Project opportunities and political uncertainty: A tale of two Tanzanias

27 Nov 2017 | 6 minute read

African Energy Live Data shows improved energy security and some progress increasing gas capacity and small renewables, but governance doubts cloud the future for power sector developers in Magufuli’s Tanzania

President since 2015, John Pombe Magufuli has a distinctly ambiguous attitude towards private investment, as is evident from his battles with Tanzania’s major mining investors and independent power producer (IPP) Symbion Power Tanzania Ltd. Perceptions of political risk are limiting Tanzania’s attraction to IPPs and keeping international lawyers busy. But while Magufuli’s unpredictable behaviour and apparent lack of concern for the rule of law, or for the sanctity of contracts, has unnerved investors, he has publicly championed open and competitive international tenders, off-grid projects are blooming and some utility-scale projects are going ahead: African Energy Live Data shows more than 500MW under construction, along with the promise of many more distributed energy schemes.

The vast majority of this new capacity is owned by cash-strapped state utility Tanzania Electric Supply Company (Tanesco), with projects backed by Chinese money, and designed to make use of domestic gas resources. Construction began at the 185MW extension of Kinyerezi I gas power plant and the 240MW Kinyerezi II gas power plant in 2016; both are expected online in 2018.

Tanzania will also receive 27MW capacity from the 80MW Rusumo Falls hydroelectric power (HEP) project, which is being jointly developed by Tanzania, Rwanda, and Burundi; it began construction on 30 March.

Tanzania’s energy security has gradually reduced its reliance on HEP with an increase in thermal capacity. In 2010, HEP made up 49% of installed capacity base, according to Live Data. By 2012, droughts were causing dramatic blackouts, resulting in the country bringing in large volumes of rental power. By 2016, the country had reduced its reliance on HEP, which now accounts for 36% of the mix, by increasing natural gas and other thermal capacity. This is set to change further as new plants come online in 2018.

There is also encouragement for smaller-scale projects. New regulations for small renewable energy IPPs (REIPPs), classed as between 100kW and 10MW, were published by the Energy and Water Utilities Regulatory Authority (Ewura) on 24 October. The rules require competitive tendering for wind and solar projects of between 1MW and 10MW. For HEP and biomass projects of between 100kW and 10MW, and wind and solar projects between 100kW and 1MW, the rules allow for development on the basis of a letter of intent signed with a distribution network operator.

Dispute issues

Against this background there is substantial interest, particularly among small hydropower developers – and those who see potential in emerging sectors like geothermal (AE 358/3). But it is unlikely that many major procurements will happen in the short term. While eager for the opportunity, developers remain wary of the number of disputes taking place in the mining sector and of recent legislative changes affecting natural resources which prohibit international arbitration, among other issues (AE 350/1).

In the context of small IPPs, there are issues with the quality of the standardised power purchase agreements released by Ewura, which are likely to be insufficient for developers to raise finance from commercial banks or development finance institutions; neither are they size or technology specific.

The number of cases being brought to international arbitration by foreign companies against the Tanzanian government is causing alarm amongst creditors. Symbion’s case at the International Chamber of Commerce in Paris alone could be worth up to $562.41m. While the administration may have been in denial about the necessity of paying arbitration awards, the seizure of a Bombardier jet in Canada earlier in the year due to a $38m debt may have concentrated minds.

Symbion’s threat of a second arbitration case against the government is symptomatic of Magufuli’s fraught relationship with international companies.

There are also concerns over broader political issues. A consolidation of power among a clique of advisors around Magufuli has, on several occasions, had damaging spillover into the real economy. In the energy sector, Magufuli loyalists have been inserted into key positions, with both competent and politically-connected (to other ruling party factions) officials alike removed.

Tanesco managing director Felchesmi Mramba was removed in January, ostensibly following a politically unpalatable tariff increase, which was approved by regulator Ewura. Mramba was replaced by Tito Esau Mwinuka, a lecturer from the University of Dar es Salaam, from whence a number of Magufuli’s allies have been plucked.

Two other senior officials who had a reputation for technocratic competence and handled much of the utility’s dealings with IPPs were also demoted in the move, which some sources said was driven by Magufuli ally, then deputy minister Dr Medard Matogolo Kalemani.

Kalemani, aged 41, was promoted from deputy energy and minerals minister to be energy minister on 7 October, when Magufuli divided up the former single resources-focused minister, appointing Angellah Kairuki as the new mining minister. Their roles were formalised having stood in for Sospeter Muhongo, who was fired in May after an investigation into possible undeclared exports by mining companies.

…slow the project pipeline

International investment into the power sector has slowed to a trickle. The World Bank Group (WBG) has remained engaged with Tanesco in resolving its arrears to IPPs such as Songas and in niche areas like geothermal development. The US Millennium Challenge Corporation suspended its compact over elections in Zanzibar and the WBG’s International Finance Corporation has made little headway with its 100MW Singida wind power project.

Tanzania has struggled to attract investment into its utility-scale plants. A number of developments have failed to get off the ground over the past year, such as the 250MW Somanga Funga gas power plant being developed by Dubai-based ETG, which was earmarked to be tendered under the new competitive procurement programme.

Hopes are being pinned on more money from Asia propping up the ailing utility. Symbion claims the government has begun discussions to restart the 400MW Mtwara gas power project – without Symbion’s involvement – backed by Japanese investment. China has also shown an interest, sending a delegation earlier in the year. However, it is unlikely substantial funds from multilaterals or western investors will begin to flow anytime soon.

Offgrid success

The troubling picture on the grid stands in stark contrast to continued success in the off-grid sector. Tanzania continues to be one of the top destinations for off-grid renewable energy companies, attracting significant investment and winning plaudits for its light touch regulation.

Redavia recently announced the commissioning of two 89kW micro-grids, the country’s biggest, according to the developer. These have seen rapid take up by the local population.

Such mini-grids will spur light industrial and agricultural development and, in the long run, have the potential to support moderate industrial uses. Redavia counts among its clients a welding company and chicken hatchery.

Established mini-grid player Jumeme provides power for mills and fisheries and has found itself moving increasingly into the service sector, trading grain and fish to maintain demand at its anchor customers, who previously suffered variable output due to local infrastructural challenges.

There is a buzz around distributed generation, which is oddly removed from the gloom surrounding Tanesco’s conventional electricity grid. While ugly politics and bad legislation undermine large-scale investment in the power sector, the small-scale developers and off-grid solar companies continue to make progress.

Success here will add to support for the Magufuli administration, which is based on a narrative of socio-economic transformation, with dividends expected from the combative president’s resource nationalist agenda. His support could crumble if economic figures deteriorate (or prove to have been manipulated), which would add to pressures on the notoriously impulsive Magufuli. Tanzania offers a range of prospects for investors, but the economy’s future direction remains unclear.