Tanzania Investment Report 2012 - Foreign Private Investment and Investor Perception

7/27/2019 Tanzania Investment Report 2012 - Foreign Private Investment and Investor Perception

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TANZANIA INVESTMENT REPORT 2012

FOREIGN PRIVATE INVESTMENT

AND INVESTOR PERCEPTION


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ABBREVIATIONS AND ACRONYMS

BOP Balance of PaymentsBOT Bank of TanzaniaBPM5 Balance of Payments Manual, 5th Edition IMF

BPM6 Balance of Payments Manual, 6thEdition

IMFCSR Corporate Social ResponsibilityDSE Dar es Salaam Stock ExchangeEAC East African CommunityEADB East African Development BankEIB European Investment BankEU European UnionFDI Foreign Direct InvestmentFPI Foreign Private InvestmentGDDS General Data Dissemination Standards

GDP Gross Domestic ProductIFC International Finance CorporationIIP International Investment PositionIMF International Monetary FundM&A Mergers and AcquisitionsNBS National Bureau of StatisticsOCGS Office of the Chief Government StatisticianOECD Organization for Economic Co-operation and DevelopmentPSED Private Sector External DebtSADC Southern African Development Community

TIC Tanzania Investment CentreTNCs Transnational CorporationsUK United KingdomUSA United States of AmericaUNCTAD United Nations Conference on Trade and DevelopmentURT United Republic of TanzaniaUSD United States DollarWIR World Investment ReportZIPA Zanzibar Investment Promotion Authority


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PREFACE

This report is an outcome of surveys on foreign assets and liabilitiescarried out in Tanzania, in 2010 and 2012 to cover information for theperiod of 2008 through 2011.

The main objective of the surveys is to monitor the inflows of foreignprivate investment (FPI) to the country. The results are used to assess theimpact of FPI on the economy and update the countrys Balance ofPayments (BOP) and International Investment Position (IIP). In addition,the information collected is used as input in the design of investmentpromotion and facilitation strategies, as well as macroeconomic policyreviews and formulation. The report presents the sources, magnitude,composition, and direction of FPI flows into the country. It also providesassessment of investors perception about the countrys investment

climate, linkages with the domestic economy and issues related tocorporate social responsibility.

It is my hope that this report will continue to be a useful source ofinformation for policy makers, private sector, development partners,research institutions, academia and the general public.

Prof. Benno J. NduluGovernor, Bank of TanzaniaChairman, Executive Committee (PCF Surveys)2013


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ACKNOWLEDGEMENT

This report was prepared under the leadership of Prof. Benno Ndulu, thechairman of the Executive Committee of the Private Capital flows Surveys.The other members of the Executive Committee were the acting Executive

Director, Tanzania Investment Centre, Raymond Mbilinyi and the DirectorGeneral, National Bureau of Statistics, Dr. Albina A. Chuwa,

The overall supervision of the Survey was carried out by SteeringCommittee consisting of Dr. Joseph L. Masawe (Director of EconomicResearch and Policy BOT), Mr. John Kyaruzi (Director of Research and

Information System TIC) and Mr. Morrice Oyuke (Director of EconomicStatistics NBS).

Data collection, processing and report writing was done by a TechnicalCommittee under the supervision of Mrs G. Mwakibolwa, (the thenManager, Department of International Economics and Trade - BOT) andMr. J. Nyella (the new Manager International Economics and TradeDepartment BOT). Other members of the Committee were Mr. F. Mlele,Mr. Z. Kiwelu, Mrs E. Rweyemamu Ngirwa, Mr. P. Mboya, Mr. G.Mwambe, Mrs J. Saidimu, Dr. C. Masenya, Mrs V. Kejo, Mr. P. Stanslausand Mr. D. Mattaba (BOT). Others were Mr. N. Tibenda (TIC); Mr. V.Tesha and Mr. M. Assenga (NBS).

Sincere appreciation is extended to the companies covered by the surveyfor their continued support and co-operation and Prof. G. D. Mjema forhis editorial comments.


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TABLE OF CONTENT

ABBREVIATIONS AND ACRONYMS ..................................................................... iPREFACE ........................................................................................................... iiACKNOWLEDGEMENT ...................................................................................... iiiEXECUTIVE SUMMARY ..................................................................................... viCHAPTER 1 OVERVIEW OF TRENDS AND PROSPECTS OF FOREIGN PRIVATEINVESTMENTS ................................................................................................... 1

1.0 Introduction ................................................................................ 11.1 Global FDI Trends ....................................................................... 11.2 Africa FDI Trends ........................................................................ 41.3 Tanzanias Macroeconomic Developments.................................... 6

CHAPTER 2 METHODOLOGY .......................................................................... 112.0 Introduction .............................................................................. 11

2.1 Organization of the Survey ........................................................ 112.2 Survey Implementation ............................................................. 132.3 Response Rates ......................................................................... 132.4 Data Processing ........................................................................ 142.5 Change in Reporting and Estimation Technique ........................ 142.6 Challenges Related to the Creation of Dummy Questionnaires ... 152.7 Estimation for Non-response and Boosting for Population ......... 162.8 Adherence to International Standards ....................................... 16

CHAPTER 3 FINDINGS ON FOREIGN PRIVATE INVESTMENTS ....................... 183.0 Introduction .............................................................................. 183.1 Foreign Private Investments ...................................................... 183.2 Profits and Dividends ................................................................ 253.3 Private Sector External Debt ...................................................... 27

CHAPTER 4 INVESTORS PERCEPTIONS AND LINKAGES TO THE ECONOMY284.0 Introduction .............................................................................. 284.1 Investors Perceptions ................................................................ 284.2 Linkages to the Domestic Economy ........................................... 314.3 Corporate Social Responsibility ................................................. 324.4 Source of Raw Materials ............................................................ 334.5 Likely Direction of Investments .................................................. 34

CHAPTER 5 MAIN FINDINGS AND POLICY IMPLICATIONS ............................. 35APPENDICES .................................................................................................... 40APPENDIX 1: GLOSSARY OF KEY CONCEPTS.................................................. 40APPENDIX 2: STATISTICAL TABLES ................................................................. 44APPENDIX 3: QUESTIONNAIRE COMPANIES WITH FOREIGN ASSETS AND

LIABILITIES ...................................................................................................... 47


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CHARTS

Chart 3.1: Inflows of Foreign Private Investments, 20082011 ........................ 19Chart 3.2: Financing of FDI, 20082011 ......................................................... 20Chart 3.3: Composition of FDI Inflow, 20082011 .......................................... 21Chart 3.4: Inflows of FDI, Top Five Source Countries, 20082011 .................. 22Chart 3.5: Stocks of FDI, Top 10 Source Countries, 2011 ................................. 23Chart 3.6: Stock of Other Investment by Sector, 2011 ...................................... 24Chart 3.7: Source of Financing of Flows of Other Investments, 20082011..... 25Chart 3.8: Average Net Profit after Tax by Sector, 20082011 ........................ 26Chart 3.9: Net Profits and Reinvested Earnings ................................................ 27Chart 4.1: Overall Investors Perceptions on Main Factors affecting Investments......................................................................................................................... 29Chart 4.2: Impact of Banking Services by Activity ............................................. 29Chart 4.3: Impact of Telecommunications Services by Activity .......................... 30Chart 4.4: Impact of Electricity Supply and Reliability by Activity ..................... 31Chart 4.5: Likely Investment Direction in the Mid-Term ................................... 34

TABLES

Table 1.1: Global FDI flows, 20052011 ............................................................ 1Table 1.2: Africas FDI Flows 2008 2011 .......................................................... 5Table 1.3: Tanzanias Capital Flows and Stocks, 2008 2011 ............................ 6Table 1.4: Tanzanias Selected Macroeconomic Indicators, 2005 2011 ............. 9Table 2.1: Survey Response Rate for the 2010/11 Census ................................ 13Table 2.2: Survey Response Rate for the 2012 Sample Survey .......................... 13Table 3.1: Foreign Private Investments, 20082011 ........................................ 19Table 3.2: Stock and Flows of FDI by Activity, 20082011 .............................. 21Table 3.3: FDI Inflows by Regional Groupings ................................................... 24Table 3.4: Retained Profits and Dividend Payments, 20082011 ..................... 26Table 3.5: The Composition of PSED, 20082011 ........................................... 27Table 4.1: Distribution of Employment by Job Category and Residency 2008 2009 ................................................................................................................. 32Table 4.2: Distribution of Employment Levels by Activity 20082009 ............. 32Table 4.3: Corporate Social Responsibility by Activity 20082009 .................. 33Table 4.4: Corporate Social Responsibility by Sector 20082009 .................... 33Table 4.5: Sourcing of Raw Materials 2007 - 2009 ............................................ 34


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EXECUTIVE SUMMARY

Rationale

Foreign private investments (FPI) particularly in the form of foreign directinvestment (FDI) has, in the recent past become an important source offinancing new investments especially in emerging and developingcountries. This type of financing is welcome and, indeed, actively soughtby virtually all emerging and developing countries. The contribution thatFDI makes to countrys economic development and integration into theworld economy is widely recognized. For this reason Tanzania has madeconsiderable efforts over the past three decades to improve investmentclimate with a view to attracting more FDI. In this regard, major policyand structural reforms were carried out since the mid-1980s targeting atimproving business and investment environment in the country. These

efforts have resulted into an increase in the inflow of FDI into the countryin the recent years.

The increase in FDI inflows has brought in the need to monitor them witha view to ascertaining their magnitude, type and composition. Inresponse, monitoring exercise was initiated in 2000, by conducting a pilotsurvey followed by a census and ultimately the first Tanzania InvestmentReport of 2001 (TIR01).

In 2003, the second census was carried out followed by three sample

surveys. The census and the three consecutive sample surveys resultedinto the publication of Tanzania Investment Reports of 2004, 2006 and2009. The Tanzania Investment Report of 2009 contained the results forsurveys that were respectively carried out in 2007 and 2009.

The current Tanzania Investment Report of 2012 contains results ofcensus and sample survey conducted in 2010 and 2012, respectively.

Objectives

The main objective of conducting the study is to monitor foreign privateinvestments and consolidate the gains and lessons obtained fromprevious surveys. The specific objectives of the survey were to:

i. Collect and analyze data on foreign private investment for 2008-2011 in order to develop a basis for development of investmentpromotion strategies, improve BOP statistics and establishinternational investment position (IIP);

ii. Enhance public-private sector dialogue through capturing privatesector perceptions on Tanzanias investment climate and reportresults of the analysis to stakeholders for their information anddecision making; and


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iii. Recommend appropriate investment policies and strategies aimedat improving the countrys investment climate.

Response Rate

In Tanzania Mainland, the census that was conducted in 2010 involved a

population of 2,055 companies of which 1,848 (90.0 percent) were visitedand the rest were not found because of various reasons including changeof address and/or location, change of name, closure, merger, andbecoming dormant or going under. Out of the visited companies 1,555questionnaires (84.0 percent) were collected from the companies of which680 (44.0 percent) were foreign companies and 875 (56.0 percent) werelocal companies. The 16.0 percent of the questionnaires that could not becollected were from companies that could not be located because they hadbeen either liquidated, fallen dormant, closed or had re-located to otherregions. In this regard, the response rate for Tanzania Mainland was 84.1percent. In Tanzania Zanzibar, the census conducted in 2010 involved adistribution of questionnaires to a population of 208 foreign companies ofwhich 206 questionnaires were collected. The response rate for Zanzibarwas 99.0 percent. Therefore, on average the response rate for the censusin both Tanzania Mainland and Zanzibar was 85.7 percent.

In Tanzania Mainland, a sample survey was conducted in 2012 involving350 companies of which 299 (85.4 percent) questionnaires were collected.In Tanzania Zanzibar, another census was conducted in 2012 involving

380 companies of which 340 (89.5 percent) of the questionnaires werecollected. Therefore, the overall response rate for both Tanzania Mainlandand Zanzibar was 87.5 percent.

Main Findings from the Survey

foreign private investments maintained strong growth

The survey findings indicate that the stock of foreign investments rose atan annual average rate of 10.3 percent to USD 10,393.2 million in 2011from the amount recorded in 2008. FDI continued to dominate foreignprivate investment accounting for 89.3 percent of total stock in 2011,followed by other investments that accounted for 10.6 percent of the total.The stock of portfolio investments continued to be small.

FDI inflows exhibited a mixed trend amid the global financialcrisis

FDI inflows bounced back in 2010 from a sharp decrease recorded in

2009. The decline in 2009 was a result of fall in the global flows as theimpact of global financial crisis deepened. Moreover, the inflows declinedby almost 31.1 percent in 2011 following high repayment of short and


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long term loans. The inflows averaged USD 1,344.6 million per annumduring the review period and accounted for 94 percent of the total foreigninvestment inflows.

...financing of FDI inflows changed from debt to retained earnings

The survey results indicated that FDI was mainly financed by retainedearnings since 2009, which contrasts with the previous years when loanswere the major source of financing. In 2011, for instance, almost 100percent of the inflows were in the form of retained earnings. Thissignificant shift is consistent with high levels of profits realised. It alsogives an indication of increase in investors confidence and expansion ofinvestment opportunities in the country.

...electricity and gas activities received substantial inflows

Electricity and gas activity, which received less than USD 3.0 million in2008 and 2009, experienced a sharp increase to USD 290.5 million in2010 and USD 209.4 million in 2011.

inflows to the agriculture remained sluggish

Agriculture, which accounts for the largest share of GDP continued to

record low levels of FDI. Despite the increase in the inflows to this activityby nearly 50 percent between 2008 and 2011, the annual inflows to this

activity were lower than that of traditional recipients namely: mining andquarrying, manufacturing, finance and insurance; and information andcommunication.

...few countries continued to be dominant as major sources

South Africa, the United Kingdom and Canada accounted for an averageof 71.5 percent of the total FDI inflows to Tanzania between 2008 and2011. Similar pattern was observed in the period before 2008 implyingthat the sources of FDI inflows remained inadequately diversified thus,exposing the country to risks originating from external shocks.

private sector external debt was characterized by highrepayments

In 2011, there were higher repayments relative to disbursements makinga net outflow of USD 323.3 million to affiliates relative to a net inflow ofUSD 99.9 million received from non-affiliates. It is important to note thatloans from affiliates constituted large share of private sector external debt

(PSED) during the period under review.


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portfolio investments remained small

The share of portfolio investments remained negligible as it accounted forless than one percent of the total foreign investment inflows during thereview period. This is due to the low level of development of the capitalmarket which is characterised by a small number of market participants

(listed companies and investors), inadequate tradable securities andrestrictions on capital account transactions.

manufacturing, mining finance and insurance activities recordedhigher profits

The survey findings reveal that the overall net profits after tax increasedconsistently at an annual average rate of 79.3 percent form 2009 to 2011.The highest increase was recorded in 2011 when net profits after tax

more than doubled from USD 679.0 million in 2010 to USD 1,492.7million. Most of the increase in profits in 2011 occurred in mining andquarrying consistent with favourable developments in the price of gold inthe world market that year. An average of about 82.5 percent of the netprofits after tax was reinvested during the period covered. Highest profitswere recorded in manufacturing, mining, finance and insurance activities.

employment level under FDI related companies increase

marginally

The survey findings indicate that total employment for the surveyedentities was 83,879 in 2009, compared to 83,473 recorded in 2008. Theaverage total employment between 2008 and 2009 stood at 83,676 ofwhich, 94.1 percent of the employees were local and 5.9 percent wereforeign. While mining and quarrying had the largest stock of foreigninvestment it ranked fifth in employment. Meanwhile, agriculture whichranked seventh in foreign investment was the second largest employer. Inevery category of employment, locals exceeded foreigners, but the largestconcentration of locals was in the skilled and unskilled categories wherethey accounted for 97.1 percent and 97.9 percent, respectively.

supply and reliability of electricity remained a challenge

During the survey, investors indicated that there was a generalimprovement in investment climate in the country relative to the periodwhen they commenced business operations. Banking, telecommunication,immigration, air and inland transport services were perceived by theinvestors to have positive effects on their business operation at the time ofthe survey. These findings are consistent with the findings that large

proportion of respondents had intention to expand businesses in themedium-term However, about 60 percent of responding companiesmentioned supply and reliability of electricity as issues of concern to theirbusinesses.


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cost of telecommunications rated positive by most sectors

About 75 percent of the responding companies, particularly in education,real estate, information and communications, construction,accommodation, finance and insurance indicated positive effects oftelecommunications on business activities during the start of operations.

Likewise, about 80 percent of the companies indicated positive effect ofcost of telecommunications at the time of the survey.

banking services rated positive by most sectors

The analysis of the effects of banking services by activity revealed that

banking services were rated positively at the start of business operationby most of enterprises with the highest positive impact being registered inactivities related to information and communications, followed byconstruction, real estate, mining and quarrying, in that order. On the

other hand, the highest impact of the negative effects of banking serviceswere felt in electricity followed by administrative and support activities.Likewise, at the time when the census was conducted most of therespondents indicated that the banking services impacted their business

operations positively.

manufacturing led in contributing toward corporate socialresponsibility

Analysis of corporate social responsibility (CSR) by activity showed that

manufacturing had the highest contribution compared to the otheractivities in 2009, as it accounted for about 26.7 percent (about USD 3.0

million) of surveyed companies The wholesale and retail trade industrywas second contributor to CSR as it accounted for 21.2 percent (USD 2.4million)of total CSR in 2009 by surveyed companies The other activities

with high amount spent on CSR in 2009 included finance and insurance(USD 1.4 million), and health (USD 1.1 million). Relatively lower amountswere spent by transport industry that spent USD 0.2 million on CSR andmining and quarrying that spent about USD 0.1 million.

most of the companies had plans to expand their businesses inTanzania

The findings showed that 75.7 percent of the surveyed companies wereplanning to expand their businesses in the next three years. However,19.9 percent of the respondents were planning to maintain the same levelof investment while the remaining 4.4 percent would scale downinvestments in Tanzania in the next three years.

Recommendations

i. To consolidate the growth momentum of the private capital flows,the efforts to improve investment climate and to promote strategic


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investment need to be enhanced. This is necessary also to enableinvestors to generate higher returns and encourage reinvestment.Such measures include reducing the cost of doing business,expanding investment opportunities and promoting diversificationof investments.

ii. Following the sharp increase in inflows to electricity and gas, theon-going initiatives to put in place policy and regulatory frameworkfor governing the electricity and gas activities need to be expeditedin order to provide guidance and ensure adequate benefits to thecountry.

iii. Efforts to make agriculture more attractive to investors need to bestepped up in order to boost inflows to agriculture, which have sofar remained low compared to traditional recipients. Such efforts

include investments in rural infrastructure, irrigation schemes,rural electrification to facilitate agro processing and the

countrywide land mapping and categorization.

iv. To diversify the sources of capital flows, promotional efforts need tobe enhanced in other regions such as Asia and Latin America. Thiswill help to reduce risks emanating from external shocks.

v. Locally-owned companies need to be encouraged to list in the stockexchange in order to tap up more resources from the international

markets. In addition, there is a need to expedite the on-goinginitiatives to liberalize the capital account. This can be donethrough fast tracking of legal and institutional reforms in thecapital markets and securities authority, demutualization of DSEand encouraging private sector run stock exchanges, provision ofincentives to listed companies and investors, and implementation of

the roadmap on capital account liberalization designed under theEAC framework.

vi. The ongoing initiatives in electricity and gas industry need to bekept on track in order to sustainably address the problem ofavailability, reliability and affordability of electricity.

vii. The implementation of the skills localization policy need to bestrengthen, for instance through establishment of skills programsthat will be aligned with skills required by investors with a view to

speeding up the transfer of skills to locals.


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CHAPTER 1

OVERVIEW OF TRENDS AND PROSPECTS OF FOREIGN PRIVATE

INVESTMENTS

1.0 Introduction

This chapter presents an overviewof the performance of the globalFDI flows during the period ofglobal financial crisis and itsaftermath (2008 2011). Thechapter covers global and AfricaFDI trends as well as distributionby region and activity. It alsoexamines Tanzanias FDI trendsand provides an assessment ofthe countrys FDI relatedmacroeconomic performance forpast five years.

1.1 Global FDI Trends

1.1.1 Overview

The World Investment Report(WIR, 2013), shows that the

global FDI flows declined by 38.1percent to USD 2,366.3 billion in2009 compared to the amountrecorded in 2008 following theglobal financial crisis. Afterwardsthe flows rose to USD 2,913.5

billion in 2010 and further toUSD 3,329.5 billion in 2011.Despite the increase, the flowsstill remained some 23 percentbelow the 2007 peak. In terms ofinflows, FDI dropped in 2009 andthen picked up gradually in 2010as the global economy recoveredfrom the financial crisis (Table1.1).

The previous report had predictedslower FDI growth in 2012 largelydue to slow down in the cross-border mergers and acquisitions(M&As) and Greenfieldinvestments in the first fivemonths of 2012. However, thelonger-term projections indicate amoderate but steady rise, with

global FDI reaching USD 1,800billion in 2013 and USD 1,900billion in 2014, barring anymacroeconomic shocks (WIR,2012).

Table 1.1: Global FDI flows, 2005 2011

(USD Million)FDI flows 2005 2006 2007 2008 2009 2010 2011

Total 1,864,725 2,878,445 4,274,744 3,821,730 2,366,251 2,913,465 3,329,546

FDI inflows 982,593 1,463,351 2,002,695 1,816,398 1,216,475 1,408,537 1,651,511

FDI outflows 882,132 1,415,094 2,272,049 2,005,332 1,149,776 1,504,928 1,678,035

Change in FDI flows (%) - 54.4 48.5 -10.6 -38.1 23.1 14.3

Source: World Investment Report, 2013

The good performance in FDIflows in 2011 was experienced

across all major economicgroupings, namely advanced;developing and transition

economies. Flows to developedeconomies increased by 21percent during the year reaching

USD 748 billion, while in thedeveloping economies the flowsincreased by 11 percent, reaching


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a record USD 684 billion. Flowsto transition economies grew at amuch higher rate of 25 percentreaching USD 92 billion during

the period.

The recent recovery in FDI inflowsin developed economies is aresponse to the measuresadopted such as restructuring of

the banking industry thatresulted in divestment of foreign

assets as well as generation ofnew FDIs as assets changedhands among major players. The

downward trend in outward FDI

from developed countries thatwas observed up to 2009 turnedaround to an increase in 2010and 2011. The reversal was

mainly on account of highervalues recorded under M&As,facilitated by stronger balancesheets of the transnationalcorporations (TNCs) and historic

low rates of debt financing.

The performance of FDI flows didnot match the global industrialoutput and trade, which bouncedback to pre-crisis levels. However,

FDI flows to Africa, West Asia,least developed countries,

landlocked developing countriesand small-island developingstates all declined during the

period, largely due to perceivedrisks and regulatory uncertaintyin a fragile world economy (WIR,2012). At the same time, growthin FDI inflows was remarkable in

major emerging regions, such asEast and South-East Asia andLatin America. The growth of FDIduring the period under review

resulted into high globalproduction that generated value-added of approximately USD 16.0

trillion in 2010, representing aquarter of global GDP.

1.1.2 Sectoral Distribution ofFDI Flows

According to the WIR (2011), FDIin services sector (businessservices, finance, transport andcommunications and utilities),and the financial industrydeclined in 2010. The share ofmanufacturing activity rose toalmost half of all FDI projectsexcept for business-cycle-sensitive industries such as metal

and electronics. The food,beverages and tobacco, textilesand garments, and automobileindustries recovered in 2010 butthe mining and quarrying

industries registered a declinecompared to the growth recordedduring the crisis. Likewise the

chemical industry (includingpharmaceuticals) remained

resilient in attracting FDIsthroughout the crisis period.

1.1.3 Regional Distribution ofGlobal FDI Flows

FDI increased across advanced,developing and transitioneconomies in 2010 and 2011

compared to 2008 and 2009

reflecting recovery from the globalfinancial crisis. Flows todeveloped economies increased by21 percent during 2011 to reachUSD 748 billion, while indeveloping economies the flowsgrew by 11 percent, reaching arecord level of USD 684 billion.Flows to transition economiesincreased by 25 percent to USD

92 billion. Developing andtransition economies accounted

for 45 percent and 6 percent of


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the global FDI, respectively in2011.

Both FDI inflows and outflows inthe developing and transitioneconomies increased in 2010compared to the recession in2009. Outflows increased by 21percent in 2010 accounting for 29percent of global FDI outflows.Foreign investors are increasinglyinvesting in both efficiency andmarket-seeking ventures in theseeconomies to respond to the shiftin the international productionand consumption. As a result,these economies absorbed morethan half of global FDI inflows in2010 mostly from otherdeveloping and transitioneconomies through South-Southcooperation. The distribution ofFDI flows to the developing andtransition economies during theperiod was, however, uneven withsome significant regionaldifferences. There were declinesin FDI inflows to some of thepoorest regions particularly sub-Saharan Africa, least developedcountries, landlocked developingcountries, small-islanddeveloping states and South Asia.At the same time, the rise of FDIswas strong in major emergingregions, such as East and South-East Asia and Latin America.

Total FDI inflows to East Asia,South-East Asia and South Asiaregion rose by 30.8 percent in2010 compared to 2009 reachingUSD 325.8 billion and further toUSD 374.4 billion in 2011 (WIR,2012). The increase wasinfluenced by high inflows toChina and India. However,increase in inflows was notuniform across the region. While

the inflows to major ASEANeconomies such as Indonesia,Malaysia and Singapore morethan doubled, those to East Asiarose by 17 percent, and to SouthAsia declined by one-fourth.During 2010, FDI inflows in WestAsia fell by 12 percent andlikewise, FDI outflows from theregionmainly driven bygovernment-controlled entitiesalso declined by 51 percent in2010.

WIR (2012) shows that FDI flowsto Latin America and theCaribbean increased by 27percent in 2011 compared to 13percent during 2010. Theconsistent rise in FDI flows wasmostly registered in SouthAmerica (over 50 percent)particularly Brazil. On the otherhand, FDI outflows from theseeconomies increased by 67percent in 2010, mostly due tolarge cross-border M&Apurchases by Brazilian andMexican TNCs.

1.1.4 Prospect of Global FDI

Flows

The global efforts towards thereform of the financial systemand the exit strategies pursuedby governments are likely to havepositive effects on FDI flows intothe financial industry in thecoming years. Estimates in theWIR 2012 indicate that the globalFDI will continue with itsrecovery trend to its pre-crisislevel in 2012. In the first quarterof 2011, FDI inflows rosecompared to the same period of2010, although this level waslower than the last quarter of2010. The flows are expected to


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rise further to USD 1.7 trillion in2012 and reach USD 1.9 trillion

in 2013. This positive scenarioholds, barring any unexpected

global economic shocks that mayarise from a number of risk

factors still at play. In addition,support measures bygovernments of the developedeconomies during the crisis

period as well as the record cashholdings of TNCs, on-going

corporate and industrialrestructuring, rising stock marketvaluations and gradual exits by

States from financial and non-

financial firms shareholdings areexpected to create newinvestment opportunities forcompanies across the globe.

Hence, more FDI flows areanticipated as economic recoverycontinues.

1.2 Africa FDI Trends

1.2.1 OverviewThe share of Africas FDI in totalinflows to developing economiesfor the past three years was 7.8percent on average. The inflows tothe region declined from USD52.6 billion in 2009 to USD 43.1billion in 2010 and to USD 42.7in 2011. However, the inflows to

sub-Saharan Africa recovered

from USD 29.5 billion in 2010 toUSD 36.9 billion in 2011. Africasshare in total global FDI inflowsfell consistently during the periodcovered by the survey.

FDI to primary sectors, especially

oil industry continued todominate FDI flows to thecontinent. While Ghana has

emerged as a major host country,Angola and Nigeria haveexperienced a significant decline

in FDI flows. Although thecontinuing pursuit of naturalresources, in particular by Asian

TNCs, is likely to sustain FDIinflows to sub-Saharan Africa,political uncertainty in North

Africa is likely to make 2012another challenging year for thecontinent as a whole.

1.2.2 Regional Distribution ofAfrica FDI Flows

Inflows to Africa, which peaked in2008 amidst the resource boom,continued with downward trend

in 2010 through 2011, althoughthere were significant sub-

regional variations. Otherdeveloping regions outside Africaperformed considerably better,causing Africas share of FDIinflows among developingcountries to fall from 4.4 percent

in 2009 to 3.3 percent in 2010and further down to 2.8 percent

in 2011.

Inflows to North Africa halved toUSD 7.7 billion during 2011accounting for roughly one-thirdof the total in Africa (Table 1.2).

The major recipients in the regionwere Libya and Egypt. In West

Africa, Ghana registeredsignificant FDI inflows as it is

considered an alternative sub-regional source of oil to Nigeriafollowing oil discovery in recent

years. Ghana and Nigeriacombined accounted for threequarters of the sub-regions FDI

inflows. However, the region as awhole recorded a downward trendas a result of political instabilityin some countries.


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Table 1.2: Africas FDI Flows 20082011

(USD Billion)

RegionFDI inflows FDI outflows

2008 2009 2010 2011 2008 2009 2010 2011

Africa 57.8 52.7 43.1 42.7 7.9 3.2 7.0 3.5

North Africa 23.1 18.2 15.7 7.7 8.8 2.6 4.9 1.8

East Africa 4.2 3.8 3.7 4.0 0.1 0.1 0.1 0.1

West Africa 12.6 13.5 11.8 16.1 -0.4 -1.0 -0.4 -0.3

Southern Africa 13.8 11.0 2.4 6.4 -0.7 1.5 2.4 1.8

Central Africa 4.2 6.2 9.5 8.5 0.1 -0.02 0.05 0.1

Source: UNCTAD, 2012.

FDI inflows in Southern Africaregion recovered from asubstantial drop in 2010 to USD6.4 billion in 2011. However, theregions largest FDI recipientAngola recorded a decline in2011. During 2011, FDI inCentral Africa concentrated inthree commodity-rich countries,namely the primarily oil-exporting

Congo and Equatorial Guineaand the mineral exportingDemocratic Republic of Congo(DRC). In 2010, the inflows toCentral Africa took the samepattern where FDI concentratedmostly in the oil-rich countriessuch as Chad, Congo, EquatorialGuinea and Gabon. Thedownward trend of FDI inflows toEast Africa regionthe recipientof lowest FDI inflows in sub-Saharan Africawas reversed in2011. However, the discovery ofgas fields is likely to change thispattern in the coming years. In2011, FDI inflows to East Africaincreased modestly by 8.1percent led by Uganda and the

United Republic of Tanzania.

FDI inflows to Africa during 2011and 2010 were from both

developed and developingcountries, mainly China, Indiaand the United Arab Emirates(UAE). During the period, most ofthe FDI were channelled intothree sectors. The primary sectoraccounted for 43 percentconsisting mainly coal, oil andgas; manufacturing accounted for29 percent with almost half of it

in the metal industry. Servicesaccounted for 28 percent mainlycommunications and real estate.

1.2.3 Private Capital Flows to

Tanzania

Private capital inflows toTanzania dropped by 34.2percent to USD 1,023.4 million in

2009 but rebounded to USD1,812.5 million in 2010. Thedecrease in 2009 is attributableto the adverse effects of the globalfinancial crisis that weakened thefinancial position of TNCsreducing their ability to expandinvestments globally. FDI inflowsto the country fell again in 2011albeit by a smaller magnitude,consistent with the slowdown ineconomic growth that year (Table1.3). Other investments that


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include borrowing from unrelatedsources declined sharply fromUSD 172.0 million in 2008 toUSD -0.7 million in 2010 beforerecovering to USD 99.9 million in2011. Portfolio investment begun

by increasing from USD 0.2million in 2008 to USD 0.4million in 2009, then declined toUSD -0.1 million in 2010 beforerising to USD 0.7 million in 2011.

Despite the cyclical nature of theflows, the stock of foreign privatecapital increased consistentlyduring the review period to USD10,393.2 million in 2011. FDIand other investments are

projected to rise further in linewith the recovery trends of theglobal capital flows.

Table 1.3: Tanzanias Capital Flows and Stocks, 20082011(USD Million)

Type of investmentCapital inflows Capital stocks

2008 2009 2010 2011 2008 2009 2010 2011

Capital flows and stocks 1,555.5 1,023.4 1,812.5 1,330.0 7,751.0 8,566.0 9,278.1 10,393.2

Foreign direct investment 1,383.3 952.6 1,813.3 1,229.4 6,941.5 8,066.3 8,762.2 9,278.1

Portfolio investment 0.2 0.4 -0.1 0.7 11.0 12.5 12.7 17.6

Other investment 172.0 70.4 -0.7 99.9 798.5 487.2 503.1 1,097.5

It is important to note that themain source of capital inflows to

Tanzania is the developed and

emerging economies, which weresignificantly impacted by thecrisis. However, governments inthese countries took severalactions including stimulativepolicy measures such asextending loans to the privatesector; re-instituting stringentregulatory and supervisorymeasures on the banking

systems; and reinforcingoversight on the financial andcapital markets. The gradualrecovery of the global economyassociated with these measuresand new investmentopportunities in natural gas arelikely to attract more capitalinflows to Tanzania.

1.3 Tanzanias Macroeconomic

Developments

1.3.1 Economic Development

The growth of real GrossDomestic Product (GDP) sloweddown from 7.4 percent in 2008 to6.0 percent in 2009 as a result ofthe global economic and financialcrisis. This was followed by arecovery to a growth rate of 7.0percent in 2010 as the globaleconomic situation began toimprove. In 2011 GDP growthslowed again to 6.4 percent in2011 mainly due to insufficientrainfall that affected agriculturaloutput adversely, as well as hydropower generation and powerdependent activities.

1.3.2 Inflation Developments

Average annual inflationincreased from 10.3 percent in2008 to 12.1 percent in 2009 due


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to food shortages experienced insome parts of the country and inthe eastern Africa region. In2010, inflation eased to anaverage of 7.6 percent on accountof improvements in food supply in

the country and the easternAfrica region but rose again to12.7 percent in 2011, mainly dueto insufficient rainfall thataffected food production in theeastern Africa region, and high

global oil prices. At the end of2011 inflation was at a peak of19.8 percent. Following the fiscalconsolidation measures taken by

the government and tightmonetary policy measures takenby the Bank of Tanzania, inflationtook a downward trendthroughout 2012 reaching 12.1percent at the end of the year.

1.3.3 Monetary and FiscalPolicies

The Bank of Tanzania (BOT)continued to implement monetarypolicy with the objective ofattaining and maintaining pricestability. This involved openmarket operations and steadysale of foreign exchange. Theperiod covered by the surveybegun with countercyclicalmonetary and fiscal policy

measures taken in 2009 toprevent credit crunch that couldhave followed the sharp decline inglobal demand. As a result thegrowth of credit to the privatesector remained positive at 9.6percent in 2009, albeit muchlower than the growth of 44.6percent that had been registeredin 2008. The growth recovered

gradually to 20.0 percent in 2010and 27.2 percent in 2011. In2012 the growth of credit to

private slowed to 18.2 in line withmeasures taken by the Bank of

Tanzania to contain inflation.

Interest rate remained marketdetermined as BOT continued to

take measures to deepenfinancial markets, strengthencompetition and addressstructural impediments in theeconomy. Further, the BOTcontinued to use monetary policyinstruments to sustain stabilityin the market.

The exchange rate remained

market determined with the BOTparticipating in the foreignexchange market for liquiditymanagement purposes andsmoothening short-termfluctuations. In the course ofimplementing these measures,adequate level of internationalreserves was maintained.

1.3.4 Financial Sector Stability

The assessment of the financialsoundness indicators of thebanking system conducted inSeptember 2011 indicated thatthe domestic financial sector wasstable and resilient to adverseshocks. According to theFinancial Stability Report (2011),this was in line with the outcomeof the stress tests conductedduring the period. However,dynamic vulnerabilities in theglobal economy and highinflationary pressures andexchange rate volatility appear tobe the major threats to thedomestic financial sector. Theforeign exchange risk wasminimized through adoption ofthe prudential limit in net openposition of banks to foreignexchange exposure and a


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requirement for financialintermediaries to invest mostly inrated institutions. The reportindicates that, by September2011, Tanzanian banks had 96percent of their foreign

placements invested in A ratedbanks, 3 percent in B ratedbanks and 0.9 percent in unratedbanks. In addition, the banksreduced their total investment inEuro securities by 27.2 percent oftotal foreign placements recordedby June 2010 to 24.8 percent bySeptember 2011. These measuresresulted into stable financial

sector conducive for economicgrowth.

Recognizing the need forcoordinated domestic efforts tosecure financial and overallmacroeconomic stability in thecountry, the BOT has beenfacilitating the operations of the

Tanzania Financial Regulators

Forum (TFRF) to achieve its setobjectives. The regularconsultations under the forum,have provided the regulators witha ground to develop the neededunderstanding of theinterconnections in the financialsystem, both via the direct linksbetween financial institutions andthe indirect ones created in the

financial markets. Thisunderstanding is crucial forguiding the regulatoryresponsibilities of promotingmeasures that will safeguard thestability of the respective sub-sectors, without affecting thestability of the financial system orcompromising the growth of theeconomy.

1.3.5 External SectorDevelopments

Tanzanias exports toneighbouring as well as foreigncountries maintained positive

growth trend overtime anddiversified towards non-traditional exports includingminerals, manufactured andhorticultural products. Largeshare of the growth came fromincreased investment in themining combined with highproduction, particularly gold. Theratio of exports to GDP declined

from 26.9 percent in 2008 to 23.8percent in 2099 but maintainedan upward trend thereafterreaching 30.6 percent in 2011(Table 1.4). In addition, officialreserves increased from USD2,872.6 million in December,2008 to USD 3,744.6 million atthe end of December, 2011. Thislevel of reserve was sufficient tocover only 3.7 months of importsin 2011. This level is howeverlower compared to an average of4.9 months of imports in the pastthree years.

1.3.6 Investment Climate

Tanzania has enormousinvestment potential in a numberof areas including agriculture,

mining, manufacturing,transportation, tourism,education, health, andinfrastructure. In view of this theGovernment is taking measuresto improve investment climateand promote foreign as well asdomestic investments in order toattain high economic growththrough exploitation of the

available investmentopportunities. In 2010 forinstance, the government adopted


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a roadmap aimed at improvingthe countrys investment climate

where responsible ministries,departments and agencies incollaboration with the private

sector undertook to addressimpediments relating to the costof doing business.

Table 1.4: Tanzanias Selected Macroeconomic Indicators, 20052011

Indicator 2008 2009 2010 2011

Population (Million) 39.3 40.7 43.2 44.5

GDP growth (%) 7.4 6.0 7.0 6.4

GDP per capita (USD) 525.0 526.0 547.0 558.0

CPI average inflation rate (%) 10.3 12.1 7.6 12.6

Exports of goods and services/GDP (%) 26.9 23.8 27.6 30.6

Imports of goods and services/GDP (%) 41.9 35.0 39.1 49.9

CAB/GDP (%) -12.4 -8.4 -8.5 -16.5

CAB*/GDP* (%) -15.3 -11.4 -11.9 -19.0

Average exchange rate (TZS/USD) 1,196.9 1,306.0 1,395.7 1,557.4

Official reserves (USD Million) 2,872.6 3,552.5 3,948.0 3,744.6

Reserves months of imports cover 4.0 5.6 5.2 3.7

Source: Bank of Tanzania, National Bureau of Statistics

Notes:

CAB = Current Account Balance, pa means period average, CAB* = CAB excluding official grants

The government has alsocontinued with efforts to engagein regional integration initiativeswith the objective of expandingmarkets for goods and servicesand increasing access to regionalresources. It is currently,implementing both East AfricanCommunity Customs Union (EAC- CU) and Common Market (EAC

CM) Protocols. With the EAC CU, all the cross-border tariffshave been removed and this isexpected to boost intra-EACregional trade. In July 2010 EACadopted the Common MarketProtocol with a view to deepeningcooperation and facilitatingmovement of goods, services,labour, people and capital. These

initiatives provide potentiallylarge market area where goodsand services can be easily traded.

Tanzania is also a member of theSouthern Africa DevelopmentCommunity (SADC) which is inthe process of implementingcustoms union. SADC provideseasy access to goods and servicesproduced in the country. The tworegional blocs provided a marketof over 400 million people in 2011

(EAC and SADC, 2012).

1.3.7 Structure of the Report

This report is organised in fivechapters. Chapter two presentsthe methodology used in carryingout the surveys, while chapterthree provides an analysis ofinflows and outflows of foreign

private investments for the period2008 to 2011. Chapter fourdiscusses investors perceptions


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and linkage with the domesticeconomy. The final Chapterhighlights on the main findings

with their corresponding policyimplications.


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CHAPTER 2

METHODOLOGY

2.0 Introduction

This chapter presents themethodology used in conductingsurveys on foreign private

investments in Tanzania. Thesurveys conducted were censusin 2010 capturing data for 2008and 2009; and the sample surveyconducted in 2012 for 2010 and

2011 data. The chapter alsocovers the organization of theForeign Private Capital Flows(PCF) survey, which includesinstitutional framework, surveyfunding as well as pre and postsurvey activities. Lastly, itprovides an assessment of data

quality with reference to theinternational best practice.

2.1 Organization of the Survey

2.1.1 Institutional Framework

In conducting foreign privateinvestment surveys, fiveinstitutions were involved in

Tanzania Mainland namely theBank of Tanzania (BOT),

Tanzania Investment Centre (TIC)and National Bureau of Statistics(NBS). In Zanzibar, the Zanzibar

Investment Promotion Authority(ZIPA) and Office of ChiefGovernment Statistician (OCGS)were involved.

2.1.2 Survey Funding

The surveys for both TanzaniaMainland and Zanzibar were fully

funded by the Governments ofTanzania through the institutionsinvolved in the survey.

2.1.3 Scope

The surveys covered companieswith foreign investments both in

Tanzania Mainland and Zanzibar.

All industrial activities as definedby the UN International StandardIndustrial Classification were

covered.

Unlike in the previous surveyswhere only foreign liabilities werecovered, for the first time, thesample survey conducted in 2012was expanded to cover foreignassets in Tanzania Mainland. Inthis case, a separatequestionnaire was administeredfor companies with affiliatesoperating abroad. Also, thetraditional questionnaire was

expanded to cover both foreignassets and liabilities, particularlyon trade credits and advances.Data for assets covering theperiod 2009 to 2011 are reported

as actual without being weighted.

2.1.4 Pre and Post SurveyActivities

Compilation of InvestorsRegister

The investors register provides acomprehensive list of companieswith foreign asset and liabilities.

The register incorporatesinformation that includes namesof companies, sectoral activities,contacts of the companies,contact persons and value and

status of investment.

This register which iselectronically maintained in a


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web based private capitalmonitoring system iscontinuously updated to facilitateimplementation of surveys. Theupdating process involvesaddition of new and rehabilitated

or expanded companies. It alsoinvolves removal of companiesthat have been closed, liquidated,relocated, under receivership,merged or have changed businessnames.

Major sources of information forupdating the registers were; theBusiness Registration and

Licensing Authority (BRELA),Tanzania Investment Centre(TIC), NBS and Ministry of Energyand Minerals (MEM) for TanzaniaMainland. In Zanzibar, thesources were; ZIPA, ZanzibarCommission for Tourism (ZCT),OCGS and the Office of Registrarof Companies.

Sampling ProcedureThe sample size for the surveyconducted in Tanzania Mainlandin 2012 was largely based on theresource envelope and the level ofprecision desired. The samplingprocess involved dividing thepopulation of 601 enterpriseswith foreign assets and/orliabilities into two strata namely

Strata A and B. Stratum A had262 enterprises with stock valuesof USD 2.0 million and abovewhile stratum B was composed of339 enterprises basing on 2009stock position.

All the enterprises in stratum Awere included in the sample whilethose in B were further sub-

divided into 85 clusters with fourenterprises each. The enterpriseswere assigned numbers one to

four in each cluster. Then asystematic random sampling wasapplied to select 347 enterprises,262 for stratum A and 85enterprises from stratum B.

In the case of Zanzibar, censuswas carried out to cover allcompanies with foreigninvestments and someenterprises that are 100 percentlocal. The coverage of local

enterprises was intended to keeptrack of the progress for thedomestic investments. Thecoverage involved a total of 380

companies.

Questionnaire Design

The questionnaires for censusand sample survey were designedbased on IMF Balance ofPayments Manuals 5 and 6respectively. The twoquestionnaires were designed tocapture information on company

profile, equity and non-equity.For census, information oninvestors perception and linkageto the domestic economy was alsocovered. The sample surveyquestionnaire was extended tocover assets on trade credits andadvances, goods for processingand under merchanting. Inaddition, a separate

questionnaire was designed tocollect information on assetsparticularly for companies thathave been authorised to investabroad on special considerations.

The full set of the questionnairesis appended to this report.

Awareness Creation andSensitization

Prior to the field work, a pressrelease was issued to the publicthrough widely circulated


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newspapers in the country. Theintention was to create awarenessto the public and sensitize thetargeted respondents about theobjectives of the survey, coverageand the type of information

sought.

Training of Researchers

In-house trainings wereconducted prior to thecommencement of the surveyswith the aim of reviewing thequestionnaires, researchersmanual and survey logistics. Thetraining which involved fourteen

researchers from thecollaborating institutions wasfacilitated by local experts.

2.2 Survey Implementation

In order to monitor and evaluatesurvey activities smoothly, thecensus and sample surveys in

Tanzania Mainland were

implemented in two phases.Phase one involved Dar esSalaam region and phase twocovered up-country regions. Aface-to-face interview techniquewas employed in administering

questionnaires with a view toimproving the response rate. Thistechnique is considered the mosteffective compared to othertechniques. Researchers wereresponsible for reviewing all

collected questionnaires againstaudited financial statements forquality and consistency checksbefore data entry and processing.

2.3 Response Rates

As shown in Table 2.1, out of2,056 companies that weresurveyed during the census,

1,761 were located andsuccessfully interviewedrepresenting an overall responserate of 91.6 percent. Likewise,Table 2.2 shows the responserate during the sample surveycarried out in 2012. The responserate from surveyed companies inMainland Tanzania and Zanzibarwas 87.5 percent. The response

rate is partly attributable to theawareness creation andsensitization that was undertakenprior to the survey.

Table 2.1: Survey Response Rate for the 2010/11 Census

Area Questionnaire distributed Questionnaire collected Response rate (%)

Mainland 1,848.0 1,555.0 84.1

Zanzibar 208.0 206.0 99.0

Overall 2,056.0 1,761.0 91.6

Table 2.2: Survey Response Rate for the 2012 Sample Survey

Area Questionnaire distributed Questionnaire collected Response rate (%)

Mainland 350.0 299.0 85.4

Zanzibar 380.0 340.0 89.5

Overall 730.0 639.0 87.5

It is worth noting that, somecompanies could not be located

due to various reasons such asrelocation, closure, liquidation,


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mergers and acquisitions,receivership and change ofnames.

2.4 Data Processing

Data processing was carried outin a new web-based PrivateCapital Monitoring Systemdeveloped by the Macroeconomicand Financial ManagementInstitute of Eastern and SouthernAfrica (MEFMI). Two weekstraining workshop was organisedin Zanzibar for systemcustomization andfamiliarisation.

In order to maintain consistency,completed questionnaires weresubjected to a thorough screeningprocess to identify missing valuesor reported values that wereinconsistent. Data verificationand consistency check within andacross cycles were done to ensuredata quality.

2.5 Change in Reporting andEstimation Technique

Two methodological changes wereadopted in this report. First, thereporting has been changed frommarket value to book valuereporting. The change to bookvalue reporting results from anumber of factors including thefact that:

Only few companies are listedin the stock exchange whichmakes it difficult to estimatemarket value for companiesthat are not listed

It will facilitate comparisonwith other countries in theregion as they report in bookvalues

Book value reporting providesa more realistic reflection ofthe financial affairs ofcompanies

The second change is on theestimation techniques fromsample to population. In caseswhere sample surveys wereconducted in Tanzania,population figures were obtainedby creating dummyquestionnaires for the enterprisesthat either did not respond or fellout of the sample. In creatingdummy questionnaires distinctprocedures were used fordifferent components of equityand non-equity. On the equityside, the components estimatedinclude paid up capital,reinvested earnings, revaluationreserves, share premium andshareholders deposits. These

were estimated under thefollowing assumptions:

Paid up capital:these are partof funds contributed byshareholders. Information onissued and paid up sharecapital was obtained from theaudited financial statements.During creation of dummyquestionnaires, this figure wasassumed constant.

Revaluation reserves: theserefer to the surplus createdwhen there is an adjustmentin book value of assets toreflect the current marketvalue. Since companies do notrevalue their assets annually,this figure was assumed to beconstant.


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Share premium: this is theexcess amount by which theprice at which share issuedexceeds the par value andforms part of non-distributablereserves. During creation of

dummy questionnaires, sharepremiums were assumed to beconstant.

Shareholders deposits: arenormally interest free andwere thus assumed to beconstant.

Retained earnings are

estimated on the basis of thesectoral GDP growth ratesusing the following formula:

1001

1

t

tt

rRERE where

tRE is the retained earnings

at time t andtr is the

growth rate of the sector in

which the enterprise beingestimated belong at time t.

In some cases, dummyquestionnaires were created forprevious years where anenterprises was found to havebeen existing for some years backbut was not included in the

register. In such cases reinvestedearnings were worked backwardusing the formula:

1001

1

t

t

tr

RERE .

The components covered undernon-equity include loan

repayments, disbursements andinterest payments, other changesrelated to non-equity and other

charges. The estimation of non-equity largely depended on theinformation provided in theaudited financial statements inthe previous survey and werearrived at as follows:

tttt CBOCPRROB

0where

0OB stands for opening balance

at the beginning of the period

tR stands for receipts or

disbursements during the period

tPR stands for principle

repayments during the period

tOC stands for other changes

during the period, and

tCB stands for closing balance at

the end of the period.The treatment of interestpayments and any othertransactions depended on theinformation provided in thefinancial statement.

2.6 Challenges Related to theCreation of DummyQuestionnaires

The dummy questionnairescovered statistics on equity andnon-equity only. Attitudequestions mostly relating to theinvestors perceptions could notbe worked out to obtain

population estimates. Thisrestricted the analysis.

Companys ability to generateprofits was pegged to the sectoralGDP growth rates. However, it iswidely accepted that thecompanys ability to generateprofits depends on other aspectssuch as the productivity and

efficiency of the factors ofproduction, costs of productionand markets. The procedure


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assumed that big and smallenterprises grow at the same rateignoring the effects of theeconomies of scale.

The assumptions on constant

components of equity ignored newFDI inflows. In addition,disbursements of new loans werenot reflected which could resultto underestimations.

2.7 Estimation for Non-response and Boosting forPopulation

The new estimation techniqueinvolved two steps. In the firststep, all enterprises in thepopulation were categorized intotheir relevant sectors whilekeeping them in their respectivestrata (i.e. strata A and B). Sinceall the enterprises in strata Awere included in the sample, theestimation was made only for

non-response. In this casedifferent weighting factors fornon-response were applied foreach sector. The same procedurewas applied in estimating non-response for the enterprisesbelonging to stratum B. Inaddition, sector weights wereapplied to boost for population.

Therefore a combination of two

weighting factors, one to estimatenon-response and the second toestimate sample were used instratum B. The weights wereobtained by taking the inverse ofthe fraction of the sample dividedby population for each sector. Forinstance, if the total number ofenterprises in agriculture activityis , and a sample of

enterprises were selected, thenthe weighting factor under the

agriculture sector would be1

tw

The second step involved

adjusting the data for connectingdata series from the censuswhich covered data for 2008 and2009 to those obtained from thesample survey which covered2009 - 2011. The adjustmentfactor of 0.34 was obtained bytaking the ratio of the stockposition of 2009 from the twosurvey cycles (census and the

sample survey). The data for thesample survey was then weightedusing the adjustment factor.

2.8 Adherence to InternationalStandards

2.8.1 Analytical Methods

The surveys were conducted inaccordance with the acceptable

international standards.Economic activities wereclassified based on InternationalStandard for IndustrialClassification with somecustomization to meet countryspecific requirements. Forcensus, data compilationprocedures followed closely theIMFs Balance of Payments

Manual, 5th Edition (BPM5).However, following the revision ofBPM5, sample survey wascompiled in line with BPM6.

2.8.2 Timeliness

The survey results were releasedabout 12 months after completionof fieldwork. The focus has been

to meet timeliness criteria fordata dissemination as guided byIMFs framework in the GeneralData Dissemination Standard


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(GDDS), which is between six tonine months after fieldwork.Noteworthy, the fieldwork for thesample survey was completed inSeptember 2012 and the outputtables were produced in February

2013 which is fairly within GDDSrequirements.

2.8.3 Causal Information

During the surveyimplementation, researchers weretaking note of additional relevantinformation provided by therespondents but not captured by

the questionnaire. Suchinformation has been analysedand included in the report.

2.8.4 Summary

This chapter has presented themethodology used in conductingthe sample surveys of foreignprivate investment in Tanzania

during 2008 and 2011. It showsthat the survey was conducted inaccordance with the internationalbest practices as provided in theIMF BPM5 and BPM6. Responserates of 85.6 percent and 87.5percent were attained during the2010 Census and 2012 samplesurvey, respectively; showingsignificant cooperation from the

respondents.


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CHAPTER 3

FINDINGS ON FOREIGN PRIVATE INVESTMENTS

3.0 Introduction

This chapter discusses findings ofthe survey on foreign privateinvestments (FDI) in Tanzania forthe period 2008 - 2011. Thediscussion focuses on the maincomponents of FPI namely foreigndirect investments (FDI), portfolioequity investments and otherinvestments.

3.1 Foreign PrivateInvestments

The findings indicate thatTanzania recorded a notableincrease in the stock of foreignprivate investments during theperiod covered. The value of thetotal stock of foreign investmentsincreased at an average of 10.3percent per annum from USD

7,751.0 million at the end of 2008to USD 10,393.2 million at theend of 2011 (Table 3.1). FDIcontinued to dominate inflows asit accounted for 89.3 percent ofthe total stock of foreigninvestments in 2011 followed byother investments that accountedfor 10.6 percent. The share ofportfolio investments was small,

reflecting the low level ofdevelopment of the capital marketand existence of capital accountrestrictions.

Foreign private investmentinflows to Tanzania declined by34.2 percent in 2009 in the wakeof the global financial crisis. Thedecline was reversed to an

increase of 77.1 percent in 2010due to huge inflows to theelectricity and gas industry aswell as recover from the lobal

financial crisis. In 2011, foreignprivate investments net inflows

declined by 26.6 percent onaccount of large loan repaymentsto related companies (Chart 3.1).It is pertinent to mention thatopening stocks and flows duringa year do not necessarily add upto closing stocks because changesin stocks include not onlytransactions (which are capturedas flows), but also holding gainsand losses, debt-equity swapsand sampling differences.

3.1.1 Foreign DirectInvestments

During the period, FDI inflowsaveraged USD 1,344.6 million,accounting for about 94 percentof the total foreign privateinvestment inflows. However,

there was a decline of FDI inflowsby 31.1 percent to USD 952.6million in 2009 compared to USD1,383.3 million recorded in 2008.

The decline is associated with lowdisbursements from the relatedcompanies. This is consistentwith the global economic andfinancial crisis prevailing aroundthat time which weakened the

financial position of relatedcompanies. In 2010, Tanzaniarecorded the highest FDI inflowsamounting to USD 1,813.3million as the recovery of theglobal economy coincided withlarge inflows for natural gasexploration activities. As a result,the stock of FDI grew at anaverage of 10.2 percent per

annum from USD 6,941.5 millionin 2008 to USD 9,278.1 million in2011 (Table 3.1).


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Table 3.1: Foreign Private Investments, 2008 2011(USD Million)

2008 2009 2010 2011

Items Inflows Stock Inflows Stock Inflows Stock Inflows Stock

Direct Investment 1,383.3 6,941.5 952.6 8,066.3 1,813.3 8,762.2 1,229.4 9,278.1

Equity capital 178.4 2,896.4 397.2 1,902.8 464.7 2,343.0 304.2 2,656.3

Reinvested earning 219.2 653.1 267.3 972.8 573.5 1,232.0 1,248.6 1,953.0

Loans from related parties 985.7 3,392.0 288.2 5,190.7 775.0 5,186.4 -323.3 4,668.7

Long-term 722.2 3,033.0 257.7 3,715.3 162.5 3,128.1 -252.2 2,776.9

Short-term 263.4 359.0 30.4 1,475.3 612.5 2,058.3 -71.2 1,891.8

Portfolio Investment 0.2 11.0 0.4 12.5 -0.1 12.7 0.7 17.6

Other Investments 172.0 798.5 70.4 487.2 -0.7 503.1 99.9 1,097.5

Long-term 129.6 614.5 81.5 319.7 -2.1 291.0 -54.2 257.4

Short-term 6.9 87.9 0.9 7.4 -1.6 23.9 9.2 31.4

Trade credit and advances 35.5 94.0 -12.0 106.2 3.7 141.0 91.7 325.1

Currency and deposits 0.1 2.0 0.0 27.7 0.1 26.1 60.5 467.8

Other equity 0.0 0.0 0.0 26.4 -0.7 21.2 -7.2 16.0

Total Private Investments 1,555.5 7,751.0 1,023.4 8,566.0 1,812.5 9,278.1 1,330.0 10,393.2

Chart 3.1: Inflows of Foreign Private Investments, 2008 2011

Financing of FDI

Prior to 2008, FDI inflows inTanzania were mostly financedthrough long and short-termloans from related companies.However, the current resultsshow a significant shift tofinancing of FDI through retainedearnings (Chart 3.2). Retained

earnings financing is among the

preferred modes of financing as itreduces debt exposure and debtservice burden to investors andthe economy. This significantshift is consistent with higherlevels of profits realised in 2011.It also gives some indication ofincreased investor confidence andinvestment opportunities in thecountry. These developments

occurred at a time when


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companies were facing borrowingconstraints as most of affiliateand non-affiliate sources of loan

were adversely impacted by theglobal financial crisis.

Chart 3.2: Financing of FDI, 2008 2011

178.4 3

97.2

464.7

304.1

219.2

267.3

573.5

1,2

4

8.6

654.3

240.8

162.5

-252.1

331.4

47.3

612.5

-71.2

2008 2009 2010 2011

(USD Million)

Equity capital Reinvested earning Long-term Short-term

FDI Stocks and Flows byActivity

During the period under review,the share of the stock of FDI inmining and quarrying was thelargest, averaging 43.7 percent ofthe total (with a high of 53.5percent in 2008 and a low of 34.3percent in 2009). The secondlargest share was inmanufacturing that accounted foran average of 14.9 percent (with a

high of 16.4 percent in 2011 anda low of 12.5 percent in 2008).The next largest shares were inaccommodation; finance andinsurance; and information andcommunications (Table 3.2 andChart 3.3). The dominance ofmining and quarrying is in linewith WIR2010, which indicatesthat most FDI in the less

developed countries particularly

sub-Saharan Africa are directedtowards natural resource basedactivities.

With respect to inflows, electricityand gas activity rose from amongthe least recipients in 2008 and2009when it received underUSD 3.0 million annuallyto thesecond largest recipient in 2010(USD 290.5 million) and third in2011 (USD 209.4 million). Thehigh inflows to this activity

followed the discoveries of gasand oil deposits in Songo Songoin Lindi and Mnazi bay inMtwara. These discoveries haveattracted more explorationactivities in Mkuranga in Coastregion, Msijute in Mtwara regionas well as at the deep sea.


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Table 3.2: Stock and Flows of FDI by Activity, 2008 2011(USD Million)

Activity

2008 2009 2010 2011

Inflow Stock Inflow Stock Inflow Stock Inflow Stock

Mining and quarrying 669.8 3,714.1 385.1 2,770.1 909.9 3,738.3 406.5 4,123.0

Manufacturing 277.6 870.7 214.5 1,235.8 157.1 1,332.9 217.3 1,520.5

Accommodation 129.7 388.7 35.9 671.7 21.1 747.0 165.6 872.8

Financial and insurance 81.7 416.3 95.9 687.9 95.5 700.7 121.1 756.6

Information and communication 127.6 532.4 185.1 1,545.2 83.5 909.9 -98.3 627.8

Electricity and gas 1.0 24.7 2.1 111.3 290.5 328.6 209.4 539.8

Wholesale and retail trade 21.1 372.0 -16.9 296.8 36.9 328.3 114.5 400.5

Agriculture 21.2 202.3 29.0 308.8 22.9 304.5 31.4 355.4

Construction -3.7 119.5 14.9 150.6 -23.5 123.6 30.7 142.5

Real estate activities 26.5 79.7 1.5 89.7 1.5 89.1 12.0 99.2

Professional activities -0.7 1.1 0.5 26.9 213.0 27.6 6.1 30.1

Other service activities 1.4 3.8 1.4 15.1 -0.7 16.6 0.7 15.0

Education 0.4 2.0 0.3 18.2 1.6 20.6 1.8 10.8

Public administration and defense 0.0 0.0 0.0 0.5 0.0 0.4 0.4 0.8

Transportation and storage 2.7 28.8 3.9 137.8 4.0 94.2 10.4 -216.7

Grand Total 1,356.4 6,945.6 953.1 8,066.3 1,813.3 8,762.2 1,229.4 9,278.1

Chart 3.3: Composition of FDI Inflow, 2008 2011

49.4%

20.5%

9.6%

6.0%

0.1% 14.5%

2008

40.4%

22.5%

3.8%

10.1%

0.2%

23.0%

2009

50.2%

8.7%

1.2%

5.3%

16.0%

18.7%

2010

33.1%

17.7%13.5%

9.9%

17.0%

8.9%

2011

FDI inflows to agricultural activitycontinued to rise in 2011reaching USD 31.4 million (48.5

percent) compared to USD 21.2million in 2008, consistent withthe governments agricultural


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programs including KilimoKwanza. Information andcommunications, constructionand other service activitiesrecorded net negative inflows in2010 and 2011, largely onaccount of losses incurred as wellas repayments to their affiliatesabroad which exceededdisbursements.

Sources of FDI

Between 2008 and 2011, SouthAfrica, the United Kingdom andCanada accounted for an averageof 71.5 percent of the total FDIinflows. Inflows from South Africaaccounted for an average of 32.5percent of total inflows (Chart3.4).

Chart 3.4: Inflows of FDI, Top Five Source Countries, 2008 2011

97.8

291.1

451.8

392.2

443.5

91.3

89.3

282.1

342.6

347.3

30.7

40.7

45.9

269.3

357.0

18.9

50.1

241.3

199.7

526.5

Kenya

Mauritius

United Kingdom

Canada

South Africa

(USD Million)

2008 2009 2010 2011

The stock of FDI from SouthAfrica, UK and Canada increasedto USD 3,087.2 million in 2011,representing 49.6 percent of thetotal for the year (Chart 3.5).Most of the FDI from thesecountries are in the mining andquarrying, manufacturing andfinance and insurance activities.

Looking at the sources of FDI byregional groupings, the findingsshow that the largest share of FDIinflows originated from the OECDwhich registered an annualaverage of USD 750.6 million(56.0 percent) during the periodunder review. Canada and theUnited Kingdom accounted for

74.1 percent of the total inflowsfrom OECD. SADC was thesecond in prominence, withSouth Africa contributing anaverage of 76.1 percent of thetotal inflows from SADC duringthe four years. Within the EACregion, Kenya continued to be thedominant source accounting for86.8 percent of the average FDIinflows from the region between2008 and 2011 (Table 3.3). It isworth noting that in 2011,negative FDI inflows of USD783.9 million from other regionswere reported reflecting largerepayments of loans and losesincurred by companiesoriginating from those regions.


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Chart 3.5: Stocks of FDI, Top 10 Source Countries, 2011

75.0

114.9

183.8

197.3

276.8

517.4

650.4

1,080.4

1,344.8

2,177.9

France

Botswana

Norway

Japan

Switzerland

Kenya

Mauritius

Canada

United Kingdom

South Africa

(USD Million)

Note: The list of source countries exclude international financial centers

3.1.2 Portfolio Investment

Portfolio investments related totradable debt or equity securities,continued to account for lessthan 1.0 percent of the total stockof foreign private investments in2011. In particular, portfolioinvestment inflows averaged USD

0.3 million per annum for theperiod covered by the survey witha minimum of USD -0.1million in2010 and a maximum of USD 0.7million in 2011. This finding isconsistent with capital accountrestrictions and the low level ofdevelopment of the countryscapital market which ischaracterised by a single stock

exchange, a few number ofmarket participants (listedcompanies and investors),inadequate tradable securitiesand restrictions on capitalaccount transactions.

Large share of the portfolioinvestment was recorded in theaccommodation and

manufacturing activities. Most ofthe portfolio investment inflowscame from United Kingdom,

Kenya and the United States. Theinflows from Kenya are partlyassociated with the on-goinginitiatives to enhance economiccooperation under the EastAfrican Community.

3.1.3 Other Investments

The other investment categorywhich includes long and short-term loans from unrelatedparties, currency and depositsand other equity was the secondlargest component of foreignprivate investments after FDI(Table 3.1). During 2011, thestock of other investmentsincreased to USD 1,097.5 millioncompared to USD 798.5 millionrecorded in 2008. Inflows of otherinvestments decreasedsignificantly from USD 172.0million recorded in 2008 to USD99.9 million in 2011, largely dueto decline in long-termdisbursements from unrelatedparties. Large share of theinvestments under this categorywere directed to finance and

insurance, manufacturing, andelectricity and gas activities(Chart 3.6).


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Table 3.3: FDI Inflows by Regional Groupings(USD Million)

2008 2009 2010 2011 Average

OECD 591.5 398.8 875.9 1,136.3 750.6

Canada 199.7 269.3 342.6 392.2 300.9

United Kingdom 241.3 45.9 282.1 451.8 255.3

Switzerland 16.3 11.1 10.5 153.4 47.8Netherlands 24.3 22.1 110.0 14.5 42.7

Norway 41.3 -0.5 21.2 66.3 32.1

Denmark 10.4 9.3 49.3 7.6 19.2

Japan -11.6 5.3 32.7 31.3 14.4

United States 33.9 8.7 -2.1 1.2 10.4

Sweden 10.7 5.1 16.4 0.8 8.2

France 6.2 2.6 2.4 13.7 6.2

Luxembourg 0.8 10.1 3.0 3.5 4.3

Italy and Vatican City 3.6 12.7 -0.3 -0.3 3.9

Other OECD 3.2 2.4 8.2 0.3 3.6

SADC 603.3 400.2 445.0 751.3 549.9

South Africa 526.5 357.0 347.3 443.5 418.6

Mauritius 50.1 40.7 89.3 291.1 117.8

Botswana 25.6 2.1 7.0 16.4 12.8

Zambia 1.9 1.0 2.5 1.6 1.7

Other SADC -0.9 -0.6 -1.1 -1.3 -1.0

EAC 24.6 33.9 90.8 125.7 68.7

Kenya 18.9 30.7 91.3 97.8 59.7

Uganda 5.6 3.2 -0.5 27.9 9.1

Other EAC 0.0 0.0 0.0 0.0 0.0

Other regions 159.3 107.0 401.5 -783.9 -29.0

Grand Total 1,378.7 939.9 1,813.3 1,229.4 1,340.3

Chart 3.6: Stock of Other Investment by Sector, 2011

8.3

21.0

34.4

38.6

60.6

105.5

158.7

187.4

483.0

Other sectors

Agriculture

Accommodation

Transport and storage

Mining and quarrying

Wholesale and retail trade

Electricity & gas

Manufacturing

Financial and insurance

(USD Million)


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The mining and quarrying,manufacturing, and informationand communications recordednegative flows due to higherrepayments of debts relative todisbursements during the period.Prior to 2009, long-term

borrowing from unrelatedcompanies constituted thedominant source of investmentsunder this category. However, in2010 and 2011, this trend shiftedto trade credits and advances(Chart 3.7).

Chart 3.7: Source of Financing of Flows of Other Investments, 2008

2011

129.

6

81.

5

-2.

1

-54.

2

6.

9

0.

9

-1.

6

9.

2

35.

5

-12.

0

3.

7

91.

7

0.

1

0.

1

60.5

2008 2009 2010 2011

(USD Million)

Long-term Short-term Trade credit and advances Currency and deposits Other equity

3.2 Profits and Dividends

The overall net profits after taxincreased consistently at anannual average rate of 79.3percent between 2008 and 2011.

The highest increase was

recorded in 2011 when the netprofits after tax more thandoubled from USD 679.0 millionin 2010 to USD 1,492.7 million.Most of the increase in profitsoccurred in mining and quarryingconsistent with favourabledevelopments in the price of goldin the world market that year(Chart 3.8). Other activities thatrecorded high profits weremanufacturing, and finance andinsurance, while information and

communications, agriculture,accommodation andadministrative and supportservices recorded losses. Anaverage of about 82.5 percent ofthe profits was reinvested duringthe period (Chart 3.9). This

resulted into a shift in FDIfinancing from loan to retainedearnings particularly from 2009onwards.

A total of USD 190.0 million waspaid to shareholders as dividendsin 2011, representing a declinefrom USD 194.5 million in 2010but much higher compared to anaverage of USD 59.3 million paidin 2008 and 2009 (Table 3.4).


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Table 3.4: Retained Profits and Dividend Payments, 2008 2011(USD Million)

Income on Equity -

2008

Income on Equity -

2009

Income on Equity -

2010

Income on Equity -

2011

SectorReinvested

Earnings

Divide-

nds paid

Reinvested

Earnings

Divide-

nds paid

Reinvested

Earnings

Divide-

nds paid

Reinvested

Earnings

Divide

nds

paid

Agriculture, -17.1 0.8 -0.1 0.9 -1.5 8.5 0.3 15.4Mining 17.0 0.0 -2.5 0.0 359.9 15.7 864.5 42.6

Manufacturing 111.9 39.6 160.4 30.2 249.4 120.2 322.5 107.0

Electricity and gas 2.1 0.0 5.1 0.0 25.7 0.0 36.6 0.0

Water supply 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Construction -13.8 0.0 1.0 0.0 -2.1 0.0 -6.8 0.0

Wholesale and retail

trade 12.0 2.7 3.4 0.6 16.1 9.4 40.9 17.5

Transportation and

storage 7.4 1.7 6.4 2.1 4.5 3.6 4.0 -2.3

Accommodation -3.4 0.0 -12.3 0.0 -37.4 0.0 -8.0 0.0

Information & com 16.8 0.1 24.8 0.5 -201.2 21.3 -203.6 0.0

Finance 95.4 10.8 84.4 24.1 114.0 10.4 169.0 5.8Real estate -2.3 0.1 2.1 0.1 6.9 0.0 26.2 0.0

Professional activities -1.1 0.0 -0.1 0.0 40.4 0.1 2.0 0.5

Administrative and

support -9.0 2.2 -7.5 0.4 0.0 0.0 0.0 0.0

Education 0.3 0.0 0.4 0.0 0.7 0.0 0.2 0.0

Health activities 0.5 0.0 0.8 0.0 0.0 0.0 0.0 0.0

Arts, entertainment 0.9 0.7 -0.1 1.3 0.0 0.0 0.0 0.0

Other service 1.5 0.0 1.2 0.0 -1.3 5.2 0.5 3.5

Total 219.2 58.6 267.4 60.1 574.0 194.5 1,248.2 190.0

Chart 3.8: Average Net Profit after Tax by Sector, 2008 2011

-50.5

-12.7

-5.6

-3.5

-2.2

0.0

0.3

0.4

0.4

1.1

1.8

5.1

7.9

9.2

20.8

141.4

201.1

239.5

Information & com

Accommodation

Administrative and support

Construction

Agriculture,

Water supply

Professional activities

Education

Health activities

Arts, entertainmentOther service

Real estate

Electricity and gas

Transportation and storage

Wholesale and retail trade

Finance

Mining

Manufacturing

(USD Million)


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Chart 3.9: Net Profits and Reinvested Earnings

288.4 337.9

679.0

1,492.7

219.0 267.4

574.0

1,248.2

2008 2009 2010 2011

Net profits Reinvested earnings

(75.9%) (79.1%)

(84.5%)

(83.6%)

(Millions of USD exceptfigures

in brackets which show the

percentage of net profits

reinvested)

3.3 Private Sector ExternalDebt

In 2011, the stock of privatesector external debt (PSED) wasUSD 5,766.3 million, an increase

of 37.6 percent compared to USD5,689.5 million in 2010 (Table3.5). About 81 percent of thetotal stock in 2011 was sourcedfrom related companies implyingthat PSEDs were mostly driven byFDI related activities. This may beassociated with difficulties inobtaining loans from non-

affiliates such as banks ascompanies and banks strived torecover from the adverse effects ofthe global financial crisis. Largepart of the debt disbursementswere received by the companies

operating in the finance andinsurance, manufacturing, andelectricity and gas activities. Themajor sources for PSED were theUnited Kingdom, South Africa,Norway, Netherland and theUnited Arab Emirates.

Table 3.5: The Composition of PSED, 2008

2011(USD Million)

Components2008 2009 2010 2011

Inflows Stock Inflows Stock Inflows Stock Inflows Stock

Loans from affiliates 985.7 3,392.0 288.1 5,190.7 775.0 5,186.4 -323.3 4,668.7

Long-term 722.2 3,033.0 257.7 3,715.3 162.5 3,128.1 -252.1 2,776.9

Short-term 263.4 359.0 30.4 1,475.3 612.5 2,058.2 -71.2 1,891.8

Loans from non-affiliates 172.0 798.5 70.4 487.2 -0.7 503.1 99.9 1,097.5

Long-term 129.6 614.5 81.5 319.7 -2.1 291.0 -54.2 257.4

Short-term 6.9 87.9 0.9 7.4 -1.6 23.9 9.2 31.4

Supplier credits 35.5 94.0 -12.0 106.2 3.7 141.0 91.7 325.1

Currency and deposits 0.1 2.0 - 27.7 0.1 26.1 60.5 467.8Other equity - - - 26.4 -0.7 21.2 -7.2 16.0

Total Private External Debt 1,157.7 4,190.5 358.5 5,677.9 774.3 5,

Documents

Tanzania Investment Report 2012 - Foreign Private Investment and Investor Perception