tanzania Pyrethrum Processing and Marketing Company – an FDI that started operations in Tanzania in 1998.Tanzania Investment Centre 78 . and pyrethrum dry marc. Sun flag Tanzania – an FDI investment that is one of the largest vertically integrated textile mills in East Africa.3 million to conduct on-job training for its 900 local staff. The company has spent Tshs 37 million to upgrade skills of its 60 professional staff and an additional Tshs 43 million to upgrade the skills of its semi-skilled and unskilled workers. processing. European Union and South Africa. Another example is Unilever Tea Tanzania Ltd. SAO Hill. DIMON – an FDI that has been processing tobacco for the export market since 1997 has incurred Tshs 20 million to upgrade the skills of its 30 professional workers. In 2003. This company. an FDI that has been producing coffee for the export market since 2000. The Company has 3 expatriates that provides regular in-house training to its staff. TPM (1998) Limited. Similarly. These include: Kahama Mining.

knowledge. contributes little to modern science and technology. Foreign Direct Investment (FDI) appears to have had a greater impact on fostering the country’s technological capacity. iii) Centre for the Development and Transfer of Technology (CDTT) for monitoring and regulating technological flows. However. Vaso Agro Ventures.5 million to upgrade skills of 34 employees. Tanzania. ii) Tanzania Commission for Science and Technology (COSTECH) in 1986 to determine “Research and Development (R&D) priorities. new best practices and other intangible assets from FDI to local firms throughout the country. including: 79 Report on the Study of Growth and Impact of Investment in Tanzania . iv) Tanzania Industrial Research and Development Organisation (TIRDO) in 1979 to monitor services related to technology. in recognition of the importance of science and technology established the “National Science and Technology Policy” in 1986. Over the past four decades. like other developing countries. In principle the diffusion of all these intangible assets should lead to increased efficiency and productivity per worker. 5. knowledge and innovation and other intangible assets to capital deficient developing countries. Tanzania established a number of institutions aimed at improving the country’s technological development. All these ins-titutions and organisations have played some role in enhancing Tanzania’s technological base although there are few tangible achievements to date. the conclusion we draw is that there are no doubts that human skill development is taking place and being undertaken by both domestic and foreign investors in Tanzania. The main ones are: i) Tanzania National Scientific Research Council (TNSRC) in 1969. a joint venture between local and foreign investors (25:75% share split) has expatriate staffs that offer training to over 100 employees at about Tshs 5 million per year. Incentives should thus be developed to entice investors to undertake more human skills development to their employees. A study by Mohamed (2000) show that Less Developing Countries account for only 4 percent of the world’s application and development of modern science and technology. innovations.8 5. In general. Tanzania. as Tambunan (2003) points out. the ultimate impact of investment in the economy depends not only on the performance of foreign firms. However. vi) Institute of Production Innovation (IPI) for production-related innovations.8.10. FDI is greatly accredited as a source of new technologies. best practices in investment can be transferred in several ways. which was later revised in 1996. v) Small Industrial Development Organisation (SIDO) to provide the institutional support including marketing skill information. Based on the above experiential findings. but also on the diffusion of new technologies. although the country has a long way to go.1 Impact of Investment on Technology Transfer Introduction An important measure of impact is the transfer of technology.

which do not. This is because FDI embodies and integrates technological elements from various methods (Tambunan op cit. Investments made in skill development and technology in their study explains much of the difference in productivity between local and foreign firms. technology transfer. Apart from the above channels. The results show that FDI contributes relatively more to economic growth than domestic investment but the result holds only when there is some threshold of stock of human capital. through employer sponsored and other professional training locally and abroad and through between job movements of experienced personnel. Technology transfer and diffusion between local and foreign firms works through subcontracting arrangements between foreign and local firms. Klein et al 2000). and  Employment of expatriates from developed countries that would transmit knowledge to developing countries.8. Borenzstein et al (1998) in a test of the effect of FDI on economic growth using cross country regression framework found that FDI is an important vehicle for the transfer of technology. Batra and Tan (2000) in a study on inter firm production linkages and productivity growth in Malaysia found that local firms that entered into subcontracting arrangements with their foreign counterparts became more efficient. Public enterprise workers were oblivious to The United Republic of Tanzania .3 Transferring Business Skills and Working Styles In the past. both tangible and intangible has been weak despite many support institutions as discussed above. This section will provide illustrations on lessons learned in new working styles and culture. Similarly. customer-focus was virtually absent. Before 1990. 5.  Technology licensing by developed countries to firms in developing countries thus allowing acquisition of knowledge. transfer of technology and technical/managerial skills. In an earlier study Batra and Tan (1997) established found that firms that invest in training and upgrading of their employees’ skills and in new technology grow faster than those.8. 5. Tanzania’s efforts aimed at improving her low technological base was hampered by its almost closed nature of the socialist economy (UNCTAD.Tanzania Investment Centre 80 .2 Tanzania’ Experience In the particular case of Tanzania. Significant liberalisation of the economy thereafter triggered considerable private domestic and foreign investment that has opened doors to acquisition of modern technology. Purchase of exports from developed countries. 2001). Foreign firms turned out to be more efficient compared with their local counterparts by virtue of the investment undertaken in skill development and new technology compared with local firms. experience shows that FDI remains the most effective mode of transferring knowledge and best practices to developing countries.  Importation of capital goods embodying improved technology.

customers. This technology. Walk into a Shoprite (Supermarket). Britain. Dalnick Metal Ltd leases mining equipment to small and medium scale miners. The company managed to pioneer a branding and certification process for its germ quality Tanzanite production. to mention. Mauritius. India. Walk into an Indian or indigenous Tanzanian shop and smiles greet you – others even offer a soft drink while the customer waits for service. China. Files went missing without explanation. Mobela Gems Limited provides another example of technological transfer. In the manufacturing sector. the company has introduced “just-in-time” production systems that are more efficient. Civil servants are also emulating these business skills and offering better services. Other mining companies are expected to emulate this example by adding value to minerals produced through processing in-country and branding their products. to mention a few. Civil servants were no exception. Then mid-eighties things began to change. shaping and selling gemstones. Long queues symbolised pervasive inefficiencies. Similarly there appears to be considerable spill over of tyre retreading 81 Report on the Study of Growth and Impact of Investment in Tanzania . Foreign investment is paving way for a new culture of hard work. it has facilitated the manufacture of spare parts within the country – thus enhancing technological skills in the mining sector. or Nandos (Restaurant) or Woolworth (Clothes). customer focus and new ways of doing business using stateof-the art technology – based especially on computers and telecommunication linkages. In addition. reducing costs and maintaining high and consistent product quality. Investors from South Africa. Another example relates to leasing mining equipment. Mbeya Cement has also improved product quality to remain competitive. Seaunguk Trading Company’s processing and fruit-canning plant is exemplary. Tanzania Civil Aviation Authority. This business style has spread quickly to almost all sectors of the economy. North Korea. The company has transferred fruit production technology to small-scale farmers who now supply fruit of a uniform size and quality. but a few came in. Malaysia. Economy-wide reforms ushered in competition.8. between 2000 and 2003. The company processes and cans fruit for export and the local market. polishing. For example. are now customer-focused. The joint venture between local and foreign investors (50:50% share split) started operations in 1999 cutting. Government executive agencies providing public services such as the Business Licensing Agency (BRELA). The foreign partners have managed to train local employees in gemstone processing. Tanga Cement invested US$ 12 million for improving operational efficiency. apart from increasing productivity. Afgem (a South African Mining Company) invested about US$ 20 million in Tanzanite fields in Merelani. and say “thank you” as they receive payment. USA and Thailand. Wazo Hill cement factory has eliminated the dust that in the past polluted the environment.4 Examples of Technology Transfer in Selected Sectors In the mining sector there are a number of examples related to technology transfer. and the company now exports quality gemstones to India. 5. In the cement business quality has improved through the injection of foreign investment partnerships. young women and men greet customers with a smile. fill their orders with dispatch.

Ltd that grows flue-cured tobacco. small local entrepreneurs have sprung up to provide repair. 5. largely for the export market. the company expanded its operations into tea processing. In order to ensure good quality and hygienic conditions. Another example is Wonder Foods Tanzania Ltd. growing flowers and simple bookkeeping and accounting. Small-scale farmers cultivating tea have benefited from extension services provided by this company. Olarreaga and Schiff 2001 have identified a positive relationship between imports of capital goods and related technology diffusion and productivity growth.Tanzania Investment Centre 82 . Apart from facilitating communication that has impacted positively on business efficiency. cutting flowers and growing fresh beans. Overall.8. For example. Perhaps the largest impact has been in telecommunication. blending. The company conducts seminars to out growers on vegetable production. a joint venture between local and foreign investors (25:75% share split) started operations in 2003 growing flowers. packaging and distribution. The simple technology transferred to outgrowers has enabled the producers to use less water in production and supply to the company of uniform quality products that are competitive in the international market. Since it’s establishment in Tanzania. the company has helped local milk producers acquire the technology for raising high producing milk cows and equipment for hygienic sanitary storage and transportation. According to UNCTAD (2000). sweets and cool drink powder technology in Tanzania that has a high chance of being emulated by others in this category. Mobitel and TTCL have revolutionised telecommunication linkages in the country. and Global Outdoor Systems Ltd appear to be emulated by many other local producers. slightly higher than intermediate and consumer goods. recharge and hook-up services. Although less than 7 percent of FDI has gone into agriculture. Tanzania has benefited from capital imports with technology-embodying products (machinery. The company established a new agro-processing plant to pack. equipment and tools). In 1998. Morogoro small-scale farmers cultivating tobacco have benefited from new cultivation techniques extended by Golden Leaf Growers Co. This company. the investment made so far appears to impact on agricultural development through technological transfer. the International Chemical Products Ltd that acquired Mufindi Pyrethrum Extraction Plant in 1997 has introduced new technology in pyrethrum flower production and facilitated training of local staff to improve quality. The United Republic of Tanzania . together with Celtel. Eaton and Kortum 1996. Vaso Agro Ventures.10 provides broad categories of imports according to Bank of Tanzania classification. Similarly. Vodacom – a mobile operator company. Linlan (T) Ltd has introduced production of confectioneries. has invested about US$142 million. 2001. capital goods imports have averaged over US$ 500 million per year. Studies by Damijan et al.5 Technology Transfer-through Imports of Capital Goods Another route through which investments can foster technology transfer is through imports of capital goods. Figure 5. market and distribute milk power in the country.activities ushered in by Tredcor (T) Ltd. The production of sign boards and outdoor advertising facilities pioneered by Afrigavix Ltd.

albeit slowly. Entrepreneurship – or attitudes toward innovation.Source: Based on Bank of Tanzania Economic and Operations Reports (various years). The Government. information 83 Report on the Study of Growth and Impact of Investment in Tanzania .1 Entrepreneurship Growth Another measure of investment impact relates to fostering entrepreneurship growth. pro-activity.9. Further incentives are needed to entice more transfer of technology especially through FDI investors training SMEs to supply to them inputs that meet requirements of quality and standards. The conclusion we make here is that investments are fostering the transfer of technology. through its institutions such as SIDO should also become more active in upgrading the capacity of SMEs to supply inputs to FDIs through training in skills development. The literature on the impact of investment on entrepreneurship growth is limited (UNCTAD 2004).9 Impact of Investment on Entrepreneurial Growth 5. foreign direct investments (FDI) can lead to considerable growth in a country’s entrepreneurship. and risk taking plays a key role in fostering investment and economic growth. The study illustrates how FDI spillovers from production networks and linkages may work: affiliates increase a host country’s access to specialised varieties of intermediate inputs and technologies. Rodriquez-Clare (1996) for example shows that through networks and linkages with local firms. The UNCTAD study cited above provides examples of where domestic firms acquire soft technologies from foreign affiliates through contact with experts. the improved knowledge and skills raises productivity of domestic producers and in some cases leads to growth of a country’s number of entrepreneurs. 5.

over 80 percent were sourced through imports – a pattern that would be expected in a country where nearly all mining machinery and equipment have to be imported. Often this aspect was found to be important in part because of assurance of reliability of supplies and more so because some of these local suppliers had to be advanced inputs and working capital to facilitate production and regular supplies. In mining.12: Network of Suppliers of Raw Materials and Other Inputs FDI Sector Local Sourcing (%) Import (%) Non-FDI (Local) Local Sourcing (%) Import (%) Joint Venture Local Sourcing (%) Import (%) Agriculture Manufacturing Services Mining 87. components and services.5 80. investors tended to transfer requisite skills and knowledge to the local firms/individuals so as to meet standards. Ability to develop relations of trust. Access to local information and business practices – a network of suppliers of raw materials and other inputs flourished well where local information was readily available and the local firms/individuals showed business-like acumen.0 60 10 12. While service-related joint venture firms sourced 90 percent locally. the main types of networks and linkages relate to local sourcing and purchase of inputs. The investor’s choice of suppliers depends on several attributes. The extent of investment impact on entrepreneurship growth depends on the strength and breadth of the networks and linkages established. local sourcing of inputs was the largest contributor to the growth of entrepreneurship. FDI firms sourced only 60 percent locally. The United Republic of Tanzania .5 Source: ESRF (2004) Survey for TIC In agriculture investors sourced over 80 percent of their raw materials and inputs locally.12 and further illustrated in Box 5.5 20 40 90 90 70 80 23 10 30 20 77 80 73 90 12. Next was manufacturing firms that sourced over 70 percent. Table 5. ♦ ♦ Tanzania’s experience with regard to facilitation of entrepreneurial growth through a network of suppliers’ linkages is shown on Table 5. In the field study conducted for this assignment. thus fostering entrepreneurship growth.1. Overall. Services did not reveal discernible pattern. The study learned that over time companies tend to develop more local input network and linkages.5 20 27 10 87. quality and reliability of local supplies – where these were inadequate.Tanzania Investment Centre 84 . including: ♦ Cost.flows and observation.

Humac Laboratory to conduct test and experimentation of samples and drilled rocks from TMCL. Box 5. The company plans to train more input suppliers as capacity utilisation rises from the current 73% to 95% by 2007. Unilever Tea Tanzania. Only 1% of its products are for exports. For example. Its main products are flowers.1: Tanzania: Investments are Fostering Entrepreneurship Growth – Albeit Slowly Dabaga Vegetables and Food Canning Company is a local company that started operations in 1976 in Iringa town. baked beans and T/puree for the domestic market. Africa Mashariki Gold Mine has established similar arrangements. flower cuttings and fresh beans. albeit slowly. pickles. The company started operations in Moshi. Suppliers are trained on their own farm to produce and supply quality fruits and vegetables. margarine. APC Lyamungo Coffee Estate. The three company expatriate staffs have played a key role in fostering entrepreneurship growth through subcontracts and out-sourcing almost all its input supplies. tomatoes (20). The company assisted in the establishment of a local company . cooking facts (Pride). that has been contracted to provide drilling. also an FDI. Since 1999 the company has been involved in mineral exploration of gold and diamonds in Mwanza Region. The company uses a network of input suppliers – cottonseeds. which started operations in 1966 in Mwanza. DIMON Tobacco Processors is an FDI that has contracted a locally based firm called TORITO to research on issues related to improvement in tobacco flavour. The company pays an equivalent of 5 percent of its annual sales on R&D. To date the company has trained the following entrepreneurs (their numbers in bracket): pineapples (66). Vegetable Oil Industries Ltd (VOIL) is a joint venture between domestic and foreign investors (20:80 % share split). The conclusion we make from the above experiential analysis is that investments are fostering entrepreneurial growth. Stanley Mining Services. COPCOT Ginneries (Geita) and LINTEX Ginneries (Shinyanga). This company has contracted a locally based international agency called Utzkapeh to provide strategic R&D and to check the company’s compliance with environmental standards set by international organisations. The new local firms established to supply cottonseed to VOIL are: Alliance Ginneries. Kilimanjaro in 2003. quarrying and civil works for the company. The company has trained over 35 local suppliers to grow flowers. and drinking water (AQUA).Linkages related to Research and Development (R&D) was negligible among local investors but foreign based firms tended to have considerable investment in this area. Blue Mountain Coffee Farm is also an FDI that produces quality coffee for the export market. It produces tomato sauce. 85 Report on the Study of Growth and Impact of Investment in Tanzania . TANCAN Mining Company (TMCL) is a joint venture between domestic and foreign investors (40:60 % share split). TMCL appointed SGS laboratory to counter-check and verify the work of Humac while providing them with advisory services. has a strategic technology partnership in the area of R&D with TACRI – a local firm that does experiment and improvement of coffee seedlings. vinegar. There is need to develop incentives to entice investors to source more locally as well as increase their network of suppliers of raw materials and other inputs. The company. This company which deals with gold mining in Tarime. mangoes and oranges (4). Through an elaborate skills transfer mechanism. onions (5). cinnamon (1). manufactures double refined cottonseed oil. juices. conducts R&D on improvements in the quality and care of tea. and chilly powder (3). jam. another FDI that grows coffee for the export market. Mara region assisted in the establishment of a local firm. to undertake flower cutting and produce quality seeds. Vaso Agro Ventures is a joint venture between domestic and foreign investors (25:75 % share split).

approving a US $ 183 million. The World Bank played a key role in Songas. groundnut sheller. Domestic and foreign investment has community level impact that is not well documented in the literature. Box 5. when natural gas was discovered on and around Songo Songo Island.000 delivering about 600.10 Community and Neighbourhood Impact Another measure of impact is the contribution of investments in fostering community development. coffee husk pulpier. KIDT that was incorporated in 2001produces oil expellers. This FDI company which started operations in Tanzania in 1998 produces pyrethrum crude extract. interest-free loan in October 2001. at the national level.2: Developing a resource out of reach: Songas natural gas When discussing investment impact. 5. including additional capital committed to the expansion of Ubungo generating capacity. The company’s extension service transfers skills and knowledge to the farmers that have enabled the supply of uniform quality pyrethrum flowers to the company.000 farm families to grow pyrethrum that is supplied to the company.Tanzania Investment Centre 86 . the investment made to exploit Songo Songo gas has brought to the people of Tanzania a reliable supply of safe. Then in 1994 a powerful public/private investor partnership turned the dream into reality. World Bank’s technical representatives provided expertise and oversight for more than 12 years to see the Songas project through completion in 2004. (about 225 kilometres from Dar es Salaam). pyrethrum powder and pyrethrum dry marc.Tanzania Pyrethrum Processing and Marketing Company provide another example of networking to obtain quality pyrethrum flowers. The United Republic of Tanzania . but a few products. Ever since 1974.12. This later aspect is discussed separately in Section 5. The Commonwealth Development Corporation (CDC) made an initial US$ 6 million investment in Songas in 1997 and progressively increased its stake. to mention. It has brought to the people of Tanzania a reliable supply of safe. For example. clean and efficient energy with far reaching socio-economic impact (see Box 5. the technical assistance given by Japanese experts has transformed KIDT into a powerful dynamic entrepreneurial powerhouse capable of producing internationally competitive products.2). With technical and financial assistance from the Japanese Government. train weather plates. Over 30 entrepreneurs have graduated from KIDT training and have established their own machine/foundry or forging workshops. sugar cane squeezer. the Songas story is exemplary. Source: ESRF Survey (2004) for TIC.000 tons of cane or 50 percent of the company’s requirement. While KIDT is 100% local firm. The Government of Tanzania provided policy and logistical support. The company estimates it has brought about 300.000 to 5. the development of this resource remained a dream. Kilimanjaro Industrial Development Trust (KIDT) is a typical success story in entrepreneurship growth in Tanzania. clean and efficient energy. Similar extension services undertaken by Kilombero Sugar Company has resulted into growth of sugarcane out-growers from 2. Tanzania’s experience shows that investments are making a commendable contribution towards community development. thus fostering poverty reduction and those that have negative effects – especially on the environment. Those that improve the socio-economic well being of the communities within the investment area and beyond. spare parts for industrial and agricultural machinery. earthenware products. largely for the export market. Field studies conducted for this assignment revealed two kinds of impacts.

69 percent of the donations or nearly Tshs 4. Source: ESRF Survey (2004) for TIC. which is capable of producing 45 percent of Tanzania’s total electricity requirements. Other more specific examples of community level impact were obtained from this study’s fieldwork. both domestic and foreign. The sample of 30 investors interviewed. The plant provides safe.The major user of natural gas from Songo Songo is Ubungo Power Plant in Dar es Salaam. the plant was refurbished and converted to use the country’s own natural gas resources. Since July 2004 Ubungo plant. Water 6 percent (Tshs 418 million).7 billion incurred by the 30 sampled investors between 1998 and 2004 were for rural roads rehabilitation or maintenance. reliable. Overall. Originally built to run on imported liquid fuel. has been using natural gas in place of the expensive imported fuel. 87 Report on the Study of Growth and Impact of Investment in Tanzania .11 and 5. Others expenditures with their value in brackets are: education 12 percent (Tshs 862 million). Health 11 percent (Tshs 773 million).3 provides elaboration of some main philanthropic firms in the survey. Box 5. Source: ESRF (2004) survey for TIC. efficient clean electricity to Dar es Salaam and the national grid. as Figures 5. feel obliged to contribute part of their earnings for some social course – especially in reducing problems related to access to social amenities. Electricity 1 percent (Tshs 87 million) and others 1 percent (Tshs 63 million).12 illustrate.

Tshs. considers social responsibility part of the company’s vision. and Tshs 4 billion for rural roads improvement as part of sugar out-growers support. an FDI that began gold mining in 2002. The company estimates over 1. Since inception the company has contributed Tshs 400 million for construction and equipping village health facilities. Tshs 2 million for water supply and Tshs 6 million for improving community rural roads. 18 million have been donated for primary and secondary school improvement. provides anther example of commendable philanthropy. Nyanza Bottling Company. an FDI that produces timber for the domestic and export market. The company that started operations in 1984. Tshs 600 million for rural roads construction and Tshs 30 million for the construction of ward office. Over 700 households have benefited from these socio-economic activities. Over 3. Over 10. Tshs 30 million for improving community health facilities. Tshs 550 million for primary and secondary school improvement efforts. and Tshs 10 million for improving rural roads. The United Republic of Tanzania . Since 2000 when the company began operations. Tshs 100 million for water supply.Source: ESRF Survey (2004) for TIC.Tanzania Investment Centre 88 . Tshs 100 million for rural water supply. Kilombero Sugar Company. is exemplary when one talks of philanthropy. Box 5. To this effect. another FDI that began operations in 1998.000 households have benefited directly or indirectly in this socio-economic assistance. Tshs 20 million for improving community health facilities. Tshs 250 million for improving community health facilities. the company has contributed Tshs 106 million in support of community primary and secondary schools. has contributed Tshs 30 million is support of community primary and secondary schools. Sao Hill Industries.3: Investors are becoming charitable and generous Afrika Mashariki Gold Mine. a joint venture between foreign (64% of the shares) and local investors that produces soft drinks for the domestic market has also made valuable socio-economic contributions.000 households have benefited from these charitable activities.500 households have benefited from the company’s socio-economic assistance.

Upgraded roads are usable all year round.000 households have benefited from these charitable activities. Below we describe a few case studies to give supportive evidence of the performance of some large investment enterprises. most of these FDI have “Certificate of Incentives” that provide more business advantage compared with local investors. despite own firm-level interests. As time and resources could not allow sampling many firms. 5. The company has contributed Tshs 15 million in support of primary and secondary schools and Tshs 140 million to provide reliable water supply to the surrounding communities. Tshs 27 million for water supply and Tshs 40 million for improving rural roads.1 provides a breakdown of the social-economic contribution provided by 30 sampled domestic and foreign investors that have high impact on the recipient communities.Vaso Agro Ventures. Meremeta Mining Company. For example. A policy should be developed to encourage greater contribution to local economies in fighting poverty and enhancing equitable development. Tshs 20 million for health improvements. Local investors are also good philanthropists as shown in Annex B. as in Kilombero. a wholly owned local gold mining company that started operations in 2002 has shown commendable social responsibility. although most investment enterprises have performed well as a result of a better investment climate and favourable policy regime. some farmers have shifted from low value maize production to sugar cane production – thus earning higher income. in the absence of an “equal playing field”. improvements in rural roads are having valuable benefits to communities. improvement of roads in large sugar cane plantations such as Kilombero are meant to facilitate transport of cane by out-growers to ensure regular supply rather than fostering a charity of giving to the communities. Over 1. rehabilitation of community roads in pyrethrum growing areas was meant to assist out-grower farmers to supply pyrethrum flowers throughout the year. The conclusion is that available field data reveals that FDI investors tend to make larger social contributions to communities around their investment (Annex 4. Investors also show a high degree of social responsibility through assisting in the provision of education. causing less damage to the vehicles using them. Annex 4. is also among food philanthropic firms. The improved roads allow farming households and the firms to move their goods more often and more cheaply. some have achieved better and at times significant performance than others. Thus. Similarly. Source: ESRF (2004) Survey for TIC The considerable investment channelled to improve rural roads appears to have been made to facilitate access to local supplies critical for investor requirements. 89 Report on the Study of Growth and Impact of Investment in Tanzania . health and water facilities. Even improvement of roads by mining companies such as Kahama Mines appear to have self-interest in mind to improve input access and other amenities.11 Illustrative Cases of Some of the Performing Investments Clearly.1) compared with local investors. we limited our case study of investment performance only on those upon which information was available. However. it is difficult to make any definitive conclusion on the contribution of FDI and Non-FDI to the socio well being of local communities. In some cases. The company has contributed Tshs 89 million is support of community primary and secondary schools. For example. However. another joint venture between foreign (75% of the shares) and local investors that started operations in 2003. and used for illustrative purposes.

5.000 tobacco farmers have benefited from the company’s improved crop husbandry skills transfer. its shares were listed in the Dar es Salaam Stock Exchange. Club (menthol and filter) and Crescent star (kali).11.160 2004 325 344 8 200 50 22. Between 2002 and 2004. Million 345 344 11 295 50 22.000 dealers and retailers have benefited directly through the marketing of the company’s products.362 Skills Development Dividend paid to shareholders Taxes and other charges paid to government Share Capital or Market Capitalisation TZS. Over 250 of the nearly 700 employees (35. Similarly. plant and machinery and training. the company’s production efficiency has improved due to investment in new technology.174 170. enabling the company to pay higher dividends to its shareholders. Table 5.000 42.000 45.8 billion and taxes paid to government averaged Tshs 48. Camel (filter and lights). Profits have more than doubled.13: TCC Performance 2002 Male (Local) Employment Female (Local Foreigners Number of those trained in house Number of those trained abroad TZS. Sweet menthol. paying greater taxes to the government and providing better remunerations and training to employees (Table 5. Million 172. The United Republic of Tanzania . Since its privatisation in 1995. The company’s main products are: Sportsman.13).Tanzania Investment Centre 90 .533 58. The company estimates that over 40. Winston (lights and filter). Million TZS.213 2003 345 344 11 295 50 24.6 billion. In 2000. The British American Tobacco initially started the company in 1961. Embassy (menthol. the dividend paid to shareholders averaged Tshs 22. lights and kings).7%) have received training to upgrade skills. over 200. TCC has the capacity to produce 4 billion sticks per annum TCC is a shining example of the success of Tanzania’s privatisation programme.000 176.316 Source: TCC databank (Can this information be updated?) TCC has also contributed importantly in the transfer of technology through a network of suppliers.1 Tanzania Cigarette Company (TCC) TCC is a joint venture between foreign (75% of the shares) and local investors.

14: Kioo Limited Performance 2002 Male (Local) Employment Female (Local Foreign Number of those trained in house Number of those trained abroad 12. Million Source: Kioo Limited database Overall. Table 5. commitment (respectful.000 251 15 22 251 2003 233 15 22 233 2004 189 15 21 189 1 12.000 1. Foremost are beverage and liquor firms such as Tanzania Breweries.000 2. The company also supplies packaging materials to the pharmaceutical and food industry.5 billion in 2004. engagement and teamwork). This wholly private owned local company started production in 1966 producing glass and bottles for nearly all types of requirements.2 Kioo Limited Company (KLC) Kioo limited is another success story. Over 80 percent of the company’s raw materials are sourced locally (sand. KLC exports about 60 percent of its products to Sub-Saharan countries – earning the country foreign exchange.11. the company adopts best practices in its manufacturing process that are environmentally 91 Report on the Study of Growth and Impact of Investment in Tanzania .200 12. but also to foster competitiveness in a globalised world. Overall. Tanzania Distilleries. The company has strong linkages with other industries that use its products. Coca Cola.000 2.000 tons per annum. The company is expected to contribute higher tax revenue to the government when its Tanzania Investment Centre certificate of incentives expires. and feldspar). Serengeti Breweries. The company also paid taxes and other charges that reached Tshs 2. responsible and transparent) and synergy (diversity.The company management believes that its success lies in adoption of sound investment core values: high quality culture (excellence. 5. of whom 8 percent are foreign technical experts.14 illustrates. As Table 5. and Pepsi.500 Skills Development Share Capital or Market Capitalization TZS Million Taxes and other charges paid to the Government TZS. These values are important not only to enable companies improve efficiency. dolomite. The company is a good example of investment that has high forward and backward linkages with the economy. All employees have been trained locally and in-house to upgrade skills and knowledge. innovation (dynamic. KLC current (2004) production capacity is 55. KLC employs an average of 267 people. simplicity and satisfaction). enthusiastic and fast).

Table 5. The main reason to success is related to reduced treatment fees.99 percent and reduction in the death rate to between 1-5 percent.15: Number of patients treated between 2002-2004 Year 2002 2003 2004 Total Children Male 2.220 3.253 24. the number of medical graduates has quadrupled from 15 in 2002 to 60 in 2004. Similarly. The investment employs over 270 medical and other professional staff.736 Adults Female 8. recycling used bottles and adhering with hygienic conditions on all its packaging materials.5 million in 2002 for roads and special illnesses (Open Heart Surgery). Between 2002 and 2004.11.366 3. The re-known hospital provides medical services to an increasing number of patients (Table 5. Enrolment into the medical university has more than tripled from 26 in 2002 to 88 in 2004.8 million in 2003 and over Tshs 680.390 14.510 5.920 10. HIV/AIDS and other communicable diseases.3 Mission Mikocheni Health and Education Network (MMHEN) Mikocheni Mission Health and Education Network (MMHEN) that provides medical and academic services to the country is another investment success story. The number of patients treated in this hospital has risen from an annual rate of 6 percent in 2002 to 21 percent in 2003/04.776 4.180 20. Tshs 2. including Tshs 2.836 5. tropical diseases. In addition. of which 67 percent are women.247 7. in part due to reliance on medical doctor interns – making their services more affordable.163 Female 4.Tanzania Investment Centre 92 .410 12.friendly. This performance is exemplary taking into account the acute shortage of qualified medical doctors in the country. The investment comprises Mikocheni Mission Hospital. The Hubert Kariuki Memorial University and the holding company that deals with administrative matters. 000 for supporting various community activities in 2004.601 10. 5.500 63.933 Source: MMHEN database Improved services have resulted into increased recovery rate to between 75.15). In addition. several community contributions were made.405 Male 3.780 26. the centre provides charitable mobile clinics in Mikocheni area that targets pregnant women. The United Republic of Tanzania . the investment contributed to the government over Tshs 670 million in various taxes and charges.877 3.629 Total 19.

Arusha and Moshi. the bank has won several prestigious awards. To attest this contention. with loans and advances of over Tshs 200 billion. and management of foreign exchange risk.11. In terms of skills transfer. The bank. Its consumer business focuses on up scaling individuals and their businesses. Ghana. • Supporting investment in processing operations to raise the quality and value of export crops and improve farmers’ earnings. is part of the competitive and efficient banking system that is evolving in Tanzania following the country’s financial sector reforms. The Training aims at ensuring high levels of service to customers through quality career planning and skills enhancement of national staff. It is a successful FDI that re-opened in 1993 with branches in Dar es Salaam (3). Apart from training. To illustrate the contribution this investment is making in Tanzania several pointers are noticeable. Botswana and the Great Britain. employees are well remunerated.4 Standard Chartered Bank Tanzania (SCBT) Standard Chartered. particularly in countries such as Gambia. the bank is the largest lender to the corporate sector. Examples of this include: • Providing pre-export finance to the agricultural sector to improve cash flow to farmers. Some examples of the innovative products and services that SCBT has launched in Tanzania recently include: • Tanzania’s first Visa Debit Card • A revamped SME Banking Business • A sophisticated Excel Banking Centre In terms of making available resources for the country’s development. donor agencies. including “Best Bank in Africa” (1998. Its lending policies support inward investment. The bank aims at fostering good performance by providing staff with performance 93 Report on the Study of Growth and Impact of Investment in Tanzania . 1999 and 2000).5. In addition. The bank has developed a strong wholesale banking business by establishing relationships with major international corporations. being part for the Standard Chartered Group that has 950 offices in 50 countries. Structured Trade solutions. Training is both in-house and external. Kenya. SCBT is also expanding the range of products and services including Import and Export Finance. “Bank of the Year” for several years including 2004. local businesses. Mwanza. development of domestic industries and making full use of Tanzania’s abundant natural resources. the bank has developed business within the agriculture sector and provides financial access to Small and Medium Enterprises (SMEs). Government and public enterprise organisations. training is provided to all 200 plus employees. has brought to Tanzania the best of banking worldwide. and “Employer of the Year” in 2005 awarded by Association of Tanzania Employers. with a long history in Tanzania dating back from 1917. and • Making available term funding for large-scale rehabilitation of recently privatised public enterprises.

000 (Tshs 69 million) in 2004 to assist in irrigation projects in the Mombo and Sanya regions which are in Tanga and Kilimanjaro regions. In 2004. The United Republic of Tanzania . respectively. for example. Thus. Salary levels are reviewed regularly to ensure competitive remuneration packages.5 million while the remaining amount was shared between the Arusha Children for Children’s Future home and the Magu district Children’s Home in Mwanza region. for a number of years it has participated in a number of community projects. With regard to community contribution. Arusha. The Kurasini Children’s Home in Dar es Salaam received Tshs 27. the bank recognises that it has wider responsibilities to the country. the bank paid to government the following taxes and other charges: Table 5. and • Donation of US$ 140. the bank is among the large or corporate taxpayers that contribute considerable revenue to the government coffers. • Donation of US$ 60.16: Tax paid during the year ending December 31 2004 Category Corporate Income tax P A Y E-Local Staffs P A Y E-Expatriates Staffs VAT Skills Levy Withholding tax on goods and services Withholding tax (intermediate commodities) Total Amount (TShs Millions) 6. including: • Donation of US$ 42. • Contribution of US$ 90. Apart from community contributions.000 (Tshs 48 million) in 2002 for the rehabilitation of Children’s Homes in different areas. to be completed in 2005.233 Source: SCBT. This project. Kagera Morogoro and Sumbawanga. September 2005. Some funds also went to a Fish Farming project in Mererani Arusha.related bonuses as well as other incentives such as subsidised schemes to purchase cars as well as to provide educational expenses.257 679 383 135 263 301 212 8.Tanzania Investment Centre 94 . will offer an alternative income-generating source for the commercial sex workers in that region thus reducing the spread of HIV/AIDS.000 (Tshs 103 million) in 2003 to water projects in the Dar es Salaam Bunju area.000 (Tshs 160 million) in 2005 to construct an Orphaned Children’s Home in the Kibaha area.

and generate income to many retailers country-wide.No.Thus. with strong back and forward linkages (building materials) Strong forward linkage. significant tax revenue and a modal of investment in R&D and technology transfer to local firm (Kioo Ltd.2 billion in taxes and other charges – revenue resources that are much needed for accelerating Tanzania’s development prospects. Mwanza. listed for public shares (leading in dividend distribution). Location Sector Description of strong case Uses locally source raw materials. Mara. and a model of renovated hotel to a 5 star standards Significant tax revenue and notable impact on growth of exports and positive balance of payments effects.17: Additional list of some of best performing enterprises S. in 2004 the Standard Chartered Bank Tanzania contributed over Tshs 8.17 lists additional firms (other than those listed in Table 5. All over the country Communication Largest mobile phone company with massive investment (over US$142 million) and number of subscribers. setting example for others to invest in the sector. Cell phone companies have significantly reduced transaction costs emanating from poor communication. Expanded fast to other regions and with a lot of branches.) Example of energy development from own Natural resources 3 Regions of Manufacturing Dar. Mining Shinyanga and Mwanza Source: Interview with TIC officials.9) that could also be considered as some of the best performing investment enterprises. Table 5. in discharging its corporate responsibility. Table 5. 1 Name of the Enterprise Tanzania Breweries Ltd. In addition to the above. producing limestone for almost all cement manufacturing plants in the country Investment that reclaimed over 10 hectors of land. 95 Report on the Study of Growth and Impact of Investment in Tanzania . 4 St Mary’s Schools Dar es Salaam Education Ltd 5 Simba Plastics Dar es Salaam Manufacturing 6 Athi River Mining Tanga Mining 7 Kunduchi Beach Hotel Dar es Salaam Tourism 8 Mining companies Arusha. increasing significant number of intakes for all levels of education ladder (nursery to college) Local source of raw materials. and Arusha 2 3 Songas Coast Energy Vodacom (T) Ltd.

especially for mining.Tanzania Investment Centre 96 .4). Various initiatives for ensuring environmental sustainability are being implemented by the government in collaboration with various stakeholders in the country. experience in the field shows that both domestic and foreign investors are aware of environmental concerns and are taking appropriate mitigation measures. Therefore. and tourism projects in the wildlife parks and coastal areas. and these are a precondition for construction and planning permits. and can require EIAs where significant capital projects are involved (UNCTAD op cit).5. Tanzania’s experience shows that there is a growing awareness on the environmental impact of unplanned and unregulated economic and commercial developments.12. The National Environmental Management Council also continues to implement various environmental conservation and management programmes including the preparation of strategies for environmental conservation. Both domestic and foreign investors are aware of environmental concerns and are taking mitigation measures as appropriate (see Box 5. despite inadequate information. The extent to which investments have facilitated environmental sustainability is difficult to discern at the moment due to lack of adequate information. For a start in 2003 the government conducted sensitisation training to local governments on implementation of the national environmental policy. There are also currently initiatives to extend impact assessments to domestic SMEs once the necessary resources and skills are available. education and sensitisation in the country. especially in sensitive coastal and rural areas of the country important to Tanzania’s growing tourism economy (UNCTAD 2002). FDI projects guaranteed by the Multilateral Investment Guarantee Agency (MIGA) must undertake EIAs to demonstrate that they do not damage the environment and are sustainable. Both TIC and ZIPA seek to assess FDI projects against environmental benefit and impact criteria.1 Cross-cutting Issues The Environment Another measure of impact relates to the effects of investments on the environment. The field studies conducted for this assignment revealed that all FDI investors conducted EIAs and are making good progress in preserving and conserving the environment. The observation above notwithstanding. The Government should continue enforcing its environmental policy to ensure compliance by all investors – domestic and foreign. oil and natural gas. The current regulation for environmental protection requires all investors to undertake Environmental Impact Assessment (EIA) studies in advance of their construction. The United Republic of Tanzania .12 5.

The company’s use of explosives during blasting causes cracks in nearby houses and air pollution. the company found out that deforestation was taking place in some villages. The company has also created a wildlife refuge for monkeys. The company also recycles the mud from the factory back to the sugarcane fields. the company compensated people around the mine and moved them 100 metres from the mine. Over 25% of the tailings produced are mixed with waste rock and directed underground to fill and seal mined areas. provides another good example of environmental protection. an FDI that started gold mining operations in 1999.Box 5. gender issues in investments. Gender mainstreaming relates to the process 97 Report on the Study of Growth and Impact of Investment in Tanzania . Wastes are recycled at the mine and water conserved. ED & F Man (20%) and Government of Tanzania (25%) is making commendable progress in environmental protection. flora and fauna around the mine.4 TIC is fostering environmentally friendly investments in Tanzania Kilombero Sugar Company – a 1998 privatised company under three shareholders: Illovo (55%). Tanzania’s experience shows that gender relations in Tanzania are characterised by a patriarchal system that gives men power and ownership over things of value and over decision-making. The company trains its workers on environmental issues and has established a nursery to propagate native trees for landscaping and re-vegetation purposes. water. 100 trees are planted under the support of the company. Immediate action was taken to mitigate this problem by supporting tree planting. immediately after being privatised. Africa Mashariki Gold Mine. an FDI that started gold mining operations in 2002. Wazo Hill. both domestic and foreign. This in turn results in different needs and opportunities of the two groups. stopped the dust that for several years has been polluting the environment.000 tons of sugar per annum. The company refurbished a sewage treatment plant. has shown concern on environmental issues. The company’s policy requires zero discharge that is aimed at minimising its impact on the air. Kahama Mining Corporation. installed molasses binding equipment and secured a market for molasses. an FDI that started operations in 1997 processing tobacco for the export market. requires gender mainstreaming. Nile monitor lizards and small antelopes. These efforts are exemplary in Tanzania’s quest for sustainable development. reduced pollution of Kilombero river water by stopping discharge of raw sewage of molasses into the river. To date. Gender refers to the social relationship between men and women that provides women and men with different roles and access and control of resources in society. 5. DIMON Morogoro Tobacco Processors. To the extent that this is the observed phenomenon. As a mitigation measure. The company’s flue cured tobacco uses wood for curing. a company that produces cement. New methods are being practised to contain cyanide and mercy that are used in the mining process. provides another example where environmental conservation is of prime concern.2 The Gender Dimension Another measure is the extent to which gender is mainstreamed in all investment plans and strategies. for every 50 tons of tobacco grown. In addition the company supports Morogoro Prison Tree Planting Project. mangooses. A unique paste tailing process is being implemented that uses 50% less water than traditional methods. The National Environmental Management Council (NEMC) has been invited to team up with mine offers to conduct periodic environmental audits. Source: ESRF Survey (2004) for TIC. After assessment.12. The company that produces over 430.

In particular. Increasing individual motivation by understanding why differentials exist in career advancement between men and women. TIC is urged to work with the relevant stakeholders to develop gender-specific investment guidelines that will take into consideration the following processes: ♦ Empowering all employees and especially women to fully and effectively participate in investment decisions. DIMON. so that the whole investment system becomes truly participatory and sustainable. Investors tend to employ more women (e. Tanzania is signatory to a number of declarations concerning gender equality. ♦ ♦ Addressing gender in all investment aspects provides an opportunity to enhance overall investment performance by: ♦ ♦ ♦ ♦ Improving investment productivity. Making investment policy and strategy more inclusive and representative of the client base. and implementation process.Tanzania Investment Centre .g. The objective is to ensure that investments undertaken in Tanzania take on board concerns and needs of men and women. 98 The United Republic of Tanzania . This study revealed that there is no discrimination between men and women in terms of employment (Table 5. However.g. and Promoting women in enterprise leadership and management in an attempt to achieve gender equality.11). TPM) depending on the nature and structure of their production processes. it is important to note that Tanzania has made significant progress in fostering gender equality. accountability and customer service by delivering products and services according to the needs of male and female clients. and Increasing effectiveness of employees by providing an equitable working environment. the study noticed a lack of guidelines with regard to gender issues. Unilever Tea) or more men (e. The needs of men and women differ as a result of the different roles that the society has placed upon them. Within this framework. Sao Hill. Understanding the needs and concerns of men and women and plan for investment development accordingly.of integrating gender and equality concerns in all investment policies.10 and 5. including the following: ♦ Ratified the convention on elimination of all forms of discrimination against women (CEDAW). activities. Sunflag. half of which is female. programme (project) objectives.

and Analysing the expected consequences of changes for women and men respectively. economic and political empowerment of women. unless a decisive action is taken to combat the spread of the pandemic. At this rate.12.♦ ♦ ♦ Signatory to the Beijing Platform for Action. To achieve the above ends. and improving women access to education. Signatory to the SADC declaration of gender and equality. It strikes adults in their prime years. The conclusion we make is that HIV/AIDS is becoming a serious labour-force problem that is 99 Report on the Study of Growth and Impact of Investment in Tanzania . This has resulted in decline in labour productivity and at times reduced output.3 HIV/AIDS Another impact related to the spread of HIV/AIDS due in part to the indirect effects associated with the investment – especially where market towns have developed to supply socio-economic services. Gender mainstreaming is a strategy and a method for achieving equality objectives. 5. Estimates show that by 2004 the country had over 1. Tanzania Investment Centre may have to establish a gender unit at its headquarters to provide gender guidance to local and foreign investors. and up to 10 percent in rural areas (we could get updates from the recent DHS and THIS). In urban centres the rate of infection exceeds 24 percent.5 million productive adults infected with deadly virus. According to Cuddington (1993). Loss of experienced workers due to the HIV/AIDS epidemic implies replacing them with younger less experienced workers. Examining every question which concerns individuals from a gender perspective. Tanzania’s experience obtained from field survey during this study shows that over 67 percent of the investors regard HIV/AIDS as a major labour-force problem. In conclusion. In Tanzania. which implies that it kills workers of much greater than average productivity. the impact of HIV/AIDS epidemic is devastating. Tanzania’s GDP in 2010 could be reduced by 15-25 percent compared with a no-HIV/AIDS scenario. Essentially it entails: ♦ ♦ ♦ Identifying the different conditions and requirements for men and women. These estimates do not augur well for the country’s quest for higher investments to enhance growth and development of the country. including the elite and professionals. and Unveiling the “Women and Gender Development Policy” that stresses enhancing women’s legal rights. the effect of HIV/AIDS is increasingly becoming a big problem due to high death rates of the skilled and educated manpower. HIV infection in Tanzania already ranks at the top of the country’s health problems. training and employment. it is important that gender be mainstreamed in all components of both local and foreign investment.

For instance. investment codes have to be harmonised within a framework where member states belong to several other regional groupings. The increase in the scale of business operation can also enlarge profitable investment opportunities and attract more foreign investors into the region. enhance savings. Central and Southern African regions. regional integration has increased intra-regional trade but has not led to significant intra-regional FDI in Tanzania. Tanzania needs to take more decisive action to combat the spread of HIV/AIDS.4 Regional Integration Initiatives Regional integration is expected to facilitate formation of a larger market through trade liberalisation and harmonisation of policies. The new EU-ACP partnership under the familiar Cotonou Agreement entails much longerterm cooperation between the ACP and EU countries through the required Economic Partnership Agreement (EPA). The main challenges are related to socio-political instability. the body urges the member states to implement macroeconomic policies that encourage sound investment flows. The National AIDS Control Programme has to be intensified and activities spread in both urban and rural areas. The Regional Investment Facilitation Forum (RIFF) – which was formerly known as Cross-Border Initiatives is a programme (established in 1999) for stimulating cross-border trade and investment amongst countries of the Eastern. Another important investment provision under the EAC is the model investment code that is being developed for the EAC as described in Box 5. with the objective of accelerating the process of trade liberalization and curbing food insecurity. According to Kweka and Mboya (2004).likely to affect productivity of investments as experienced workers die and have to be replaced with younger less experienced workers.12.5. At the multilateral level. inadequate adherence to the rule of law and cumbersome and inefficient legislation – all of which increase investment uncertainty and limit private initiative. However. The United Republic of Tanzania . In addition. In SADC. 5. However. the traditional focus of the multilateral trading system (MTS) on trade issues has altered to include trade related investment measures (TRIMs). The EPAs have both trade and investment provisions in addition to development assistance. and stimulate technology transfer in the region. Investors have to develop HIV/ AIDS workforce guidelines and conduct sensitisation seminars in an effort to reduce the spread of the pandemic. several processes are at various stages to promote intra-regional flow of investment at regional and extra-regional level. realising an effective and stable regional integration is challenging. the EAC has provided for cooperation and development of capital markets of the three member countries with the objective that capital market can be one of the important strategies for achieving higher rates of investment and for attracting FDI.Tanzania Investment Centre 100 . which are important for LDCs to increase inward FDI expected to augment their trade competitiveness in the global setting. which are yet to be forthcoming for Tanzania as it has not yet concluded any EPA. However. Therefore. the program does no longer exist due to lack of resources for its proper functioning.

Policies should be reviewed to also encourage more exports of manufactured goods. establishment of “incubation” grants and loans to Small and Medium Enterprises (SMEs). Example of such initiatives in the case of the EAC include creation of several instruments to promote private investment and increase the pace of regional integration including:  A common competition policy and law to protect and promote free trade and fair competition. and permit harmonisation of trade and investment laws and regulations throughout the region. development of regional investment policy should be reassuring creation of a “win-win” situation (attracting greater investments and fostering beneficial integration) for all members.13 Policy Implications There is a need to develop further policies and incentives to encourage investments in the domestic production of complementary goods and services with a view to developing a more integrated economy. The first set of measures to improve the country’s balance of payments requires getting trade policy right. a regional body for all of the national private sector apex organisations in the three member states. promoting the contributions of catalytic export-oriented entrepreneurs and investors. especially for investment projects. The assistance is essential to enable SMEs purchase equipment and acquire training necessary to meet requirements for foreign and domestic investors. This means creating a more favourable environment for investors (both domestic and foreign). by allowing broader purchasing of shares within East Africa and enhancing its capacity to issue international bonds. 101 Report on the Study of Growth and Impact of Investment in Tanzania . The Government can encourage networking and linkages by improving the capabilities of local suppliers through supply-side policies such as cost-sharing grants. to promote cross-border trade and investment and to influence policies at the national level. and creating those linkages necessary to maximise the benefits of export-oriented investments. especially those that Tanzania has a comparative advantage like garments and processed agro-products. In addition. Tanzania stands to gain from the EAC integration if it becomes better prepared – especially in the area of human resource development and making further institutional reforms to make the economic environment more competitive. 5. Generally.Since member countries are at different stages of development. and  The East African Development Bank.  The East African Business Council. assistance to SMEs is needed to upgrade local technology. which is being restructured to strengthen its role as a resource mobilisation organisation. to ensure that they are business friendly.

matching grants for training could be considered. For instance. local communities and other stakeholders have brought an outcry leading to the formation of a special Committee investigate the matter. it is important that gender be mainstreamed in all components of both local and foreign investment as a strategy for ensuring not only higher economic growth. in mining conflicts with small miners. Equally important is the need to raise public savings by reducing budget deficits. For instance. suggesting that the government should revisit the current regime of investment incentives with a view to removing excessive concessions and minimizing abuse. This suggests that greater effort is needed to improve the implementation of policies. but also equality objective of development policy. among other things.Tanzania Investment Centre 102 . Policies to enhance further and more deliberately investments in human skill development and technology transfer are important. some of these complaints arise from shortcomings in the implementation of the mining policy while other complaints arise from poor communication of provisions in the policy and code governing mining. Investments are generating employment as well as developing skills and technology transfer. In particular. policy reviews should take explicit consideration of such cross cutting issues as environment. gender. Although it was noted that as domestic and foreign investment increases. raising tax revenue and controlling public expenditure. technological networking with local R&D institutions could be encouraged and subcontracting arrangements between FDI and domestic investors could be encouraged. it was also observed that the prevalence of tax exemptions through the investment “Certificate of Incentives” has eroded revenue sources. tax revenue also shows a tendency to rise. FDI has worked well with some communities but there are FDIs.Encouraging domestic investment should be accompanied by promotion of domestic savings through improved financial intermediation that should be progressively deepened and diversified to develop flexible money and capital markets. It is within this framework that TIC’s resolve to establish zonal centres should be commended. The Committee has revealed that. For Investment Policy to be more effective (in enhancing further growth and impact of investment). which have come into conflicts with local communities. HIV-AIDS and regional integration initiatives. The centres should be expected to become the springboard for information and facilitation support for small and micro entrepreneurs. The United Republic of Tanzania .

F 2002) completed the drafting and workshop to discuss it in 2002. the code is a very welcome idea. the code includes several investment provisions relating to eligibility and granting of incentive certificates. duty draw back for all exporters. The second part is more substantive section of the code. The code provides for national treatment and non-discrimination. transfer and retention of funds. harmonizing national investment policies/agencies in order to achieve the regional development goals. 100% deduction allowance on training. Furthermore. and it deals with the rights to establish and benefit an enterprise from the code and other operational investment incentives procedures. exemption on import duty for all machinery and raw materials. interpretation and scope of the code. Part four covers the establishment.Box 5. and those intending to invest in the allowable areas /sectors (see section 5 (5) and section 8 of the code. These are shown in Annex I of the code. The code also provides for establishment of (and conditions thereof) special economic zones including export processing zones. The investment allowed to employ only four or less foreigners but can employ more if deemed necessary and approved by the immigration department. It should also be noted that the investment code is intended to be a legal instrument. may want to incorporate into their national investment policies and laws. although its content does not differ substantively with that of Tanzania/(Tanzania investment policy). and avail the facilitative services of investment agency of a partner state to any eligible investors. The first is the preliminary part highlighting on the title. The code is now going through the usual process of adoption and ratification within the regional and national bureaucracy. part five contains miscellaneous clauses/issues and regulation of the code. and finally. free trade zones. operation and incentives for the special economic zones. The special economic zones are given specific fiscal and non-fiscal incentives according to specific investment activities. technology parks and tourism centres and virtual zones. investors are obliged to access their respective incentive packages from national investment agencies. Source: Adapted from Kweka and Mboya (2004) 103 Report on the Study of Growth and Impact of Investment in Tanzania . In the interim before harmonisation of investment policies and laws made. The code is composed of five parts. Eligible investors for the investment incentive certificates are only those meeting the minimum threshold. The investment laws of the respective partner states cover the minimum thresholds for portfolio investment for foreign and local investment. research and mineral exploration expenditures and loss carried forward to be offset against future taxable profits. compensation in case of expropriation and settlement of disputes etc. The code outlines some key benefits of establishing the investment code/agency as being: improving the investment climate in the region by advocating policies and regulations that are favourable to foreign investment. incorporation and registration of investment. Finally.5: The EAC Model of investment Code (2002) The EAC Model of investment Code - 2002 (hereafter “the code”) is in advanced stage of preparation after the consultant (see Ruhindi. the code is envisaged to provide the international best practices in investment promotion and practices that will enhance increased flow and impact of foreign investment in the region. in turn. Establishment of the regional investment agency and code do not replace but rather complements the respective national code/agency. rather a guiding document for a particular member state that. Other incentives for investors include a uniform corporation tax of 30%. Part three describes the rationale and objectives for establishing a regional investment promotion agency. From a region trying to hasten its integration process for growth and poverty reduction.

While this is often pointed out as criticism against TIC and the Government in general. TIC. Agriculture received less than 10 percent of the investments – in part due to unfavourable infrastructure that continues to retard this sector.0 6. In fact the domestic entrepreneurs face softer conditions (e. Nevertheless. Clearly. is also offering investor-friendly post-investment services. However. To a large extent. one of the Government’s objectives in reviewing implementation of investment policy is to increase support for domestic investment (especially SMEs). lower capital threshold) for accessing TIC investment incentives. which rose from 12 percent of GDP in 1997 to nearly 16 percent in 2003. findings of this study show that TIC is making commendable progress.3 percent were foreign. extending TIC services nearer to the local areas (such as the established TIC zonal offices) is imperative. Sectors that benefited most from the increased inflows are: manufacturing. services and tourism. For that reason. In addition. apart from promoting investment. TIC mandate and various policy documents contain provisions for promoting both types of investment. Despite this finding. it is a public perception that is based on misinformed opinion. During this period. the achievements made by TIC so far should motivate the government and other stakeholders to step up resources to deliver even more and effectively. That is. the existing FDI in the agriculture sector has made a significant transformation both The United Republic of Tanzania .Tanzania Investment Centre 104 . the country received high FDI inflows that exceeded US$ 2. Achievements made in attracting investments are encouraging Between 1995 and 2007 TIC registered over 2.1 ConClusions and reCommendaTions Key Conclusions TIC is a truly “one stop” centre that can greatly benefit foreign as well as domestic investors. The higher resources reversed the declining trend in Gross Fixed Capital Formation (GFCF). this perception points to the need for public awareness campaign on the provisions and role of TIC for domestic as well as foreign investors. Stakeholders interviewed applaud TIC as a truly “one-stop” centre for investment facilitation and promotion. and in particular investment promotion services have not been extended equally to the local (compared to foreign) entrepreneurs. of which 55. there is a general feeling among many domestic entrepreneurs that TIC. An investment policy could also make explicit to the public its aim to recognise investors who have grown to the threshold requiring TIC certificate of incentives. done by formulating deliberate policies (or special package) for promoting SMEs and by reviewing the fiscal policies that are currently unfavourable to the growth of domestic investors.6.g.4 billion compared with only US$ 90 million during the preceding six years. The overarching goal of Tanzania Investment Centre (TIC) is to facilitate and promote investment in Tanzania – thus facilitating economic growth and poverty alleviation.076 investments. mining.

The study proposes use of social cost benefit rather than or in addition to the statutory criteria currently being used by TIC in evaluating the impact of investment. albeit slowly. investment policies being implemented in the country are laying solid foundations not only for attracting higher levels of foreign and domestic investment. There is also evidence on transfer of technology and innovation. Studies from other countries such as China. in policy and institutional effectiveness) that will attract further investments both local and foreign. Together with the solid achievements being made in fiscal and monetary management. …but more investment is required as well as increased productivity Is the current level of investment adequate in realising Tanzania’s Development Vision 2025 goal of reducing poverty and promoting sustained development through GDP growth of over 8 percent? The study. notes a insignificant relationship between investment and growth.6 percent has to be increased to between 20-25 percent to achieve a growth rate of 8 percent or more. and to the domestic investments in particular. Investments are having desirable impact … Generally. gaps and areas for improvement in the range of criteria’s used and applied some to analyse the impact of investment in Tanzania. This entails making further economy-wide improvements (e. If Tanzania is to achieve its development goals. different criteria should be employed so as to know the costs and benefits of investment. it is important to emphasise that the overall objective of promoting investment is to improve productivity and competitiveness of the Tanzanian economy. Investments are also fostering entrepreneurial growth through forward and backward linkages. For instance. Japan. To achieve this. an important issue is not only the achievements in attracting a desirable level of investment.in terms of the performance of the particular commodity/sub sector (such as Floriculture) and in economic impact of the neighbouring community. In addition to the conventional criteria such as employment and tax revenue generation.g. Robust criteria are required to evaluate impact of investment However. one of the important criteria for evaluating the impact of foreign investment is the extent of linkages generated to the rest of the economy. but also for sustained growth in the future. revamping exports and contributing towards community development and government tax revenue. jobs are being created and new skills are being learnt. The weak link is associated with low productivity of investment and inadequate complementary factors particularly lack of skilled human resources and poor infrastructure. Domestic savings are rising. using historical data. In evaluating the impact of investment on the economy. The report has highlighted the current status. investments are contributing towards (at least 1% of) the country’s economic growth - which is poised to grow by 105 Report on the Study of Growth and Impact of Investment in Tanzania . further liberalisation of foreign account may raise funds for investors to invest outside the country. but whether such investment unleashes the desirable impact. South Korea and Taiwan report that investments averaging over 20 percent of GDP have been pivotal in their country’s fast economic growth. recent (2000-2003) investment to GDP ratio of 17.

Target Promotion of Investment in value-adding and key sectors for growth One major way in which to realise full impact of investment on fastening growth is to stimulate linkages between different sectors of the economy by ensuring existence of backward and forward stimuli of the new investment to the rest of the economy. Investment productivity is higher where a country has skilled workforce and well-developed physical infrastructure.Tanzania Investment Centre 106 . For instance. especially water and electricity. while many of the FDIs and privatised firms have generated significant tax revenues to the government and modest employment opportunities. 6. transport and communication. Promote excelling domestic investment Domestic investment forms about 70% of the total investment in Tanzania. a number of improvements are recommended. Review labour laws to attract and retain skilled labour. An impressive impact has been apparent in certain areas and weak in others. thus. Make further improvement in the investment climate Improve taxation system by eliminating multiplicity of taxes and reducing investor’s transaction costs and cost of doing business. the government should identify and target identified sectors whose linkage and value adding potential is substantial in investment promotion activities. harbours. both imported and local. Hasten reforms that will instil confidence in investors that contracts will be enforced and property rights honoured. Make further efforts to improve access to long-tem credit. and prioritise good governance by reducing corruption and improving the quality of bureaucracy at all levels of government.over 6 percent per annum in the foreseeable future. Experience with the promotion of mining sector reveal that targeting sectors is possible and can be effective.2 Recommendations In order to amplify both the magnitude and impact of investment in Tanzania. the manufacturing sector is still struggling to improve productivity. technology transfer (including R&D) and environmental conservation are relatively weak. The government should emphasise continuous improvement of physical infrastructure. Therefore. thus bearing notable The United Republic of Tanzania . a need to emphasise the government’s commitment to maintaining favourable level of budget deficit and money supply and ensuring socio-political harmony. Improve further the roads. Improve availability and access to vital utilities. Make further improvements in fiscal and monetary management in order to maintain low level of inflation. Foster macroeconomic and political stability Macroeconomic and political stability is one of the most effective factors in attracting FDI. but the impact on adding value. Moreover despite the significant inflow of FDI and improvement in business operating environment. Review business licensing to eliminate unnecessary licenses for one line of business.

Nevertheless. First. Make regular post-approval follow-up of investors This will help in understanding whether the actual investments being undertaken in the country are in line with those approved and/or benefited from TIC incentive (certificate). and foster better attitudes towards work. It is urged that the services also be provided through TIC zonal offices in order to cut costs and increase efficiency in service provision. Second. the multitude of domestic investment is subsistence SME that can hardly be transformed into growth pillars. These after-care services are beneficial both to the investor and TIC in realising customer-oriented investment promotion and support. especially those needed to take advantage of globalisation.impact on the economy. not only by creating much-needed jobs but also by having net resource inflows while fostering high linkages with the rest of the economy. it will be convenient to assess the beneficial impact investors bring to the nation as a whole and to ascertain whether or not the are in accordance with plans and objectives of TIC. Knew skills are required. the impact of economic reforms has produced a few successful domestic enterprises. 107 Report on the Study of Growth and Impact of Investment in Tanzania . comprehend complex technical know-how. These can be encouraged to excel as demonstration cases of success to be emulated by others. Finally. Institute Presidential Investor Awards Some investments make large contributions to the socio-economic development of the country. Undertake targeted promotion of investments internally and abroad The targeting should be based on thorough research. or foreign and local is too modest for the later to benefit. the relatively larger domestic investments have low level of productivity due to structural weaknesses of the economy and low level of technological capacity. Improve investment after-care services through TIC zonal offices To date TIC has been performing a well job in the area of investment after care services through its headquarters in Dar es Salaam. the synergy between large and small investments. In this way. Improve Human capabilities and encourage technology transfer This will entail making large improvements in all levels of the Tanzanian education system from primary to higher learning institutions. Market research-driven investment promotion tends to be more efficient in cutting costs of promotion and achieving more desirable investment outcomes. this investment is yet to be harnessed in a strategic manner. It is urged that outstanding investment performers be publicly recognised through bi-annual Presidential Awards managed by TIC. However.

it is imperative to ensure that all investors address environmental concerns.Tanzania Investment Centre 108 . For instance. Sustainable development requires concerted efforts directed at protecting the environment. The United Republic of Tanzania . One way of balancing is to encourage public-private partnership where each has a vital role to play in improving the quality of investment and fostering faster socio-economic development. Thus ensure that environmental regulations are met and all investors adhere to acceptable standards.Strengthen balance between social and private goals of investors This is essential because the public and private interests can diverse and the society may suffer.

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) Notes: 1998 represent FDI stock.1: FDI by Country/Region of Origin. 2001 and 2005. Percentage total does not add to 100% because of rounding-off errors and the fact that our calculation omitted countries with insignificant value. 1998 – 2004 (US$ Mill. Empty cells show no FDI reported. while zero implies very small value. and the subsequent years are flows. 113 Report on the Study of Growth and Impact of Investment in Tanzania .appendiCes Appendix A2. Source: Collated from Tanzania Investment Reports and database.

0 14.3 2.0 0.0 0.0 0.0 3.0 0.1 0.4 0.0 0.1 0.0 -0.3 0.0 0.0 0.0 3.1 -0.0 2.0 0.0 41.4 0.2 0.0 0.0 0.0 54.1 114 The United Republic of Tanzania .5 3.0 0.0 0.0 0.0 -0.7 0.0 0.5 0.0 80.0 0.6 0.5 0.0 2.5 0.0 0.0 0.0 0.3 2.8 4.0 0.0 0.4 0.8 0.0 0.1 1.9 0.0 1.0 0.0 0.7 16.0 0.0 1.9 0.0 2.1 0.0 0.0 0.4 0.0 0.0 0.8 0.3 2004 0.0 0.2 0.5 2005p 0.0 0.8 0.0 0.5 3.0 0.7 -0.0 0.0 0.0 0.9 0.5 0.0 0.0 2.7 2000 6.0 15.1 61.0 0.2 0.0 0.1 0.0 0.2 0.0 2.6 2.3 0.0 0.2 10.2 0.3 0.0 0.2 7.0 0.0 0. 1999 – 2005 Values in USD Million Country Australia Austria Bahamas Bangledesh Barbados Belgium Bermuda Bosnia Botswana British Indian Ocean Territory British Virgin Island Croatia Canada Cayman Islands Channel Islands China Cote D’Ivoire Cyprus Denmark Dominica EU Egypt Ethiopia Finland Foreign-Not Specified France 1999 48.0 0.1 0.3 0.5 11.3 0.1 230.0 44.0 0.0 0.0 0.0 0.1 10.2 6.0 1.2 0.4 0.9 0.0 0.0 0.7 0.4 0.0 25.0 0.0 0.0 0.3 0.5 5.1 21.0 11.0 79.0 0.Tanzania Investment Centre .0 0.0 14.0 0.0 12.0 0.3 0.0 0.0 0.7 19.0 0.0 0.0 0.0 0.4 0.0 0.8 0.5 0.0 0.8 0.0 0.1 5.4 0.0 0.5 2.0 0.7 0.2 2002 1.0 59.5 0.0 0.4 0.2 0.0 1.0 0.2 0.6 10.0 0.0 0.1 0.0 4.6 0.Flow of FDI by Source Country for Tanzania.0 0.5 0.0 0.3 2003 2.0 2001 3.0 0.

0 0.0 0.0 1.0 0.0 0.2 0.3 0.6 0.0 0.5 0.0 0.0 0.0 0.0 0.0 0.0 4.1 4.5 2000 0.0 0.0 1.4 3.1 18.7 2002 0.0 -0.0 0.6 6.0 5.0 4.0 0.0 -0.1 1.0 1.0 0.0 0.0 0.0 0.7 0.0 5.0 1.0 0.0 2003 2.0 0.0 0.6 0.0 0.0 4.3 0.0 0.0 0.2 0.0 0.0 1.0 0.2 0.3 0.8 0.0 1.0 2001 1.6 0.0 0.1 4.0 0.0 0.6 0.5 3.0 0.4 0.5 0.0 0.0 0.0 1.0 0.6 0.0 0.0 0.0 1.0 0.5 11.7 4.0 0.8 0.0 0.0 0.0 5.1 0.0 0.0 0.0 0.1 0.1 0.5 1.0 0.2 2004 0.0 0.0 6.7 0.9 0.0 0.9 0.2 0.4 0.0 -0.8 0.3 0.0 0.5 0.2 0.5 2005p 0.0 0.1 0.9 1.6 18.Country Ghana Germany Gibraltar Greece Guinea Hong Kong IFC India Indonesia Iran Ireland Isle of Man Israel Italy Japan Kenya Korea Kuwait Lebanon Libya Liechtenstein Luxembourg Macedonia Malawi Malaysia Mauritius Nertherlands Antilles Netherlands Nigeria Norway 115 1999 134.6 2.3 0.2 0.0 0.1 0.0 0.7 0.0 0.7 0.2 0.8 10.8 0.0 0.0 0.0 0.0 0.0 3.0 0.1 0.0 0.9 3.0 0.0 2.4 0.9 1.8 6.2 0.0 13.0 0.0 0.0 0.0 -0.0 8.0 0.1 0.0 5.3 3.0 0.5 0.6 0.1 0.5 0.0 0.4 0.0 0.0 15.7 0.0 9.0 6.0 0.0 0.0 9.0 0.2 8.0 0.5 0.0 0.3 0.0 0.1 2.0 1.8 0.7 16.2 5.4 20.0 0.5 0.0 -8.8 0.0 5.4 0.0 4.0 0.0 1.0 19.7 16.2 0.1 0.8 2.0 3.0 -0.5 0.0 -0.1 0.0 3.1 0.0 0.1 -0.0 0.0 0.1 0.3 0.4 Report on the Study of Growth and Impact of Investment in Tanzania .0 0.3 0.2 0.0 0.0 0.

5 35.0 0.4 0.2 32.2 0.2 2004 0.3 0.0 -1.9 0.0 0.0 1.0 1.2 0.0 0.0 15.9 6.0 0.8 2005p 0.0 0.0 0.5 0.0 0.1 0.6 116 The United Republic of Tanzania .8 0.0 100.0 261.0 0.6 0.8 0.0 1.9 0.0 0.1 0.0 0.1 0.0 0.7 0.0 32.0 0.0 27.4 0.0 0.1 0.0 23.S) Yemen Zambia Zimbabwe Total 1999 0.0 5.0 -0.0 0.9 0.0 0.1 0.3 2.0 0.0 0.0 446.8 1.0 0.0 0.0 0.8 0.4 19.0 0.0 0.5 10.1 0.4 10.0 0.0 -0.8 0.0 3.0 37.0 0.3 0.0 0.0 8.0 0.0 0.6 2003 0.0 0.Country Oman PTA Bank Pakistan Palestine Panama Quatar Russia Rwanda Saudi Arabia Sierra Leone Singapore Somalia South Africa Spain Sri Lanka Sudan Swaziland Sweden Switzerland Taiwan Thailand USA Uganda United Arab Emirate United Kingdom Virgin Islands (U.0 0.5 1.2 2.7 36.0 0.0 47.3 0.0 0.0 0.0 0.0 0.1 390.0 388.0 2.0 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 -0.0 0.0 0.1 0.1 0.1 0.0 6.0 95.3 0.0 0.0 0.4 0.4 0.3 0.0 91.6 0.0 -0.0 0.0 2002 0.9 0.2 0.0 311.0 0.0 0.5 0.0 0.1 0.0 0.0 14.0 0.0 1.6 0.9 0.0 1.3 0.0 0.0 0.0 2.9 2001 1.0 -0.7 86.1 0.1 0.0 7.1 38.0 0.8 5.9 0.6 0.0 0.0 0.0 0.0 0.9 8.0 0.1 0.8 9.0 0.0 0.0 5.2 3.0 0.0 0.0 0.0 0.0 0.0 0.0 493.0 0.4 0.5 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.Tanzania Investment Centre .3 0.0 0.0 34.5 330.1 0.3 0.1 7.4 0.0 0.5 1.0 0.0 0.0 0.1 42.0 0.0 0.0 1.9 0.0 141.0 0.0 0.0 0.0 0.0 0.0 0.0 29.0 0.0 2000 0.6 7.0 29.

Appendix A2. access to overseas Blomstrom 1989 markets. market information) addition tax revenue invested in public goods Cordoso & Dornbusch 1988 o (-) Reduce Profitability o increase wages and/or cost of other locally Lall & Streeten 1977 supplied inputs worsen terms of trade stifle domestic competition negative externalities (tariff-jumping FDI. complements Source(s) Cardoso & Dornbusch 1988 Helleiner 1988 Cardoso & Dornbusch 1988 positive externalities (training. corruption) new projects financed by FDI have no impact on existing domestic privatization and/or buyouts replace domestic with foreign Bhagwati Brecher. 1983 Helleiner 1988 Brecher & Diaz-Alejandro 1977 Fry 1993 Fry 1993 o o o (0) New Financing (-) Replacement Financing o o Source: Adopted from Phillips et al. labour income. telecommunications etc. from which details of the cited bibliography can be obtained. Findlay 1981. technology. 2000:23 (Table 2.) supply scarce inputs demand creation (local input suppliers. managerial skills. 117 Report on the Study of Growth and Impact of Investment in Tanzania .1).2: Inward Foreign Direct Investment and Domestic Capital Formation: the Theory Impact on Domestic Investment (+) Increase Profitability o o o o Mechanism build infrastructure (roads.

K. The United Republic of Tanzania . Model Time Series Panel & Fixed Effects Time Series Structure Model 3SLS Case Studies Case Study Time Series Structural Model 3 SLS Time Series Granger Causality + + Joint Venture . Mbekeani Brian Aitken Ann Harrison Maxwell Fry South Africa Macro Venezuela Firm level Data 46 country panel East Asia Indonesia Macro 16 countries 1966-88 Ghana 2SLS Error Corr. see (Grieco.3: Inward Foreign Director Investment and Domestic Capital Formation: Empirical Evidence (1975 – 2000) 1 Date 2000 Author(s) Phillips et al Data 59 Developing Countries (with case studies of Mauritius.Appendix A2. 1986).2). from which details of the cited bibliography can be obtained. 2000:23 (Table 2. Uganda and Kenya) 1997 1997 K.No local partner + Methodology Panel econometrics and 3 Case studies Results + 1997 1993 1993 1993/94 Louis T. Wells Wells & Warren Maxwell Fry + + +/- depends on policies in place2 + +/- depends on policies in place2 - 1992 1992 1989 1986 Katikati Faroque & Bougrine Rhee & Belot Encarnation & Wells Matos Morocco Structural Model Time Series Asia & Africa Latin America Asia 11 country case studies Case Studies 1977 Venezuela Case Study Notes: (1) For a good survey of other studies and prior to 1975.Tanzania Investment Centre 118 . Source: Adopted from Phillips et al.

119 Report on the Study of Growth and Impact of Investment in Tanzania .

Tanzania Investment Centre 120 .The United Republic of Tanzania .

121 Report on the Study of Growth and Impact of Investment in Tanzania .

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