Tanzania LNG Industry Study: Phase III Supplier Development Program Design
Table of Contents Background ...... 1 Objectives ...... 4 Lessons learned from other supplier development programs ...... 5 Critical Success Factors for a Supplier Development Program ...... 8 Overview of recommended program design ...... 8 Project Structure and Activities ...... 11 Pillar 1: Enterprise Development ...... 11 Pillar 2: Policy and Institutional Framework...... 15 Pillar 3: Workforce Development ...... 20 Pillar 4: Access to Finance ...... 24 Conclusion ...... 25 Appendix 1: Project Structure Summary ...... 27 Appendix 2: Mtwara Development Corridor and TSDP Synergies ...... 27
Tanzania LNG Industry Study: Phase III
Background
With an estimated 54 trillion cubic feet of natural gas reserves—a figure expected to more than double over the next two years—Tanzania has quickly become one of the world’s leading energy hotspots. The abundance of resources has attracted the attention of prominent global energy companies that are advancing the effort to build a world-class, liquefied natural gas (LNG) facility. A facility of this size and scope could help Tanzania become a leading LNG exporter over the next decade – a development that would transform the nation’s economy and propel the country toward the objective of becoming a middle- income country by 2025. The development of this LNG facility will require an estimated investment of $15-20 billion1 – a sum that alone has the potential to fuel economic activity and expand incomes throughout Tanzania’s economy. However, to fully benefit from this influx of investment Tanzania must address serious constraints at both the macro (policy) and the micro (firm) levels. Recently, under the technical guidance and direction of the World Bank, the DFID, and the EU (through the CIIP), the DAI led a series of analyses focused on aiding the Tanzanian government to understand and identify viable local content development opportunities linked to the future oil and gas LNG investment project. These studies come before significant levels of on-the-ground investment in the LNG project are made and before any Final Investment Decision (FID) has been reached. As such, each phase of these studies has benefited from greater levels of engagement with the private sector, both from the International Oil and Gas companies (IOCs) and local enterprises. Phase I focused on mapping the market demand for goods and services generated by the proposed LNG project. This mapping was matched with a preliminary assessment of key industries associated with supplying goods and services for the LNG project. This phase of work was instrumental toward establishing general cost parameters and understanding local industrial capacity in order to develop a short list of 11 local industries2 with enough commercial potential to merit a deeper gap study. Phase II built significantly off of the Phase I analysis by carrying out eleven in-depth industry gap studies. These gap studies took an acute look at the industrial capacity in Tanzania at present and then measured the readiness of these industries against the predicted market demand from Phase I. The team developed a ‘bottom-up’ measurement of expected levels of labor and goods that will be sourced locally for each of the eleven industries. These estimates relied on both the industrial mapping work completed in Phase I, continuous discussions with key stakeholders and industry experts in Tanzania, and additional in-country assessments of private enterprises in each industry. Phase II analysis concluded that total local value added (measured as payroll and local profits) could range between USD 750 mn to nearly 1 bn depending on improvements made to local industries and enterprises and the lead time to effect these improvements. 3 The estimated value added and employment figures are likely to change once the LNG project design is finalized and more reliable data becomes available on both local capacity and expected market demand. However, these estimates help the Tanzanian government and its development partners prioritize investment in the local market in anticipation of the future LNG project with the aim of improving the level and quality of local value added.
1 Estimates vary depending on technical design, which has yet to be determined, but in a recent stakeholder engagement session BG announced that project is expected to cost between 15 and 20 billion USD. 2 Building Camps Construction Works, Catering, Concrete Works, Docks and Jetties, Electrical Works, Equipment Hire and Scaffolding, LNG Train and Tank Works, Metal and Steel Fabrication Works, Roads and Landing Strips Works, Site Preparation. Services Industry 3 Based on Phase I assumptions and projections. Page 1
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Considering the potential for significant gains in local capture, this Supplier Development Program framework is designed around the key constraints revealed through Phases I and II:
■ Low level of oil and gas industry awareness: Tanzanian businesses have a very low level of understanding of the oil and gas sector in general, and the services, products, schedules, and procurement processes that typically define the development of an LNG facility. This was evidenced in the focus groups and firm-level interviews where decision making was informed by the most fundamental expectation that gas would be flowing in the next couple of years and that there were few opportunities available. Without exception, the focus groups played a critical information-dissemination role that had not been expected by the facilitators. The asymmetry of information severely limits the upfront ability of Tanzanian firms to participate in the supply chain for the LNG facility, because most are unaware of where and when their services and/or products might be needed, or even the scale of the services required, and what the associated value of the services might be.
■ Business management and growth skills gaps: Most SMEs with aspirations of becoming oil and gas suppliers possess little if any of the required business skills needed to position a local enterprise for doing business with large IOCs, Engineering, Procurement and Construction (EPC) contractors, and prime contractors. Firms that have grown in the Tanzanian economy during the last few decades have done so by mainly responding to domestic consumption needs. Some of the larger and more sophisticated businesses have been able to grow by providing goods and services to larger institutional consumers and foreign companies doing business in Tanzania, and were economically viable enough to develop productive capacity to substitute imported goods previously traded. Firms selling into these markets have learned to improve their business management skills in terms of bookkeeping, financial management, tax compliance, reporting, and documentation. They have also built in-house skills related to business growth operations, such as responding to public tenders and submitting formal commercial proposals. Local firms that do so (excluding those either in a joint venture with a foreign firm or international firms operating locally in Tanzania) are the exception rather than the rule.
■ Industry standards compliance gaps: The oil and gas sector, and specifically IOCs and EPC/prime contractors, is largely driven by risk mitigation. This makes sense given the high dollar value of plant equipment, as well as the potential health, environmental, and personal dangers that exist up and down the value chain. It is therefore understandable that adherence to tested and proven industry and product standards is paramount in doing business. Most local firms are not even aware of the standards and specifications, let alone have the capacity to meet them. The absence of a culture of accreditation means most local firms will not even pass the most basic compliance test and are perceived to be insurmountably challenged to upgrading to meet the demand of the TLNG development project. For example, Health, Safety and Environment (HSE) compliance is almost universally absent among small and medium-sized enterprises (SMEs) in Tanzania. Excepting those industries that do not require a high level of adherence to standards, such as the Services Industry, the current constraints will severely limit the potential for awarding subcontracts to local firms as they reinforce the perception amongst industry participants that there is little local capacity.
■ Policy gaps: The absence of local content policy for oil and gas points to a significant weakness in the enabling environment felt by local SMEs in Tanzania. The draft Oil and Gas Local Content Page 2
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Policy was referenced in local enterprise focus groups as a critical enabler to opening up the oil and gas supply chains to local businesses. Existing policies, such as the Construction Industrial Policy and Private Sector Participation Policy, are not equally and fairly enforced and have not resulted in new market growth for local businesses. Most focus group participants pointed to the broken promises of local content in the mining sector as evidence of institutional weakness and lack of transparency in the natural resource extraction industries. This underscores a need to harmonize existing policies and to publish a local content strategy and associated strategic plan.
■ Institutional weaknesses: There is a critical need to strengthen the institutions responsible for executing the local content strategy, establishing and enforcing associated industrial regulations, and creating an enabling environment. These gaps are exacerbated by the limitations of Tanzania’s national quality infrastructure (NQI).4 The capacity and effectiveness of the Tanzania Bureau of Standards (TBS) to regulate and inspect against accepted standards such as electrical, fire, and food safety is limited. Many local firms see the TBS as simply another tax that squeezes SMEs.
■ Poor infrastructure5: Limited infrastructure, such as an unreliable power supply, poor transportation infrastructure, weak information technology systems, and a stagnant education system, makes the cost of doing business expensive. It also limits the ability for the domestic industrial and manufacturing sectors to grow and results in the large companies defaulting to a reliance on imported goods and labor. This further limits the ability of local companies to compete with imported products (such as metal products), to expand their businesses, and net additional capital needed to reinvest in training staff and upgrading equipment.
■ Weak human capital: There is a serious shortage of skilled or experienced labor in Tanzania. Most workers are the product of a weak educational system that is unable to transfer skills needed by the oil and gas industry. As a result, there are few certified or accredited technicians who meet international standards. Education and technical and vocational education and training (TVET) systems in Tanzania currently do not produce the quality of skilled workers that will be needed in the oil and gas sector and educational institutions do not have a functioning curriculum in place oriented toward the oil and gas industry. These factors significantly reduce the employability of locally trained labor at present and it must be noted that it takes several years of intensive orientation to start producing industry-ready graduates with theoretical knowledge augmented by practical skills. Furthermore, there are few, if any, trained inspectors, accredited instructors, or internationally accredited certifying centers that could help build capacity.
. High cost of finance and limited access to credit. The cost of finance from local banks is very high (18–25 percent) depending on the enterprise, sector, and bank. Likewise, all enterprises commented on the onerous collateral requirements imposed upon them. It is not uncommon for 100–120 percent collateral to be required by lenders in order to provide short-term loans. Larger firms can often overcome the collateral requirements but still suffer from the high cost of finance. This is not simply a market dynamic because the regulatory framework designed to reduce
4 Martin Kellerman, Review on NQI Tanzania, July 2014, World Bank. 5 Through providing a network of roads, rails, ports, information and communications technology channels, energy, water, and basic service systems—overlaid with social infrastructure assets such as schools, hospitals, and prisons—a nation’s infrastructure creates a platform for economic development, access, and personal mobility. When operating optimally, with the support of integrated planning, investment and maintenance, this infrastructure should support economic growth and inclusive development.
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systemic risk in capital markets limits the ability of banks to reduce hurdles for borrowers. For example, the Single Borrower Limit imposed by the Bank of Tanzania6 is insufficient for construction contracts that often involve high financing threshold, and in the absence of a credit guarantee, or some similar risk mitigation mechanism, many smaller firms simply cannot access affordable finance for expansion or recapitalizing. Beyond these overarching constraints, there are a number of constraints that can be assessed in terms of the more sector specific impacts. Table 1 summarizes these constraints for the 11 industries analyzed in Phase II. Table 1: Summary of Industry Constraints
Objectives
Phase III is the culmination of Phase I and II, as it provides a Supplier Development Program framework to address local supplier weaknesses and critical gaps in the enabling environment. While this program focuses on preparing the local _companies to capitalize on oil and gas investments, it also looks to bolster the economy in a manner that is sustainable independent of the TLNG construction. This framework does not take the place of an in-depth program design (which requires additional sector and technical analysis) yet it does suggest the essential areas of intervention required to improve local capture.
The Tanzanian Supplier Development Program (TSDP) will assist in leveraging foreign direct investment (FDI) from the oil and gas industry to spur broad based economic growth in Tanzania. The core objective is to help local enterprises increase their market share of procurement opportunities linked to oil and gas investments (in this case the LNG facility). To realize this goal, the Program will achieve results under each of the following core and supplemental objectives, resulting in more competitive industries and ultimately transforming the Tanzanian economy:
. Develop local enterprises and strengthen linkages along the local value chain. The cornerstone of the TSDP, the Enterprise Development Center (EDC), will facilitate local procurement and increase the capacity and competitiveness of local industries and businesses. On the demand side, the program will help facilitate linking local businesses to supply chain opportunities in the oil and gas industry through activities including supplier qualification, procurement information dissemination,
6 In terms of the 2008 Banking and Financial Institutions (Credit Concentration and Exposure Risk) regulations. Page 4
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and technical assistance to local firms to meet standard prequalification requirements. On the supply side, the program will strengthen competitive industries and domestic suppliers by addressing key industry constraints, from improving standards to upgrading business skills.
. Advocate for policy reform and build capacity of local institutions. Using correct technical analysis and recommendations, the TSDP will advocate policy reform and promote effective and deeper local enterprise participation in oil and gas supply chains. The TSDP will provide technical assistance and capacity building to the government to develop policy framework and investment guidelines that support the establishment of economic institutions and contribute to a strong business- enabling environment. Such policy reforms and institutional improvements will help improve the business environment and accelerate business growth in the Tanzanian market.
. Improve local Infrastructure. The supplier development program does not have a discrete intervention to address the limitations of Tanzanian infrastructure as it is beyond the scope of the program. Nonetheless, the state of infrastructure is a critical constraint and the program should strive to coordinate with any and all local infrastructure improvement initiatives.
. Generate local employment. A key factor for the success of local industry will be the development of a capable domestic workforce. The TSDP will stimulate local employment through targeted skills development and training and accreditation programs.
. Facilitate access to finance. Helping local companies access finance will result in greater investment in their businesses and allow them to present the necessary qualifications and capacity to win larger contracts in oil and gas. This is particularly true for firms needing to purchase or lease capital equipment in construction related industries. Lessons learned from other supplier development programs
Previous supplier development programs (or enterprise development programs) have met with limited success as measured by the total contract value growth to local firms compared to the total project contract values. As a result, critiques of these programs conclude that they do not do enough to link local suppliers into the supply chains with large contract values. However, when not held in comparison to total contract values associated with mega capital projects like an LNG plant, these supplier development programs are catalytic in their ability to upgrade local businesses and improve the local business-enabling environment. Often times the result of such a program is greater in facilitating local business growth and improvements to multiple end-markets than just for oil, gas or mining.
Given the forthcoming investment in LNG in Tanzania it is critical that a supplier development program be put in place well in advance of FID. This accelerated effort will afford budding local enterprises more time and assistance to prepare for the requirements set forth by IOCs and EPCs and also allow large contractors to build a reliable database of local enterprises.
A look at some experiences with supplier development and enterprise linkages programs in the region is useful in forming the list of critical success factors that will guide the formulation of the Supplier Development Program framework.
The recent linkages program in Mozambique serves as a useful case study. MozLink program had two 3- year phases with the first starting in 2006. Mozlink’s results showed some promise for business linkage Page 5
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programs that fall under the theme of supporting local content development. Data for the three year Mozlink II program (supported by both Mozal and the IFC) shows that the program was able leverage around US$15 million in contract value and US$53 million in additional sales revenues for local SMEs from an investment budget of around US$700,000.7 A total of 336 formal jobs were created as well. These results are in line with other regional local content business linkage support projects.
A similar supplier linkage program, the Ahafo Linkages Program, focused on linking local community suppliers to the supply chains of Newmont’s new gold mine in Ghana. Between 2007-2010, Newmont’s Ahafo Linkages Program worked across three pillars: (i) institutional capacity building to business associations, (ii) local supplier development, and (iii) local economic development. Based on interviews with current staff at the Ahafo Foundation, the program reached success with two of the three components. Support to the business associations became mired in local politics and did not achieve the improvements in local organization capacity as expected. An important aspect that has been stressed for the successes of Ahafo was the strong leadership position of Newmont and commitment to establishing a specialized unit within its supply chain department to focus on local supplier relationships and engagement.8
The table below compares Mozlink II with the Ahafo Linkages Program (ALP) in Ghana and the Copperbelt SME Suppliers Development Program (CSSDP) in Zambia.
Table 2: Business linkage key performance results compared Mozlink II ALP CSSDP
Program Budget (US$ mn) 1.01 3 1.2 Duration of program support (years) 4 3 4 # of SME's receiving assistance 45 210 35 Value of contracts signed (US$ mn) 15 14 21.5 Total incremental sales revenue (US$ mn) 53 14.5* 18.5 Formal jobs created 336 -- 135 Total finance facilitated for local SMEs 0 -- 1.5 Cost per job created (US$) 2,976 -- 8,889
Source: Ernst and Young, Evaluation of Mozlink II, 2012. Ahafo Linkages Program: Lessons Learned, 2009. commdev.org last accessed August 7, 2013. * Contracted with local community organizations. Team has not verified data on increased sales to Ghanaian business attributable to the program.
Similar programs have also been undertaken in Nigeria, Chad, Azerbaijan and Guinea. Programs in Nigeria and Azerbaijan included an access to finance component as well. Data availability makes it difficult to draw convincing conclusions on the value-for-money of these local supplier business linkages programs and the long-term sustainability of the contracts won and jobs created.
The South African Business Linkages Program (SAIBL) was funded by USAID from 1998-2011. While
7 Ernst and Young, Evaluation of Mozlink II, 2012. 8 Interview with CEO of Ahafo Foundation. May 26, 2015. Page 6
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much larger than other discreet supplier/enterprise development projects and also not linked directly with a specific extractive industry investment, SAIBL’s accomplishments should also inform this SDP design. Over this time period, SAIBL focused on training and developing business service providers’ capacity (trained and mentored over 100) to deploy enterprise development services to local, black-owned minority businesses in South Africa. Over this time period, the project managed to build the capacity of over 3,000 SMEs and establish supply linkages valued at approximately US$830 million with large corporate firms (including some extractive industries). A key lesson to take away from the SAIBL program is the need to have a longer-term outlook to supplier development beyond the timeline of one particular project. Enterprises must be supported well before and after the peak of construction associated with a mega project and as such the design should be flexible enough to be extended as required to accomplish its maximum potential.
Other ongoing enterprise development/supplier development programs currently being implemented in the region include: Table 3: Supplier Development Program Examples Program Description Strengths Weaknesses
Chevron Foundation Program informed by in-depth Linkages not focused on oil Still in its early days to for Niger Delta value chain studies and and gas end-markets but gauge success. Some Partnership Initiatives procurement analysis of instead focused on limitations on the size of the (NDPIs) Business Chevron Nigeria. Working strengthening local non-oil and gas commercial with business service enterprises linkages into end-markets in the Niger Linkages Program providers to strengthen local larger agriculture markets Delta with which to link local enterprises in procurement, including oil palm, enterprises. business management, aquaculture and poultry. This financial management, HSE limits the risks associated with and access to finance. linking local companies to oil Program started 2014. and gas supply chains that are subject to constant business cycle changes. USAID Ghana Supply 5-year US$5mn program Strong support from IOCs in Has had limited success in Chain Development aimed at helping local country and comprehensive linking local enterprises into Program business enter into the oil and offering of basic business supply chains given lack of gas supply chain in Ghana’s development trainings and up-front technical analysis Western Region. capacity building resources. and industry prioritization. Has also experienced issues with conflicting political pressure from sparring Ministries in Ghana. Anadarko Multi-year supplier Early actions in engaging Has been limited to basic Mozambique Supplier development program local enterprises and building business development Development focused on providing training local capacity before FID and services and not resulted in Program and advisory services to local any significant levels of material levels of supplier enterprises in Cabo Delgado. investment have occurred. linkages into Anadarko’s supply chain. This is in part due to the limited capacity of local enterprises as well as the delays in project start. DFID Zambia Private 5-year (2014-2019) Informed by extensive Implementation underway in Enterprise Program component of a larger private analysis on supply chain end-2014. No results yet (PEP-Z) Business enterprise support program opportunities, complemented available to discuss. Linkages focused on establishing by a separate component business linkages with mining offering generalized business companies in Zambia. development services to new enterprises, and has strong commitment from anchor corporations from the outset.
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Critical Success Factors for a Supplier Development Program
Based on a review of these programs and incorporating information from other past and active programs we have assembled the following critical success factors to guide the shaping of the Tanzania Supplier Development Program:
Commitment- Firm commitment from anchor companies ensures a better level of success for supplier development programs. These anchor companies not only help to establish a potential key end-market for local firms but can be useful in helping shape technical support activities and provide procurement guidance and information geared at maximizing success.
Early identification of procurement opportunities in the oil and gas supply chain, even before tendering, allows for greater lead time for the program to help support the readiness and improvements to local firms. While this must be mitigated carefully so as to not raise expectations, experience shows this provides much needed incubation and growth time for local enterprises.
Coordination- Integrated coordination of supplier development activities is necessary to optimize efficiency and efficacy. It is a best practice to have one focal point of coordination through the establishment of a Program Secretariat (or Project Management Unit, PMU). This Secretariat is a key enabler for coordination with three core outcomes metric areas – (i) procurement transparency, (ii) business development and (iii) institutional strengthening. Additionally, a steering committee represented by both public and private sector representatives, including development partners and in this case IOCs, is useful in providing technical oversight to the program. This cross-sector committee becomes a useful dialogue platform from which both public and private sector motivations are shared.
Throughout the program, effective communication is paramount. This is necessary to mitigate expectations to local suppliers on where the market opportunities exist and the process by which procurement decisions are made. Likewise, the communication of materials and procurement notices have a large impact on opening up opportunities for local enterprises.
Capitalization- Addressing access to finance from the outset is critical. Most suppliers face barriers to entry related to accessing financial resources to invest in their businesses. Linkage and supplier development programs that have failed to address this fall short in effectiveness. As such, acknowledging the need and facilitating a solution in the program design helps maximize success. Program location and an exit strategy must be prioritized at the design phase. Too often programs face an abrupt end when external funding dries up or when the transition from third-party management to a permanent local institution also falls apart given the lack of local capacity (see Mozlink II). Overview of recommended program design
Our proposed design for the Tanzania Supplier Development Program (TSDP) has been informed by the lessons learned and critical success factors described above and through discussion with both public and private actors in the oil and gas industry in Tanzania today. The design has the following key parameters:
. Implementing unit and approach:
The TSDP incorporates a pillar that is focused solely on supplier development. In this component
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an Enterprise Development Center (EDC) will be established to serve as both the Secretariat for the whole TSDP program and the center of expertise for SME capacity building in the oil and gas sector.
Given the importance of maintaining independence and an unbiased ability to bridge private and public interest in reading local enterprises for supply chain opportunities in oil and gas, we propose that an independent third-party contractor manage the TSDP program as a stand-alone project entity. The TSDP could be a locally registered business or special purpose vehicle (depending on tax implications and registration requirements) managed by a third party international contractor. This contractor will be responsible to establish a project implementation team of technical experts that work with the various local agencies and institutions to carry out the activities of the TSDP. Central to this design is a facilitative approach. The TSDP will not be the direct implementer of the programs but rather manage the design and execution of the program and provide the technical expertise to the local institutions doing the direct implementation. This ensures that the TSDP builds local capacity of institutions to administer the program activities and does not become the “owner” of any of the expertise/tools themselves. This helps ensure a smoother exit plan from the outset and places emphasis on building local institutional capacity (i.e. Tanzania Chamber of Commerce, Industry and Agriculture [TCCIA] to manage the supplier database) rather than replicating functions that will likely lose traction upon project close. The use of a third party as program manager helps ensure independence, transparency and efficient ring-fenced use of funds for the program only.
We believe this model responds to the lessons learned from other programs in several ways. Firstly, a third-party managed EDC will provide a level of independence from public, private and development partner influence and thereby be most neutral in effecting outcomes. Secondly, a neutral entity will also facilitate a common platform for the EDC to which support can be leveraged from both the public and private sectors. IOCs and development partners alike can coordinate and co-fund various activities led by the EDC that are in-line with their respective development priorities. Past examples have shown that this third-party arrangement is most effective in sourcing funding from various entities. Thirdly, a professional contractor can ensure the highest level of transparency in use of resources, accountability against results and neutrality in the eyes of the beneficiaries. This helps to avoid accusations of political interference by individual Ministries (should the EDC report to a particular Ministry or government entity). Finally, knowing that an exit strategy is important, having the EDC implemented by a third party allows funders to avoid entering into a funding arrangement that requires perpetual support and instead allows the EDC to be contractually managed along a timeline. Knowing the EDC’s approach is to facilitate the deployment of its services alongside local partners and build local capacity in the process, a term-contract managed EDC provides funders more control over long- term commitments for funding based on need rather than expectations.
. Timing and duration: Based on the current status of the TLNG project, we believe the TSDP should run for an initial period of 5 years with the option of extending further depending on the project life cycle (the USAID South Africa Business Linkages Project, SAIBL, ran for almost 10 years). This proposed life is longer than other supplier development programs yet it accounts for the current status of the TLNG project to date. It also suggests a more reasonable and longer-term
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commitment to supplier development in the industry. We Mtwara – the Stavanger of East Africa? Mtwara and Lindi have similar recommend this project be fully designed and initiated by the socioeconomic characteristics in so far as they are both coastal, sparsely populated beginning of 2016. This timeline will allow suppliers to begin and typically rural in their demographics and economic activities. However, Mtwara improving their capacity before the construction phase. A project has the additional characteristic of being a small but significant supply base for the extension, assuming timelines for the TLNG do not change, will current upstream exploration and appraisal activities in Tanzania’s deep water allow the TSDP to support suppliers through the point of start of acreage. It is these oil and gas activities that point to operations of the TLNG. Furthermore, this will allow the TSDP the more substantive differences between Lindi and Mtwara; namely, that Mtwara has to continue to support local enterprises in non-TLNG business the deepest natural port operating along opportunities that may evolve in the oil and gas industry. the East African coast.
Depending on the progress and FID the project can be extended to accommodate the needs of local enterprises and
the LNG project timeline.
. Funding: Resources for the TSDP should come from both public and private sectors. Development partners including
the DFID, the USAID, and the World Bank/IFC will be instrumental in providing seed funding for technical
activities as well as mobilizing initial resources to address the access to finance challenges. IOCs and other industry investors should also commit resources to demonstrate their
commitment to a more vibrant local supplier market.
. Governance: A TSDP Steering Committee should be
established to oversee the activities of the TSDP during its lifespan. The Committee should be represented by both the The Mtwara Development Corridor (MtDC) SDI Regional Economic Development public and the private sector as well as development partners and Strategy recognized the potential for Gas to Industry projects as one of its anchors. should include those making sizeable resource allocations to the The availability of Mnazi Bay gas, both as an affordable energy source (especially for program. power generation) and as a reductant in mineral beneficiation was seen as a possible catalyst for the development of a . Location: The TSDP should be based in the Mtwara region with series of energy intensive industrial projects to be developed at the proposed a branch representative office based in Dar. This will keep the Mtwara Special Economic Zone (SEZ). However, one project aspect that was not focus on enterprises most geographically in proximity to the explored in previous Mtwara corridor scenarios until recently, due to the limited TLNG while engaging the service and industrial base that is gas opportunities, is that Mtwara is ideally suited to serve both Tanzanian and strongest in Dar. Mtwara is well placed to be a critical service Mozambican off shore projects. There is evidence that the development of a service supply hub for the Rovuma Area – seen in the gray area of the supply hub in the Mtwara port, albeit in the short-term, could support the current map. Tanzania deep sea exploration processes. Mid/downstream investments may take place at various locations such as a LNG The proposed TSDP is composed of four pillars: 1) Enterprise Plant in Lindi or Mtwara, however upstream developments need regular, Development, 2) Policy and Institutional Framework, 3) Workforce almost daily servicing for every operational aspect. From food, to consumables, to Development, and 4) Access to Finance. Each of these four pillars has maintenance and storage delivery – Mtwara, with its deep natural port and associated sub-components that address critical weaknesses as identified location, is well suited to be the service supply hub for the northern Mozambican during Phase II of our work. While a robust improvement to the private upstream and southern Tanzanian sector enterprise landscape in Tanzania requires a wider set of activities, upstream operations. we have selected these three to respond most directly to the gaps identified throughout our analysis. The activities outlined below by each pillar are intended to shape the framework for the TSDP. In some cases,
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further analysis that was not completed under the previous analytical phases will be needed completed prior to final design and implementation.
Table 4: TSDP Conceptual Structure
Project Structure and Activities
Pillar 1: Enterprise Development The enterprise development pillar of the TSDP focuses on the establishment of an enterprise development center (EDC) to improve the capture of supply chain opportunities that exist and are forthcoming in the oil and gas industry in Tanzania. The pillar focuses on support to procurement, assistance to improve the competitiveness of suppliers, and facilitating industry linkages through information sharing, communication and promotion.
The establishment of an EDC located in Mtwara will be the core driver of the SME development support proposed under this program. The core functions are described as follows:
Activity 1: Establishment of an Enterprise Development Center (EDC)
The EDC will serve as the center of expertise to drive supplier development and SME capacity building related to the oil and gas sector. Given that the planned LNG project will be located in Mtwara (though the land site acquisition is still to be finalized); work with local SMEs will be most effective with the EDC located in close proximity to the large source of market demand. This follows common practice, where an EDC is located close the capital investment site in an effort to integrate closely with the ongoing activities there. Given that many local enterprises that will benefit from the services of the EDC will be located outside of Mtwara, there is also a strong case to be made to manage a satellite office in Dar (although this cost has not been factored into the estimated expenditure for this activity).
The EDC will also serve as the Secretariat and Project Management Unit to drive all the activities supported by the TSDP. As such, we recommend a core, full-time staff of five specialists to be based in the EDC. This team will be led by the CEO of the EDC/Program Team Leader and will be Page 11
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supported by technical leads that will drive the implementation of each of the four program pillars.
We envision the TSDP and EDC to be managed by a third-party contractor for several reasons. First, a third-party managed EDC will provide a level of independence from public, private and development partner influence and thereby be most neutral in effecting outcomes. Second, a neutral entity will also facilitate a common platform for the EDC to which support can be leveraged from both the public and private sectors. IOCs and development partners alike can coordinate and co-fund various activities led by the EDC that are in-line with their respective development priorities. Past examples have shown that this third-party arrangement is most effective in sourcing funding from various entities. Third, a professional contractor can ensure the highest level of transparency in use of resources, accountability against results, and neutrality in the eyes of the beneficiaries. This helps to avoid accusations of political interference by individual ministries (should the EDC report to a particular ministry or government entity). Finally, knowing that an exit strategy is important, having the EDC implemented by a third party allows funders to avoid entering into a funding arrangement that requires perpetual support and instead allows the EDC to be contractually managed along a timeline. Pursuant to the EDC’s approach of deploying of its services alongside local partners and building local capacity in the process, a term-contract managed EDC provides funders more control over long-term commitments for funding based on need rather than expectations.
Table 3: Proposed EDC Structure
Advisory/Funders Committee
CEO
Workforce Policy Technical SME/Supplier Development/skills Finance Lead Lead Development Lead Technical Lead
Activity 2: Procurement Support
A general constraint across all sectors in Tanzania is the asymmetry of information that raises transaction costs and reduces the efficiency with which projects are originated, resourced, and assessed in terms of risk. During Phase II, the IOCs and large suppliers bemoaned the weakness of general data collection agencies that are not dedicated to the oil and gas sector but should be provided an appropriate combination of financial and technical support to conduct similar database validation. For example, the SPX databases, while well-funded by UNIDO, are considered by industry experts to
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be unreliable and verification of information is weak. Support is needed to strengthen SPX’s database management through accurate data entry, profile validation (accreditations etc.) and routine ‘zero tolerance’ audit of firms’ information. A reliable local supplier portal where purchasers can access a directory of local suppliers, gather information on individual supplier performance and reputation, and post procurement notices is an effective way of increase business-to-business activity with local firms.
The TCCIA currently manages the UNIDO-supported SPX database. However, this is unreliable and information on local suppliers is not subject to strict quality review and auditing. Technical support to remodel this database to be a more robust portal - providing resources to thoroughly screen suppliers listed on the SPX database against industry standards, and developing a reliability and customer satisfaction rating system for local suppliers - will improve its functionality. Providing training to local business service providers will also help develop a local market for service firms that can perform an evaluation of local suppliers, help them improve their processes, and enhance their ability to qualify to register on the portal. This could include harmonizing with ongoing (not-confirmed) support to developing a local supplier database led by the IOCs.
Procurement assistance to local enterprises - Procurement trainings, guidebooks, model tenders and contracts, schedules of industry-by-industry standards (including HSE) must all be developed for dissemination to local enterprises. These items will aid in overcoming the information barrier of local firms who do not have any experience or understanding in how to engage in the oil and gas market. They can be customized by core industry as well as tailored for various size enterprises and they should be accompanied by routine scheduled training sessions where local enterprises learn how to do business according to the international standards required by IOCs and EPCs. Many of these guides can be developed in conjunction with the TCCIA (or Tanzania Investment Centre [TIC]) so that local staff can be part of the development process and become the “owners” of this material for future use.
Procurement strategy to anchor companies - During Phase II two key aspects of the potential for localization of goods and services became apparent. First, most investors have poor perceptions of the capability of local firms to deliver goods and services which thereby acts as a disincentive to sourcing from local firms. Second, anchor IOCs have yet to develop local sourcing action plans that can be instrumental in allocating certain aspects of the supply chain aside for local enterprises. An early execution effort, building off the Phase I and II analyses, would assist in preparing the IOCs to engage with local enterprises in specific supply chain activities. TSDP analysts will work with IOCs and EPCs to design procurement strategies aimed at distinguishing particular areas for maximizing local content, identifying local firms that do (or could possibly) qualify to subcontract to the IOCs/EPCCs. These designs will stem off the analytical work completed in Phases I and II as well as whatever additional work is necessary. These designs will look to identify procurement strategies differentiated by short and medium-term local supplier goals thereby acknowledging those industries that are ready and those that will require greater capacity improvements.
Activity 3: SME Technical Assistance
Local enterprises often lack the technical wherewithal to provide the level of quality of goods and services required in the oil and gas industry. To address these needs a technical assistance facility will be established whereby technical experts will be available to assess, strategize, coach, and mentor Page 13
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local enterprises and business managers in key areas; such as business management, technical and product delivery, contract delivery, and schedule management. This facility will provide the resources for the various technical experts, as well as teams of roving coaches, industry specific trainings, short- term consulting for proposal training, HR systems trainings and advisory services, HSE plan review and revisions, and related activities. It can also be used to help local enterprises source investment capital both domestically and internationally.9
Activity 4: Communication, information dissemination and promotion
To date, the Tanzanian private sector has not benefited from any clear communication regarding opportunities related to future investments in oil and gas. Instead, public news outfits raise expectations by writing of mega size volumes of business to be procured locally (without good evidence to do so) and ongoing IOC activity in country also raises the perception that great opportunity abounds (as people associate these companies with lots of money and investment).
The result of both limited available information to the local private sector, and a lack of understanding of potential opportunities linked to oil and gas investments, is a very low awareness and high expectations amongst the local population and local enterprises. For example, anecdotal evidence indicates that a recent unofficial survey found that 3 in 10 people ‘on the street’ believe that gas from the deep water discoveries is already flowing to Dar es Salaam due to the presence of the recently completed pipeline. As such, the EDC must engage in communications that link the local private sector with new opportunities in order to better prepare them to take advantage of forthcoming opportunities as well as help mitigate the inflated level of public expectations that are unreasonable and ubiquitous.
A critical element of the communication strategy will be to hold industry focused events where informed presentations of facts can be delivered and industry experts and expectant local service providers can engage to understand the future of the oil and gas sector. Participants can share how demand for goods and services will become manifest in the future and what local providers need to do to capture some of this demand. The series of “Local Content Roundtable Dinner” events supported by the World Bank, in collaboration with the Tanzania Private Sector Foundation (TPSF), the Uongozi Institute and Revenue Watch, are a good example of how information and insights can be shared to raise the level of awareness and build a pragmatic expectation of what benefits may be leveraged from the TLNG development project.
In partnership with TIC, the TSDP will host business linkages events such as business fairs that bring together local suppliers with large purchasers such as IOCs and EPCs to foster business exchange. Likewise, the TSDP will host investment promotion events oriented at joint-ventures; procurement briefing sessions from IOCs and EPCs where they can discuss procurement opportunities in the pipeline, and local content exhibitions. Planned routine public consultations or business fairs around local contracting opportunities could also be created and linked to the supplier development database portal that exists.
Finally, the general and increasingly accepted “lower for longer” oil price scenario is also being blamed for the deceleration in the oil and gas sector in east Africa. This is especially relevant
9 Examples of such include Norfund and GroFin. Page 14
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considering that most Tanzanian gas is earmarked for the Asian markets where gas prices are oil indexed and responding directly to oil price fluctuations.
Pillar 2: Policy and Institutional Framework During the Phase II interviews and focus groups, one of the most reiterated policy concerns was the lack of an official Local Content Policy (LCP). Most local suppliers felt that until the IOCs are obliged to make commitments (whatever they might be), they will continue to engage with local suppliers on an ad hoc and least-cost basis to supplier development.10 However local content policy outcomes in other countries point to the need to enable the LCP execution with a variety of other policy/regulatory framework interventions (new or revisions) that endeavor to strengthen the enabling environment for a successful execution of the LCP; including, inter alia, revisions/refinements in the regulatory frameworks relating to human resource development, access to finance, goods certification, and business accreditation. While various organizations and policies already in place in Tanzania were created with the intention to promote industry growth among construction firms, the policy environment remains weak.11 There is no apparent harmonization between the existing organizations and policies, leaving local registration criteria insufficient or inconsistent with industry-driven accreditation standards. The policy and enabling environment pillar of the TSDP aims to support the policies and institutions that are integral in stimulating the competitiveness of the local market. The pillar focuses on support to policy reform, National Quality Infrastructure Institutions and associated service providers, and training institutions.
Sub-component 1: Policy Reform Support
Support to policy reform will help to shape the incentives that drive both public and private sector behavior and will define the relationship between these two groups.
Activity 1: Finalization and publication of the Local Content Policy (LCP)12
As mentioned earlier, most local suppliers believe that in the absence of a LCP that makes local content and supplier development obligatory there will be little incentive to the IOCs to proactively identify and support local suppliers. The finalization and publication of the LCP, currently in draft form, is a top priority of the TSDP, as it will outline the regulatory framework for the midstream and downstream sectors and will likely form the basis of a future Natural Gas Act. The policy must effectively balance domestic interests while providing transparent regulations for a business-enabling environment. Informed by the engagements with both the public and private sectors during the field- work period, a number of trending themes became apparent; namely, the policy is expected to:
i. Establish the regulatory framework under which investors will be obligated to identify and source local firms to supply goods and services;
10 In recent interviews, the local suppliers voiced more direct opinions indicating that the current engagement by the IOCs is focused more on proving there is no capacity locally than trying to elucidate the potential for awarding goods and services contracts to local suppliers and determine what interventions are required to strengthen the local business environment for increasing the potential for subcontracting local firms. Most felt that the LCP would oblige IOCs to be more ‘positive’ in their approach and foster a behavioural shift toward becoming more focused on identifying local firms for development rather than discounting them. 11 According to the World Bank 2014 ratings, Tanzania has dropped by 9 points to 145 out of 189 countries in its ease of doing business index since 2013 with the most significant areas being issues relating to issuing of construction permits and registering of land for specific usage. 12 At the time of writing there were rumours that the LCP had been approved and signed off by the parliament, but a publicly available copy was not available. Page 15
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ii. Provide a development plan as to how identified local suppliers will be supported to develop their competency and thereby increase their opportunity to compete for subcontracts; iii. Direct the implementation strategies for promoting and developing the local workforce; and iv. Prescribe the definition of ‘local’ in terms of local content targets monitoring.
In the absence of this regulatory framework, local suppliers do not believe they will be able to penetrate the exclusivity of the contracts that are awarded by the IOCs. The key issue for investors is that the policies adopted may include unreasonable expectations that will be impossible to meet under the current economic conditions. Lack of clarity of existing policies and uneven enforcement reinforces a negative perception of the Tanzanian regulatory environment. While the relevant authorities have indicated the draft policy is being finalized, the current lack of significant local content legislation and inconsistency of existing policies lead to great uncertainty in the marketplace. It is critical that policy gaps are addressed to manage expectations of public and private stakeholders.
Activity 2: Technical assistance to the Host Government Agreement (HGA) team from the Tanzania Government13
After extensive consultation with the key oil and gas investors in Tanzania and numerous industry and development specialists during Phase II, in the absence of key elements of the regulatory framework in Activity 1 above the IOCs are promoting the negotiation of a Host Government Agreement (HGA) to expedite the Tanzania LNG project. The HGA will be designed to capture the regulatory fundamentals that will provide certainty for their multibillion-dollar investments as binding elements of the impending regulatory framework. The challenge for the Government of Tanzania is that this process is not simply a commercial or project-specific contract, but rather a pre-emptive regulatory framework agreed outside the gambit of the policy process and expected to apply to the gas sector for the next 20-30 years. This type of agreement typically contains regulatory elements of fiscal, commercial, land, pricing, health and safety standards, labor and third party access principles that may undermine a country’s sovereignty, market competitiveness, and workers’ rights in an effort to reduce risk, and provide long term certainty for the projects. If the Government of Tanzania agrees to unfavorable terms, it may be difficult to correct long term unintended consequences created by an HGA with a 30-year expiry.
Should the Tanzanian government decide to negotiate a HGA it will require significant technical support from the donor community to ensure that the negotiations are balanced and fair and result in a sustainable regulatory framework that has a low risk of being challenged in the following decades.14 The Tanzanian government would be best prepared by the appointment of an adequately resourced
13 The fundamental principle to be applied in negotiating any HGA is that it is second priority. First priority is to put a transparent policy/regulatory framework in place that effectively negates the need for an HGA. In the event that an HGA is sought, then the government should always balance the value of the risk mitigated for the investor against the value risk transferred to the government. The risk transfer to the host government is effected by such mechanisms as the long term expiry of the HGA, or the clauses related to long-term country risk such as stabilisation clauses and deference to Bilateral Investment Treaties (BITs), where the terms of these clauses/treaties can be used to undermine a country’s sovereignty with no recourse to Tanzanian Courts. The government may offset a very low short-to-medium term risk effected by a long term HGA expiry with review clauses at ten year periods to enable a ‘rebalance of the risk’ where unintended consequences and subsequent market distortions need to be corrected. 14 From an SDP perspective this could relate to the HGA not prescribing UK standards for the LNG electrical works which would exclude all Tanzanian electricians as they are certified against UK standards Leaving the decision to investors who choose US standards will drastically reduce the potential for local capture of goods and value added. This may seem unlikely, however considering the LNG facility is expected to generate its own power from the gas available. Power will be therefore ring-fenced and not connected to the grid. This eventuality is not so farfetched. Page 16
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negotiating team with the correct balance of technical, regulatory and legal expertise.
Activity 3: Technical assistance and capacity building to the government to develop policy framework and investment guidelines to support the establishment of a Special Economic Zone and an Agricultural Processing Zone in Mtwara
An Agricultural Processing Zone (APZ) could be established anywhere with a reliable agricultural supply chain, however the Mtwara port is part of a ‘waterfront’ special economic zone or a SEZ in the IIDS 201115 (see map below). The latest indications are that an export processing zone with free port status will be established – it is believed that the designation of the Mtwara Oil and Gas FreePort Zone (MFPZ) has already been concluded. The SEZ already has earmarked 10 hectares of a total 110 hectares of the Mtwara port area as the Mtwara Oil and Gas FreePort Zone. The purpose is to enable producers to minimize the regulatory constraints to exporting manufactured goods and help them provide services into the international markets with minimal red tape in relation to customs and related processes – i.e. increase the ease of doing business in Tanzania. Consequently, an agroprocessing zone located in the MFPZ is the enabler that would provide an Agricultural Processing Zone (APZ) in the broader Mtwara SEZ with a competitive advantage. Any manufacturing business that exhibits economies of scale such as agro processing would likely need seamless access to international markets to be sustainable due to the small domestic market. That is why the Mtwara port would be a good location.
The APZ on the other hand would require support to develop the entire value chain from farmer to market. In the beginning the APZ may well process imported agricultural produce to supplement primary produce not available in large enough quantities. At least until the supply chains are developed and the local farmers are producing enough produce at acceptable standards to become suppliers of choice to the APZ and security of supply to the PAZ. The significance of the APZ is threefold:
a) Provide a critical boost to local farmers and leverage the availability of local produce and in so doing provide local markets (such as hotels and restaurants etc.) with desperately needed agro-processed goods. The local economic development potential of leveraging the agricultural sector in the Mtwara Lindi regions is also intrinsically aligned with the core sectors being promoted in the IIDS (2011); namely, agriculture, logistics and natural resources – see Appendix 1. b) The nascent oil and gas sector both in Tanzania and Mozambique will need a sophisticated and reliable service supply base and recently the Mtwara Freeport Zone's operator, the Export Processing Zones Authority (EPZA), signed tenancy deals with US-based Schlumberger Seaco,
15 Integrated Industrial Development Strategy (IIDS) with a horizon of 2025 – published in December 2011 Page 17
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the Singapore based Altus Oilfield Services, and the drillship fleet operator Transocean, amongst others. Hyundai also signed a MOU to develop a fabrication hub in the MFPZ. The service supply base will need, amongst other things, catering supplies for the offshore and onshore development and operations phases. Mtwara, with its deep water port and established harbor facilities, is well situated to be the supplier of choice of agricultural produce to the Tanzania/ Mozambique oil and gas upstream facilities. c) Provide the manufacturers in the SEZ with a ready market both regionally and globally; especially considering some of the bilateral trade agreements that Tanzania already has in place that include agricultural produce. It is not uncommon to see Kenyan processed agricultural produce on the shelves of supermarkets in South Africa. They could just as well be Tanzanian! This ‘ease of access’ to international markets will enable investors to scale up to plans that otherwise might have been constrained as limited to the small Tanzanian domestic market.
Sub-component 2: Support for National Quality Infrastructure Institutions and Service Providers
Local companies will be required to provide evidence that their products and services meet the requirements set forth, both by Tanzanian regulations and stringent contractual standards, specific to oil and gas projects. NQI institutions and service providers perform critical functions in contributing to a business enabling environment by establishing and implementing standardization that is in harmony with the local and regulatory framework and providing accreditation and assessment services to the market. The NQI institutions also play a role in providing legitimacy to local standards, accreditation, and certification. If the standards requirements for registration are enforced transparently and with regularity this, in turn, provides legitimacy to the institution and its functions. This report proposes three strategic interventions to strengthen the NQI, both in preparation for the LNG project and also to the benefit of the system as a whole.
Activity 1: Capacity building and infrastructure strengthening program for the Contractors Registration Board (CRB) to improve the accreditation of contractors
The CRB registers and regulates the activities of local and foreign contractors working in the construction industry. It provides a baseline of standard requirements for companies operating in Tanzania but the criteria for registration is weak in comparison to the requirements for Oil and Gas sector contractors. In the current market the low-level, formal accreditation and related compliance process is driven by the reality that most clients do not demand any form of advanced accreditation. The CRB currently lacks the systems, accreditation experience, and capacity to render a service that meets the expectations of global investors in O&G. Therefore, companies may seek options to accredit firms outside of the CRB environment. However, the CRB is a statutory body and will have to be involved in any efforts to improve the readiness of contractors for the LNG project.
Technical support should be provided to the CRB first to improve the enforcement of regulations and strengthen market perception of the legitimacy of contractor registration. If the capacity of the CRB can be increased sufficiently there may be an opportunity to expand the function of the CRB to include contractor accreditation. However, in terms of sequencing support, the expanded role must be based on established standards. At present, the TLNG consortium has not yet published its intended standards, though IOCs have indicated that they will abide by those standards that are aligned with
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the Tanzanian Bureau of Standards. A practical example of how this support can be affected and informed by the general characteristics of the construction sector could be to assist in developing a specialist contractors’ type that has requirements for registration that will generate a limited but reliable database of contractors. Such minimum requirements for registration could be an ISO 9000 accreditation or similar accreditation and the capacity building to enable the CRB to employ registration administrators that have the expertise to enforce such requirements in terms of auditing contractors on a rigorous 6 to 12 month basis.
Activity 2: Implement a capacity building program for the Tanzanian Bureau of Standards (TBS) to implement the transition to a blanket application of ISO standards
The TBS has indicated that it intends transition existing standards to align with ISO standards. The IOCs have indicated support for this as they believe their standards will be easily integrated into an ISO-accredited environment. During consultations with the TBS they indicated that they would expect to be involved in the application of standards related to the LNG project and would expect to be involved in the compliance with the standards but acknowledged that with limited resources their capacity will be stretched.
A recent World Bank study found that internationally accepted accreditation of conformity service providers in Tanzania is absolutely essential for inspection and test reports as well as certificates provided by Tanzanian service providers accepted abroad. Failure to provide for such accreditation services means that none will be acceptable, and manufacturers and exporters will have to have products re-inspected, re-tested and recertified (adding costs and time delays) rendering them totally uncompetitive in the market place.
The same study asserted that accreditation is no longer negotiable. In almost all countries it is the basis for the independent verification of the technical competency of conformity assessment service providers, especially in the realm of technical regulations. Tanzania can carry on utilizing the SADC Accreditation Service (SADCAS) subject to it gaining international recognition, but the cost to the country in foreign exchange will be high.
On the other hand, if the SADCAS does not gain international recognition soon, Tanzania will have a problem of immense proportions: very little of the testing and certification done by SADCAS accredited organizations will be accepted abroad and definitely not by the LNG plant. The cost to industry of re-testing and re-certification of products abroad will be immense and render them totally uncompetitive. Establishing a Tanzanian national accreditation body is a viable possibility as Tanzania has more than 200 laboratories and certification bodies that could potentially be accredited but this will be a long term solution requiring in excess of up to 5-10 years to implement.
Currently, in the short term, the local service providers complain that the multinational compliance and testing firms based in Tanzania are unaffordable which provides impetus to establishing a local accredited conformity assessment16 entity that can provide accessible services aligned to the needs of suppliers of goods and services to the TLNG development project. Additional analysis should be
16 Conformity assessment is the generic terminology for inspection, testing and certification. Two of the main providers of conformity assessment services in Tanzania were considered as representative of the Tanzanian system. They are the Tanzania Bureau of Standards (TBS) and the Tanzania Food and Drug Agency (TFDA). Page 19
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conducted to determine the feasibility of such entity when standards have been established.
Activity 3: Establish a Non Destructive Testing (NDT) center in Tanzania
Non Destructive Testing (NDT) plays an important role in evaluating structural and mechanical components utilized during construction without damaging the object or material. EPC contractors will require that materials installed on site be inspected in this manner, providing a market opportunity for firms that employ NDT technology. Currently, there are no local firms that provide NDT services, however there are a number of international firms operating in Tanzania (such as SGS and Bureau Veritas Tanzania). These international firms are perceived to be prohibitively expensive and many local firms reported that they import certification/accreditation experts. In many instances goods imported from manufacturers are certified via expensive pre-inspection.
There is a market opportunity for a local firm to provide these services, however IOCs indicated that they would be in control of their own testing on site. The TBS has a statutory mandate to manage the NQI and therefore must be involved in decisions behind the implementation, application, execution and enforcement of the NQI with regard to the LNG Project. In this regard, additional analysis should be conducted regarding the possibility of establishing a portable, state-subsidized, NDT laboratory. This laboratory could be used to leverage improved standards at affordable rates that will prompt a behavioral change with regard to conformity testing in the Tanzanian construction and related sectors.
Pillar 3: Workforce Development
Support for Skills Strengthening
There is a critical shortage of skilled and practically-trained labor in the Tanzanian market. Contractors indicated that students leaving the Vocational Educational and Training Authority (VETA) centers and Technical Institutes (TIs) still lack basic practical skills as the VETAs and TIs generally have limited equipment and students are not exposed to on-the-job training. Targeted programs to improve the skills and certifications of local workers can help both local firms and EPC contractors to seek local talent. The employment impact depends critically on the demonstrated (and certified) skills of the local workforce.
The Phase II analysis indicates that between 10,000 and 15,000 people (including both expats and locals) could likely be employed by the TLNG project at peak construction, of which around 11,000 are concentrated in the top 11 industries analyzed in depth. However other experts suggested that the number of people working in the project at peak could exceed 20,000 depending on the execution strategy of the TLNG consortium – insofar as the accommodation of labor at the site, the recruitment policy and distribution of recruitment centers in Tanzania etc. allows. The Phase II assessment also points to significant semi/un-skilled labor demand with key industries being civil engineering and general construction related – building and camp construction, site preparation, concrete works and roads and landing strips. In particular, firms and various focus groups indicated that a specific challenge is sourcing practically trained technicians with hand-on experience.
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Based on the assessments, subjective inputs from the local suppliers, and studies of other projects such as the Papua New Guinea (PNG) LNG17 project, it is estimated that between 5,000 and 10,000 people could be trained for a variety of operational roles. Such training demand could be met by a training center established by the IOCs and established Technical Institutes/VETAs (with related upgrades of the curricula). A recent NORAD study18 found that in most of the core skills areas19 qualified people are currently in short supply in Tanzania and with current levels of training labor supply will not meet half the expected demand as indicated in the table below – a situation that was affirmed during the company interviews regarding skills availability.
The timelines for training needs are roughly assessed within the time frame of the expected TLNG Consortium’s FID in 201920:
RED = current skills shortage and will not be addressed with current training levels ORANGE = shortage of skills with O&G expertise but could be addressed with current training levels GREEN = current levels are sufficient but may need basic up-skilling to prepare specifically for O&G demand.
The NORAD report estimates that less than 200 graduates (mainly in engineering), just over 100 technicians, and almost 300 artisans trained through the VETAs, will be available in time for the FID. The same report estimates the demand for engineers to be in the range 400 – 500 whilst technical skills demand21 is expected to exceed 4,000 jobs – whilst the phase II informal feedback from both local firms and IOCs suggest that the demand for unskilled labor could be more limited. The above table points to the need for a wide range of curricula to prepare the Tanzanian workforce for opportunities for employment with the TLNG development project.
17 The PNG LNG story - the PNG LNG Project at www.santos.com/library/The_PNG_LNG_story.pdf 18 Mapping and analysis of the needs for petroleum related education in Tanzania FINAL REPORT 11 December 2013 19 Construction Skills Queensland CSG/LNG Industry Construction WORKFORCE PLAN, 2010 20 BG announcement regarding delays in the project development to stakeholders at BG offices, Tanzania on the Thursday, 21 May 2015. 21 Artisan and technical skills include: Carpentry and Joinery, Electrical Installation, Food Production, Motor Vehicle Mechanics, Plumbing, Welding and Fabrication, Mechanical engineering top-ups, Electrical maintenance-top ups, Welding top-ups, Painting top-ups, Welding, and Industrial painting. Page 21
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Activity 1: Establish a practical training center (PTC), possibly through a Public Private Partnership (PPP)
The current training environment does not prepare graduates practically, and even if the skill sets above are addressed in revised curricula many graduates will still lack practical experience and consequently remain less employable in the LNG project environment. The proposed PTC would bridge the practical training gap between the existing Vocational and Educational Training Centers (VTECs) and employment. Students would be drawn from the VETAs and TIs and would primarily receive practical training on equipment relevant to the broader contractors’ work areas including: mechanical engineering, civil engineering and general building courses. Alternatively, contractors could send potential employees on refresher courses or up-skilling courses. The emphasis would be on practical training to develop or strengthen skills and mentoring. The private sector would contribute to both the PTC’s start-up funding and management funding and a third-party private company could be awarded the rights to run and operate the center. As part of the concept for the PPP the government would need to ring fence some of its skills levy as its capital contribution to the PTC, and subsequent shareholding in the PPP, while the private sector would invest as shareholders in the PPP.
There is some debate as to whether this should be a PPP or purely private sector initiative as larger investors are not in favor of a PPP where conflicting interests could derail the implementation. For this reason, the structure of the PTC should undergo a thorough assessment of concept. A PPP approach would bring commercial viability to the center, introduce good business practices and sustainability (something often lost with publicly-operated training centers) and continue to adjust to the market needs in order to earn revenue. A steering board would be established that would provide guidance on the strategic direction of the curricula enough to ensure relevance for the stakeholders while an executive commission would be accountable for the day-to-day operations, including implementing courses, regulatory compliance, and sourcing of qualified trainers and mentors. As the PTC becomes a more established and recognized center of excellence it would be able to implement a fee-for-service to ‘non shareholders’ to become the recognized certification agency for the various sectors and skillsets. The PTC would then also maintain a database of certified artisans that could then be accessed by shareholders for free, or by ‘nonmembers’ for a fee, to source labor with the knowledge that, upon finding the relevant skilled artisan or operator, that person is certified by a trustworthy PTC. The more efficient sourcing of certified labor also reduces the tracing costs when preparing to execute a project.
In the final analysis, contractors have faith in the students exiting the PTC; student have faith in the certification as increasing their employability; the government has comfort that its skills levy is being well spent as it is represented on the board; and the private sector achieves an overall increase in the skills level. Also, a greater number of artisans reduce the risk of labor inflation and offers the possibility of retaining artisans earlier since there is less ‘labor churn’ due to contractors chasing a few certified artisans and poaching from each other on a project-by-project basis.
As most of the technical skills are expected to be direct jobs related to the construction phase of the project, the PTC will be best located in the environs of Mtwara as most of the demand will be derived Page 22
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from demand in Mtwara for the upstream development over the longer term, not ignoring the potential for additional demand from the Mozambican upstream.
Activity 2: Technical assistance for TVET curriculum reform
Building off the skill gaps that we identified in the Phase II industry gap studies, focused support to strengthening the technical vocation and education institutions in Tanzania is a critical part of the SDP as it covers the strengthening of the workforce component of local content. Previous studies including those completed by NORAD and VSO (with BG) have highlighted in detail the weaknesses in both the education system as well as the VETA provision. While there are numerous areas of support, technical assistance to the Tanzanian VETA to upgrade and improve its curriculum focused on key skill areas related to the industries in Phase II as a critical priority. Specifically, technical assistance to upgrade the existing curriculum, integrate oil and gas HSE standards into the teaching protocol, and develop more market-oriented training programs is needed. To prepare for oil and gas investment, technical assistance is recommended in the following core areas:
• Pipe fitting and sheet metal working (including specialized welding and pipe fitting and coating) • Scaffolding assembly, disassembly, inventory management, and repair • Heavy equipment operation and repair • General professionalism and worksite behavior training • HSE inspections, reviews, monitoring and reporting.
Support should be given not only at the policy level to VETA but also in rolling out the revised curriculum in select VETA institutions. This hands-on mentorship and coaching of VETA professionals will aid in making effective the written curriculum. Such assistance can also be matched by in-kind donations from IOCs for the proper training materials, as well as mentorship and apprenticeship programs at the LNG worksite itself, as a means to reinforce the classroom teaching and leverage other resources.
Technical support should target the VETA TVET centers in the Lindi/Mtwara given their proximity to the proposed EDC in Mtwara and the LNG project. Certainly with greater levels of resources more VETA institutions can be supported with technical assistance.
Activity 3: Training of trainers program
One of the perceived weaknesses within the labor force is a lack of accredited inspectors; certifiers and instructors to lead accredited courses such as welding that are recognized internationally and by international EPCs and IOCs. Complementing the support to the curriculum reform and training for VETA, a “training of the trainers/accreditors” program should be created in Tanzania. An initiative of this type that invests in the workforce at a more senior technical level through focused training programs would link strongly with the support to NQI in Pillar 1. This “training of trainers” is meant to build a cadre of Tanzanian accredited professionals who can serve as service providers with the proper credentials to ensure that quality of services and certifications adhere to internationally recognized standards. The program could consist of an exchange program where candidates are sent abroad to be trained and certified (like the various levels of the American Welding Society’s Welding Inspector program) or it could facilitate bringing specialists to Tanzania to train and certify candidates
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locally. Both options must be accompanied by support services to these newly certified professionals to deploy their skills in local VETA institutions as teachers, and for local businesses as inspectors.
Like Activity 2, this activity should have strong links into the ongoing VSO program as well as the DFID/GIZ Skills for Oil and Gas Africa Initiative.
Pillar 4: Access to Finance The finance pillar of the TSDP will help ease the constraints of accessing investment capital for local enterprises to expand and improve their operations to meet oil and gas industry needs. While the Phase I and Phase II analyses did not address in any depth the barriers to finance, it did highlight the importance of facilitating local companies to overcome strict collateral requirements and high interest rates in order to borrow money. As such, this pillar is divided into two sub-components: technical assistance and a lending facility.
Activity 1: Financial technical assistance
Activities covered under this area will include providing technical assistance to local banks to develop tailored financial products that are in line with the needs of local enterprises and the oil and gas sector. In particular support can be deployed to explore ways to allow local banks to open up short-term windows for cash management, such as committed, revolving, or uncommitted lines of credit. Technical resources should also be used to conduct feasibility designs for a supplier-oriented lending facility. One particular policy constraint that was explicitly raised in the course of the team’s firm-level interviews was the issue around the Single Borrower Limit (SBL). This relates to the inability of financial institutions to lend more than 5% of its core capital to an individual enterprise on an unsecured basis (it ranges from 10-25% depending on level of secured collateral according to the 2008 Regulations). While this has good place in protecting the exposure of individual banks to the business risk of one firm it also does not account for the unusually large number and size of loans required by local enterprises to invest in their businesses in order to qualify for larger oil and gas sub- contracts. A review of this in conjunction with exploring credit guarantee schemes may be most appropriate in determining the best way forward.
Finally, financial technical assistance can be deployed specifically to help local enterprises with the process of securing investment capital, including: support to business plans, financial modeling, cash flow statements, and working capital management skills.
Activity 2: Lending facility
Local enterprises seeking to build their capacity and enter the oil and gas supply chain confront several finance-related constraints. Most do not have a substantial, or well-documented, history of operations from which to build creditworthiness and borrow from local banks to invest in new equipment or facilities. Likewise, those enterprises that do have enough credit history also lack the cash for financing purchases and/or investments in technology and their labor force. Any borrowing compromises their working capital by making current liabilities far outstrip current assets. This is worsened by the cyclical nature of contract payment schedules typical of oil and gas EPC sub- contracting. This highlights two main constraints. Firstly, having enough working capital to fund
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Tanzania LNG Industry Study: Phase III
short-term operations often limits the ability of local enterprises to bid, manage and deliver on contracts. Secondly, aside from the very high rates of interest available to local enterprises (where they qualify), most firms do not have a substantial and steady stream of current cash flow to pay commitments on debt.
The proposed lending facility could take three potential forms:
i) One option is to establish a leasing facility that is available for local enterprises in collaboration with dealers/suppliers of equipment. Here it is necessary to review the 2008 Tanzanian Financial Leasing Act to be clear on the rules and regulations surrounding contractual obligations of suppliers, lessees and lessors, including the due diligence that must be taken on goods that suppliers provide to lessees and the general protection of lessees from defective goods.
ii) A second option would be to open a credit guarantee facility. The purpose of this would be to de- risk business loans made from local commercial banks to qualified local enterprises. The guarantee would be provided against a fee (covered by either the borrower, or the lender, or both). In the case of borrower default the lender is still able to proceed with payment collections owed and share the proceeds with the guarantor. Such credit facilities allow for the partial transfer of payment risk away from the lender in countries or sectors where the market is nascent and lacks a robust market of creditworthy enterprises.
iii) A third option would be to establish a credit line. The credit line could have a wholesale, retail or a hybrid structure (the exact structure to be determined during the preparation stage, based on the discussions with the government and financial institutions), with the participating financial institutions (PFIs) providing sub-loans to beneficiaries both for new investment and working capital finance. The maturity for working capital could be up to 4 years, and up to 8 years for investment capital. Grace period, interest rates, principal, amortization and interest payment schedules for sub-loans will be freely determined by the PFIs. Assuming the credit line would be to support SMEs, the sub-loan amounts could be subject to a ceiling to ensure that large enterprises cannot benefit from it. Also, there could be a limit on the amount of sub-loans provided to any one final borrower or group of connected borrowers. Based on other programs, the total cost of the credit line could be between US$50-100 million given the large needs of suppliers in the gas sector.
Further analysis and design is required to determine the best fit-for-purpose design of a finance- related facility that can address these issues. It must be specifically oriented towards making investment capital available for local firms looking to grown into oil and gas supply chains22. Conclusion
This proposed Supplier Development Program framework requires additional consultations with the Government of Tanzania and the private sector, specifically the IOCs, in order to refine the points of leverage and build cross-sector consensus for the program. Together, facilitated workshops should focus on the following themes: (i) SDP activities to be supported, (ii) roles and responsibilities of select partner
22 We have included an illustrative figure of US$10mn for this facility. However, DAI acknowledges that further analysis is needed to confirm the optimal amount of resources required. Page 25
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institutions, (iii) resource mobilization and funding commitments, and (iv) governance. By engaging with partners along these thematic areas before a final design is selected by any lead partner (be it the World Bank, the DFID, the GOT or a particular IOC) it will maximize the probability of sourcing funding from multiple entities.
While the precise timing of the planned LNG project in Tanzania is still uncertain (given outstanding issues regarding land acquisition, the depressed global oil price regime, and the forthcoming election) the planning and launch of the SDP should proceed. Current delays to the LNG project could benefit the local market by giving companies greater lead times to build their capacity and prepare for new opportunities. Our model developed in Phase I and II shows how early support can result in significant increases in amounts of local capture, and thus local content, to Tanzanian businesses.
The World Bank Group is well situated to work alongside the Government of Tanzania to drive the formation of the SDP. Given its focus on economic development and capacity to support development programming, the Bank should consider using the analysis from Phase I and II and the resulting program design from Phase III to co-design with the government a lending program to address these constraints and help ready the market for the forthcoming foreign direct investment in oil and gas. Fast action is critical knowing that once FID is reached the project will proceed quickly. Coordinated action will also send very strong signs to the Tanzanian market that the Government, alongside its development partners and key private sector investors, is committed to harnessing its natural resources for the ultimate long- term benefit of its citizenry.
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Appendix 1: Project Structure Summary Key Estimated Supplier Development Program Design Timing* Duration Location Stakeholders Project Cost
Activity 1: Completion Mtwara* 1 year TPDC, IOCs, GoT, $4,100,000 Establishment of an EDC by end 2016
Activity 2: Full project TCCIA, TIC, IOCs, Mtwara and 5 years $2,750,000 Procurement Support lifespan and EPCCs Dar es Salaam
Relevant ministries, local business associations, Activity 3: Full project Mtwara and Pillar 1: 5 years business $2,750,000 SME technical assistance lifespan Dar es Salaam Enterprise development service Development providers, TVET institutions
Relevant ministries, local business Activity 4: associations, Full project Mtwara and Communication, information dissemination and 5 years business $1,700,000 lifespan Dar es Salaam promotion development service providers, TVET institutions
Activity 1: Finalization and Completion publication of the Local 6 months TSDP, GoT Dar es Salaam $450,000 by mid-2016 Content Policy (LCP) and drafting of Regulations
Activity 2: TA should Sub-component Technical assistance to continue until Pillar 2: 1: undetermined GoT Dar es Salaam $600,000 the HGA team from the the HGA is Policy and Policy Reform and Tanzanian Government signed Institutional Institutional Framework Framework Activity 3: Support Technical assistance and capacity building to the government to develop Completion EPZA, TIC, MIT, Dar es Salaam 1 year $850,000 policy framework and by end 2016 POPC and Mtwara investment guidelines to support the establishment of an EPZ and an APZ
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Activity 4: Capacity building and Completion infrastructure 2 years CRB, MOW Dar es Salaam $775,000 by end 2017 strengthening program for Sub-component the CRB 2: Activity 5: Support for NQI Implement a capacity Completion Institutions and 3 years TBS, MIT Dar es Salaam $1,650,000 building program for the by end 2018 Service Providers TBS
Activity 6: Completion Establish an accredited 3 years TBS, IOCs, MIT Dar es Salaam $1,850,000 by end 2018 NDT center in Tanzania
Activity 1: Completion VTECs, TIs, MoEVT, 2 years Mtwara $2,350,000 Establish a PTC through a PPP by end 2017 and IOCs
Ongoing but 1 year for majority of Pillar 3: Activity 2: should be VTECs, TIs, MoEVT, work with ongoing Dar es Salaam $650,000 Technical assistance for TVET curriculum reform implemented and IOCs Workforce support as needed Development by end 2016 Ongoing but 2 years for majority of Activity 3: should be VTECs, TIs, MoEVT, work with ongoing Mtwara $3,250,000 Training of trainers program implemented and IOCs support as needed by end 2017
Ministry of Finance, Activity 1: Full project local enterprises, Estimated 5 years Dar es Salaam $2,750,000 Financial technical assistance lifespan local commercial Pillar 4: banks Access to $1,050,000 & Ministry of Finance, Finance Activity 2: Completion $10,000,000 Estimated 2 years Central Bank, local Dar es Salaam Lending Facility by 2017 Lending banks Capitalization
Total Estimated Project Cost $37,525,00023
23 Not including the cost of the potential Credit Line (US$50-100 mn). Page 28
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Appendix 2: Mtwara Development Corridor and TSDP Synergies
The Mtwara Development Corridor’s (MtDC’s) planning area includes the Northern Region, parts of the Central Region of Malawi, the northern areas of Mozambique, the southern and south-western regions of Tanzania, and the Eastern and North-eastern provinces of Zambia. The main objectives of the MtDC are to:
(i) Link the southern regions of Tanzania with Malawi and Zambia across Lake Nyasa and Mozambique. (ii) Provide strategic access for Malawi to the port of Mtwara. (iii) Mobilize investment in support of the utilization of the MtDCs rich natural resource base.
The inherent development potential of the area is high - all four countries have good agricultural, mining and tourism development potential - which provides a sound basis for a wide range of economic activities. There are also a number of identified enablers to enhance the delivery on the Mtwara Development Corridor strategy; namely, (i) the development of the necessary physical infrastructure to underpin the development of the MtDC as both a transportation and economic development corridor; (ii) the mobilization of private sector and donor investors/investment to support utilizing the inherent and under-utilized development potential; and (iii) related human resource and social development programmes.
There are a number of notable economic projects that have been identified. They include the development of :
(i) The Mchuchuma Coal mine - the coal is intended for use in the generation of electricity (thermal power station) for industries and agriculture, for domestic use, and also for export. (ii) The Liganga Iron Ore reserves – the project life is expected to be 70 years through which a total of 219 million tons of iron ore will be mined while 175,400 and 5,000 tons of titanium and vanadium will also be extracted. (iii) The Songo Songo Island gas reserves - construction of the pipeline network was completed in May 2004. The first gas reached Dar es Salaam in July 2004, and the project started commercial operation in July 2004. The network transports natural gas to Dar es Salaam where it is used as the principal fuel for turbine generators at Songas Ubungo power plant in Dar es Salaam to generate about 190MW of electricity – or 45% of the country's capacity – for the national grid. A proportion of the gas also supplies a local cement plant, Wazo Hill, as well as a number of other industries and power plants in Dar es Salaam. (iv) Coastal and inland fisheries industries. (v) Agricultural projects - the Mtwara corridor is well endowed with fertile lands, numerous water sources and areas suitable to irrigation. It is estimated that the MtDC contains about 268 000 hectares of land suited to irrigated agriculture. (vi) A wide variety of coastal and inland tourism activities. The corridor offers the opportunity to develop nature based photographic and consumptive tourism, cultural tourism, adventure/experiential tourism all of which are key growth sectors in the world tourism industry. (vii) A range of manufacturing and processing activities based on the presence of rich natural resources.
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(viii) The deep, natural harbor of Mtwara which provides the opportunity for the development of a free trade zone and now the development of an upstream services supply hub. A total of 260 acres of land is available for EPZ activities. (ix) Significant deposits of gypsum, anhydrite and rock salt situated in the MtDC in the Lindi Region.
Supplementing, and at times underpinning,: the economic development projects are a number of infrastructure development projects which are mostly at the concept phase. They include:
(i) The Mchuchuma Thermal Power station. (ii) The power transmission system linking the new power station into the national grid, as well as additional lines to previously unsupplied areas of southern Tanzania. (iii) The petroleum products pipeline from Mtwara to Mbamba Bay. (iv) Various regional water supply schemes aimed at providing urban and rural communities with access to improved water and sanitation facilities. (v) The upgrading and development of Mtwara Port, along with the upgrading of the inland ports of Mbamba Bay and Manda, both of which are located on Lake Nyasa. There are also plans to invest in a heavy capacity ferry linking Mbamba Bay with Nkhata Bay across the lake in Malawi. Presently, whilst Mtwara port has capacity the inland ports require substantial investment if they are to handle the projected transit traffic from Malawi. (vi) The upgrading of the Mtwara Airport. (vii) The upgrading of various roads that will facilitate access for Malawi and Zambia to the Port of Mtwara as well as between the major anchor projects within the corridor. The Unity Bridge was one of the Short Term Action Plan projects submitted by the SADC to the New Partnership for Africa's Development (NEPAD) and was built by The China Geo Engineering Corporation and finally inaugurated on 12 May 2010 by the presidents of Mozambique and Tanzania.
There are other projects for one-stop border posts, vehicle overload control management, a road safety programme, upgrading of airport security, maritime advisory services, and development of a regional strategy for ship-waste reception facilities in ports. The Mtwara Corridor has unique potential for tourism with pristine beaches and clear Indian Ocean waters, a marine park, as well as inland conservation areas and freshwater recreation areas on the lake. All of these resources poses significant environmental management challenges that are being considered as part of the integrated regional development planning for the Mtwara, and now Lindi, regions as the anticipated LNG facility has the potential to develop into a growth axis between the two towns. Environmental highlights include:
Mnazi Bay Marine Park - a rich marine ecosystem with a high level of biodiversity (more than 400 marine species identified to date) stretching south from Mtwara to the Mozambique border. Three small game reserves along the Tanzanian side of the border as well the largest in the world, the Selous Game Reserve, a bit further north. And just south of the border in Mozambique is the remote Niassa Game Reserve. Stretching several hundred kilometers between the two reserves is a natural elephant corridor, the West Corridor, which is a Wildlife Management Area with village level control and management.
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More than a dozen dinosaur species were excavated from the vast dinosaur beds at Tendunguru almost a century ago, including a complete skeleton of the largest known dinosaur, the brachiosaurus brancai, now on display at the Museum of Natural History in Berlin.
Finally, there is one important project that could fundamentally augment the previous Mtwara corridor scenarios – Mtwara, with its deep natural port and location, is well suited to be the services supply hub for most northern Mozambican upstream and southern Tanzanian upstream production facilities. In the final analysis, the MtDC corridor with an Oil and Gas Services Supply Hub is intimately aligned with the Tanzanian Integrated Industrial Development Strategy 2025.24
24 IIDS published in December 2011 by the Ministry of Industry and Trade Page 29