Tanzania: Decoding the Magufuli way and forging a path for constructive private sector engagement - August 2016

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1 Accra Dar es Salaam Harare Johannesburg Lagos London Nairobi Perth Tanzania: Decoding the Magufuli way and forging a path for constructive private sector engagement Out of the shadows: Magufuli s rise to power Despite being a longstanding member of the ruling Chama Cha Mapinduzi (CCM) party, Magufuli was an unexpected selection for the party s presidential ticket in Throughout his political career, he has remained largely disengaged from party politics, steering clear of the horse-trading and politicking that had seen other prominent figures rise to the top of the party. But amid sparring between several of these same party powerbrokers, he emerged as a consensus candidate to secure the CCM s presidential ticket back in July of last year. In the lead-up to the October election, popular support for the CCM was on the wane amid rising popular disenchantment and anger over perceived corruption and underperformance. Magufuli s reputation as a man of integrity with a hard working ethic as demonstrated during his time as Minister of Works seemingly made him a suitable figure to challenge these perceptions and claw back voter support. Meanwhile, his lack of a clear political network meant he ostensibly posed a limited threat to the power-brokers who pulled the strings of the ruling party. Yet since coming to office, these same power-brokers have found themselves near powerless to stop the rising phenomenon of the Magufuli way as the new President has sought to overhaul the way in which public office John Magufuli s victory in the 2015 presidential elections marked a watershed moment in Tanzanian politics. Since becoming President, Magufuli has tirelessly sought to tackle corruption, improve governance and ensure regulatory and fiscal compliance. This presidential ambition and the new ruling style that has accompanied it, has had a perceptible impact on how the state functions including in its interface with domestic and foreign businesses. Magufuli s assertive approach has been welcomed by many observers, notably drawing him significant popular backing for standing up to corruption and vested interests. But his determined drive to increase revenue generation and regulatory compliance has also generated risks and uncertainties for private sector players, many of whom are struggling to achieve constructive engagement or gain policy clarity on a range of critical issues. In this Africa InDepth note, we explore how political change in Tanzania has altered the risk environment for business and seek to develop a concept framework for constructive engagement. functions, and the state is run. Sweeping personnel changes have seen academics and technocrats take a growing number of senior positions in office. But while this is seemingly a positive development for the private sector, the centralisation of decision-making within the President s Office, and the strong influence that Magufuli exerts over the way that his administration functions has created discord, with policies and strategic decisions sometimes being driven by a political agenda, and constructive engagement proving challenging at times. Meanwhile, these shifting power dynamics have also created behind-the-scenes tensions both within the CCM, and among the previously powerful local business figures who had become an informal annex of the party. Such is the popular support for Magufuli s personally-led governance and anti-corruption drive, that few are willing to step out of line for fear of being cast into the political wilderness or worse still, made subject to investigation and sanction. But there may still be trouble ahead for the President as he grapples with his party s structures and further asserts his authority. His decision to re-appoint Abdulrahman Kinana as CCM Secretary General after taking over the party chairmanship is interesting in this respect, forging a potentially significant alliance with the most powerful party figure who can bring party cadres in line. 01

2 Many aspects of Magufuli s ruling approach are extremely positive both for Tanzania s national trajectory, and for private sector players investing in the country. The President has largely upheld market-oriented policies which have helped to ensure continued GDP growth of over 7%. Meanwhile, he has concertedly sought to root out corruption while improving governance and performance. His reformist approach is premised primarily on a need to make the state more efficient, virtuous, transparent and accountable. These basic principles are laudable, and are likely to pervade through policy-making, institutional reform and broader decision-making in the public sector. Some results have already been seen in the uncovering of grand corruption in some state bodies, and the introduction of greater accountability around spending and performance. But the Magufuli way also carries risks that are being heavily borne by the private sector. In particular, the President has aggressively pushed for immediate results and compliance, with a heavy focus on tax collection. This was made all the more apparent with the passage of the 2016/17 Finance Act which has introduced a range of new taxes and duties (see text box) to support a planned 31% increase in government spending largely focused on capital expenditure on infrastructure and industrial projects. There is a clear risk that short-term gains for government could come at the cost of long-term investment. And with government officials across the spectrum under enormous pressure to deliver results and increase revenue generation, conversations which were previously being held along technical lines are now increasingly being driven by a political agenda. This has elevated the risk of arbitrary treatment, ill-informed decision-making, and fiscal squeeze. Recent fiscal changes in Tanzania Taxing times in strategic sectors Introduction of VAT on fee-based financial services Increase in income tax in the oil and gas industry to 35% from 30% Imposition of VAT on tourism industry Introduction of 10% excise duty on mobile money transfers on top of existing 18% VAT charge Mobile network operators must list 25% of their business on the Dar es Salaam Stock Exchange by 2017 Moves to incentivise local production Revision of excise duty on steel- and ironbased materials One-year raise of duty on imported cement from 25% to 35% Ban on export of unprocessed mineral sands, and import of coal Progressive reduction of import duty remission levels on sugar and sugar confectionery from the current rate of 10%, with levels falling by 5% each year, resulting in a gradual increase in duty levels to 25% in 2018/19. Structural factors and dynamic drivers: responding to changing risks When analysing and forecasting risk, we typically consider structural factors that produce entrenched conditions and dynamic factors that are more mutable and temporary, but often combine with structural factors to effectuate change. Structural factors are both persistent in the way that they shape risk conditions, and resistant to rapid change, such is their entrenched nature. Although the interactions between structural and dynamic factors are complex, the key aspect of the relationship is that dynamic factors disturb the status quo. The resulting impact on risk trends can be positive as well as negative. But it is important to understand the origins of changes in risk, both to help businesses understand what is driving this, and to help plan a robust risk management and engagement approach that takes account of this complexity and these drivers. Here, we have sought to graphically illustrate the structural factors that enshrine Tanzania s political, social and economic system, and the dynamic factors introduced by the change in government, which are now driving the country s risk outlook. Understandably, most businesses are particularly concerned around the trajectory of two critical risks in this context; political interference, and tax and regulatory risk. 02

3 Entrenched corruption Poverty and inequality Socialist origins of the state of the CCM National dominance political stability History of The anti-corruption drive Magufuli s strong popular mandate CCM s weakened popular mandate Revenue gap for spending plans Magufuli s personal conviction and ruling style Dynamic factors Relationship with international partners Changing external economic conditions New technology and innovation Natural resource wealth Demographic bulge Risks State governance Infrastructure deficiencies Corruption Political stability Macro-economic management Insecurity Tax and regulatory risk Political interference or commercial dispute Structural factors Lack of deep-rooted ethnic competition or conflict Fig 1. Structural and dynamic risk drivers in Tanzania Weak institutional capacity Risk trajectory key negative positive neutral Throughout our advisory work in Tanzania, we have witnessed a consistent message emanating from the private sector, be it in telecoms, oil and gas, industry or consumer goods. With government officials under significant pressure to demonstrate results, businesses are facing emerging uncertainties and risks, and are struggling to achieve constructive engagement with senior decision-makers around these issues. In some instances, the vacuum left by the dismissal or departure of key figures has exacerbated engagement challenges. New replacements have typically proven particularly keen to show early results or have been wary of being seen to step out of line with the President s office, from where most strategic decisions are being driven. Meanwhile, even experienced Ministers and senior officials who had held office under the previous administration are seen to have changed the way in which they work and engage with the private sector. Most responsible businesses welcome the change in administration and the ambitions that Magufuli has to tackle corruption and improve governance. The drive for regulatory compliance also has many positive dimensions to it, if managed in an even and fair manner. But such is the momentum behind the Magufuli government, that enforcement and revenue collection efforts are sometimes being pushed at such a pace that they overlook technical and commercial considerations, potentially with damaging long-term consequences for future investment and growth in Tanzania. 03

4 Opening the door: securing constructive private sector engagement So what have we as a business that specialises in risk management, stakeholder relationship advisory and communication support learnt from this situation? Above all, that businesses need to be more strategic and methodical in their approach to managing government relations, and planning an engagement strategy that is premised around ensuring shared advantage around how the state and private sector interact. Having first identified and prioritised risks according to their likelihood and impact, businesses need to first determine which risks or changed conditions they are prepared to accept or even support, and which ones are likely to have a serious detrimental impact on the business and future investment. An engagement strategy can then be planned that balances across positive and negative aspects of change. Identify and prioritise risks/objectives Map and profile stakeholders around these issues Businesses then need to understand where power lies within their sector, identifying who are the decisionmakers, and what their agendas and priorities are, in addition to any other external influences they may be subject to. This will help to build an informed understanding of the stakeholder environment around critical issues or decisions, and to identify where blockages or drivers are centred, as well as potential points of advocacy or support. Plan a robust engagement strategy Deliver targeted engagement and communication across key channels Having then planned a targeted engagement strategy that is observant of relevant protocol, and has clear objectives across critical stakeholders, they can begin to engage more strategically with government partners. Seeking broad engagement will be essential in order to build collective support and understanding, sharing the expertise and vital perspectives of the private sector on critical issues. The nature of the relationships that are built is also crucial to achieve progress. Businesses must above all be credible and honest to build relationships that are premised around trust and mutual benefit. Don t over-promise, and try to advocate for something rather than against something; this will shape the nature of the dialogue and increase the prospect for negotiated compromise or concession. Above all, try to understand government priorities and objectives. Consider what advantage the government might gain out of a desired decision or approach, and give thought to how they might communicate this, either to other government decision-makers, or to the wider community. This is where the shared advantage principal is absolutely critical. This leaves the million-dollar question of how to engage the President s office directly on strategic issues. To date, Magufuli has proven reluctant to engage directly with the private sector on some issues, or has been outright hostile to some approaches, notably by local politically-connected businesses seeking to forge a route into the President through their CCM connections. However, this does not mean that Magufuli is opposed to any form of debate or engagement. 04

5 On a bilateral basis, provided the issue is of adequately strategic importance, there remains scope to engage with the President. But as with other stakeholders, it is essential that businesses have considered both how Magufuli operates as an individual, and what his priorities are, in order to shape a discussion that is premised around supporting his development agenda and finding shared advantage, while also assuring that technical and commercial voices are being heard. Businesses can also be talking and collaborating more. As well as conversing informally across the business community to share experiences and insight, there are a range of private sector and industry bodies in Tanzania which can be used as key channels for communicating industry perspectives on critical issues. This can help to reduce perceptions of an individual corporate agenda, and ensure that there is more mobilisation and engagement on issues that are of critical importance to business. Some industry and private sector bodies such as the TNBC have direct routes into the Presidency, and with strong leadership and backing, they can prove effective players in the private sector s drive to get its voice heard. Author Roddy Barclay Head of Intelligence and Analysis rbarclay@.com Contact Charles Washoma Country Manager, Tanzania cwashoma@.com Tel: Mobile: st Floor Cape Town Fish Market 179/180 Msasani Village Dar es Salaam