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A Review of Private Investment in Tanzania's Power Generation Sector

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A Review of Private Investment in Tanzania's Power Generation Sector Volume 29 Number 2 A review of private investment in Tanzania’s power generation sector Anton Eberhard 1* , Katharine Gratwick 2, Laban Kariuki 3 1 Graduate School of Business, University of Cape Town, 9 Portswood Road, Greenpoint, 8015, Cape Town, South Africa 2 Independent consultant, Houston, Texas, United States of America 3 Independent consultant, Dar-es-Salaam, Tanzania Abstract This study investigates recent developments in Tanzania’s electric power generation to understand how to facilitate investment in the sector. Interviews were conducted with key public and private stake - holders; utility data was analysed and critical sec - ondary source documents were reviewed. All inter - view data was triangulated to ensure integrity of findings. It was concluded that investment in the sector is suboptimal due to a lack of coherent plan - ning; of processes related to contract negotiation; and of a commitment to contract with independent power projects. Research and analysis is limited to generation, but there are also implications for the distribution sector. The value of the findings extends beyond Tanzania across Africa and to other devel - oping regions, where countries struggle to attract investment into electric power generation. Keywords : private power investment; East Africa; regulation; power sector reform Journal of Energy in Southern Africa 29(2): 1–11 DOI: http://dx.doi.org/10.17159/2413-3051/2018/v29i2a4389 Published by the Energy Research Centre, University of Cape Town ISSN: 2413-3051 http://journals.assaf.org.za/jesa Sponsored by the Department of Science and Technology * Corresponding author: Tel: +27 21 406 1361; email: [email protected] 1 Journal of Energy in Southern Africa • Vol 29 No 2 • May 2018 1. Introduction ly, privately financed, greenfield generation, sup - Tanzania has a vast array of conventional and ported by non-recourse or limited recourse loans, renewable energy resources, and yet the country with long-term power purchase agreements (PPAs) struggles to generate sufficient power to fuel growth with the state utility or another off-taker – became a and development. In 2016, it had approximately 1 priority within overall power sector reform (World 500 megawatts (MW) in installed generation. Bank, 1993: 45, 51; World Bank and USAID, 1994: Network failures undermined what little power is 1). The IPPs were considered a solution to persis - produced. As a result, approximately 46 percent of tent supply constraints and could also potentially the nation’s total power consumption was from off- serve to benchmark state-owned supply and gradu - grid, self-generation (averaging USD 0.35/kWh) ally introduce competition (APEC Energy Working (National Key Result Area Energy, 2013). What has Group, 1997). The IPPs could be undertaken prevented Tanzania from harnessing more of its before sector unbundling. An independent regulator domestic resources in an economically efficient was also not a prerequisite, since the PPA laid down way, and what can be done differently going for - a form of regulation by contract. (More information ward? There appear to be three key elements that on the drivers of power sector reform in Africa is directly affect Tanzania’s electricity supply industry available in a supplementary file. 1) and generation procurement: coherent and up-to- With the original drivers for market reform still date planning; the planning and procurement present, especially in Tanzania, private sector nexus, including the allocation of public and private involvement appears inevitable in the future. generation projects; and a lack of sustained com - Subsequent sections delve in to Tanzania’s power mitment to private sector investment and competi - sector present and recent past to shed light on how tive bidding practices. to improve performance and investment in the The first section of the paper provides a brief country’s generation. overview of the drivers for power sector reform and their results, followed by a description of how the 3. Tanzania’s electricity sector: An overview Tanzanian sector developed. Then the current struc - 3.1 Power sector reforms ture and capacity is described, together with prices The vertically integrated, state-owned Tanzania and plant performance data. In subsequent sec - Electric Supply Company (TANESCO) performed tions, the analysis focuses on how capacity was pro - adequately in the 1960s and 1970s. In the 1980s, cured and financed in both public and independent electric supply and distribution began to deteriorate power projects (IPPs), as well as future plans. and has remained poor ever since. Repeated Finally, conclusions are drawn about fundamental attempts at reform, targeting the utility’s poor per - elements that have contributed to and detracted formance. started in the early 1990s. In 1992, a from power generation development in Tanzania, National Energy Policy was formulated that opened and about what is needed going forward. the sector to private participation, including a pro - vision to encourage private electricity generation 2. Power sector reform: Impetus and results and distribution in areas where TANESCO had not At the beginning of the 1990s, nearly all major established a public power supply system. The next power generation in Africa was financed from pub - year, bids were invited for the country’s first IPPs. lic coffers, including concessionary loans from Following this push, in 1997, TANESCO was ear - development finance institutions. These publicly marked for privatization. Under pressure from the financed generation assets were considered one of World Bank and International Monetary Fund, the core elements in state-owned, vertically inte - these efforts intensified from 1999, and included a grated power systems. In the early 1990s, however, doubling of nominal tariffs. a confluence of factors brought about a significant By 2001, with electricity costs relatively high, the change. With the main drivers identified as insuffi - quality and reliability of supply still poor, and the cient public funds for new generation and decades financial standing of the state utility persistently of sub-standard performance by state-run utilities, weak, attention focused on TANESCO’s manage - African countries began to adopt a new ‘standard’ ment. In that year, the government of Tanzania model for their power systems, influenced by pio - reconstituted TANESCO’s board and initiated a neering reformers in the United States of America, management contract that was set up to last two the United Kingdom, Chile and Norway (Clark et years, starting in 2002 but ended up spanning four al., 2005; Gratwick & Eberhard, 2008). Urged on years (Clark et al., 2005; Kapika & Eberhard, by multilateral and bilateral development institu - 2013). While TANESCO’s balance sheet improved tions like the World Bank, which largely withdrew under the management contract, specifically from funding state-owned projects, several coun - because of better collection, the quality and reliabil - tries adopted plans to unbundle their power sys - ity of supply and the rate of new electricity connec - tems and introduce private participation and com - tions did not increase materially, mainly because of petition (Eberhard & Gratwick, 2011). IPPs - name - underinvestment (Ghanadan and Eberhard, 2007: 2 Journal of Energy in Southern Africa • Vol 29 No 2 • May 2018 23). Then, in 2005, an incoming administration In 2014, PriceWaterhouseCoopers also provid - reversed plans and delisted TANESCO from privati - ed strategic advice related to the unbundling of sation, in direct opposition to an underlying objec - TANESCO. At the time of writing, however, there tive of the management contract. In 2006, the gov - had been virtually no progress made in unbundling ernment announced that the management contract the sector, with delays attributed to associated would not be extended, a decision that met with delays in the asset evaluation and a lack of clear wide public approval. oversight of the process at the ministry of energy. Two years later, in 2008, the Electricity Act was Other challenges for the sector include a lack of passed, updating the 1957 Electricity Ordinance transparency, as discussed in the context of two Amendment, which had until then governed the high-profile cases (Independent Power Tanzania Ltd sector. With respect to the structure of the electricity (IPTL) and Richmond/Dowans) in the supplemen - industry, Clause 4(1) of the Act states: tary file, and what private investors have repeatedly described as the favouring of publicly funded pro - The Minister shall provide supervis[ion] and jects over private investment. Future developments oversight in the electricity supply industry and are likely to see all private projects undertaken as shall in that respect . take all measures nec - public-private partnerships (PPPs); meanwhile, all essary to reorganise and restructure the elec - new long-term projects in recent years were built tricity supply industry with a view to attracting and owned by TANESCO (despite, it should be private sector and other participation, in such emphasised, TANESCO’s precarious financial situa - parts of the industry, [in] phases or time frames tion) rather than the private sector. Furthermore, as he deems proper. despite regulatory statutes that encourage a com - After nearly two decades of reforms characterised petitive approach, competitive arrangements were by a fluctuating commitment to private sector par - seldom the norm in doing business with
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