A new breed of legal support

Financing Tanzanian Infrastructure: Options, Challenges and Prospects

2016-11-29 12:48:17

By Paul Kibuuka

DAR ES SALAAM. TANZANIA’s population is projected to reach 100 million over the next two decades. As the population continues to grow, so does the country’s infrastructure deficit. In a speech delivered to inaugurate the 11th Parliament in Dodoma on 20 November 2015, President Dr. Magufuli affirmed his new government’s commitment to improving infrastructure seen to be a critical driver of the country’s progress and a decisive enabler for inclusive and sustainable growth. In recent years, the shared concern for the infrastructure deficit in Tanzania has led to a proliferation of a number of initiatives in water, power, telecoms, roads, bridges, railways, seaports, airports and tourism. Among the initiatives are the following: 

  • Power/Gas: Japan’s Sumitomo Corporation signed a contract for the implementation of the 240MW Kinyerezi II power plant project in an effort to help relieve chronic power shortages. The project, inaugurated by Dr. Magufuli on 16 March 2016, was co-financed with a concessional loan worth US$292m from the Japanese government. In 2015, China Petroleum Technology and Development Corporation (CPTDC) was awarded a contract to build a 542km long natural gas pipeline from Mtwara to the commercial capital Dar es Salaam co-financed with a US$1.2bn Export-Import Bank of China loan.
  • Roads: STRABAG International GmbH won a €134.4m contract to rehabilitate and expand Dar es Salaam’s Bus Rapid Transit (BRT) infrastructure system, in respect of which the African Development Bank (AfDB) approved, in 2015, loans totaling US$141.71m to the Tanzanian government as part of funds for phase 2 of the BRT system. Hanil-Jiangsu JV, a South Korean-based construction firm, and its Tanzanian partner, Doch Limited won a contract to improve the 234.3km Arusha–Holili/Taveta–Voi road (a major East African transport corridor) co-financed with a US$400m loan accorded to the Tanzanian government by Japan International Cooperation Agency (JICA).
  • Airports: In 2013, Royal BAM Group of Holland (BAM International) signed a contract to design and construct the new Terminal 3 complex at the Julius Nyerere International Airport in Dar es Salaam for which the Tanzanian government secured a US$164.3m loan from the Dutch government to help deal with airport capacity constraints.
  • Seaports: Also, in 2013, China Merchants Holdings (International) Co. Ltd, a port investor and operator, was contracted by the Tanzania government to construct a new US$10bn port in the town of Bagamoyo, which, if constructed, will tip the scales of EAC regional trade in Tanzania’s favour.
  • Flyovers and Bridges: In 2014, the government of Tanzania signed a US$64m agreement with the South Korean government for the construction of a flyover over Coco Beach along Toure Drive, to connect to Ali Hassan Mwinyi Road. China Railway Jianchang Engineering (CRJE) signed, in 2012, a US$136m construction and funding pact with Tanzania to build the 680metre-long Kigamboni Bride to link Dar es Salaam to Kigamboni.
  • Telecoms: In partnership with the Tanzanian government, Vietnam’s Viettel Group launched, in October 2015, mobile operations in the country under the name of Halotel with total investment of US$Ibn to construct and install telecom infrastructure in villages across Tanzania. In the same year, Millicom Tanzania (tiGO) secured a US$100m loan from Standard Chartered Bank in partnership with Swedish Export Credit Corporation (SEK) for the acquisition of an 85 per cent majority stake in Zantel, a telecom company in which the Revolutionary Government of Zanzibar retained a 15 per cent minority stake. In 2011, Helios Towers Tanzania (“HTT”), a subsidiary of Helios Towers Africa, obtained senior syndicated financing worth of US$85m to fund the expansion of its telecom towers across Tanzania.
  • Water: The India government offered US$380m in loans to the Tanzania government in 2015 to improve water supply in the commercial capital Dar es Salaam and from Lake Victoria to the towns of Tabora, Nzega and Igunga.
  • Real estate infrastructure: CRJE Estate Ltd, a Chinese real estate developer, secured a US$22m long-term loan commitment from the IFC in 2013 to finance a 29-storey commercial complex in Dar es Salaam. Earlier, in 2010, CRJE Estate received US$10m from IFC to finance the initial phase of the complex. Tanzania’s National Housing Corporation (NHC) signed deals with CRJE Estate and China Poly Group Corporation worth US$700m in 2012 to develop residential and commercial property.

The next five or ten years ahead will almost certainly be the busiest in the history of Tanzania’s infrastructure, thanks to the continued growth of the banking sector (total assets, according to a September 2015 Bank of Tanzania’s Financial Stability Report, grew by 12.4 per cent during the year to September 2015, while deposits grew by 6.7 per cent); the interest of pension funds in diversifying their investment portfolios into infrastructure; the government’s strong fight against corruption and wastage; the improved tax-revenue collection; and the attraction of funds from multilateral financial institutions–for instance, the AfDB, in its 2016-2020 Country Strategy Paper for Tanzania, said that it will support Tanzania’s economic transformation with an indicative concessional resource assistance package estimated at over US$1.1 billion over a five-year period.

Indeed, an argument advanced in some quarters of the Tanzanian private sector, overseas financial markets and multilateral financial institutions is that, there are a lot of other financial resources that can’t wait to be released and that President Dr. Magufuli’s administration at present must concentrate its efforts on what needs to be done to release and direct such resources to Tanzanian infrastructure.

Infrastructure investments are usually financed using project finance (where lenders and investors rely either exclusively or mainly on the cash flow generated by the project to repay their loans and earn a return on their investments) or corporate finance (where lenders and investors rely on the strength of the borrower’s balance sheet for their loans); although the Tanzanian government should make efforts to develop new arrangements that are capable of attracting a sufficiently diverse base of lenders and investors to finance the country’s strong demand for infrastructure investments.

During a recent Mkombozi Bank Plc rights issue, Capital Markets and Securities Authority (CMSA) and Dar es Salaam Stock Exchange (DSE) chief executive officers respectively Mrs. Nasama Massinda and Mr. Moremi Marwa appealed to the government to make use of the bourse in raising domestic funds by floating infrastructure bonds to finance infrastructure development. Clearly, a well-developed Tanzanian equity market for infrastructure investments and a strong liquid market for infrastructure bonds can supplement loan syndication as a project financing mechanism. This, in turn, could support lending activities and spread risks, while helping to develop key capital market instruments.

Even though it is still early to tell the effects of the Basel III framework and the Banking and Financial Institutions (Capital Adequacy) Regulations 2014, the need for banks to ensure the adequate availability of long-term funding will, perhaps, impact the structuring of infrastructure projects in Tanzania. Hence, the obvious result would be a heightened cost of loans and; in connection with that, utilizing infrastructure bonds as a source of cheap financing compared to bank loans may be an attractive alternative.

Some public infrastructure projects in Tanzania have been implemented under concession agreements. For example, private companies such as RITES Ltd of India, Tanzania International Container Terminal Services (TICTS), and DB Shapriya in association with Hyundai Heavy Industries were awarded concessions by the Tanzanian government for the railways system, Dar es Salaam port container terminal, and Mtwara port infrastructure respectively. But what is a concession?A 1998 working paper published by the World Bank entitled “Concessions for Infrastructure: A Guide to their Design and Award” defines a concession as any arrangement in which a firm obtains from the government the right to provide a particular service under conditions of significant power. In practice, concessions allow private sector participation in public infrastructure by injecting the needed funds into a “special purpose vehicle” (SPV) set up with the government to construct, develop, operate and maintain infrastructure for a specified period of time.

The legal framework for the operation of infrastructure concessions in Tanzania is, chiefly, the Public Private Procurement Act, 2010 (PPP Act), as amended in 2014, and the Public Procurement Act, 2011. These legislations stipulate conditions for competition and private sector involvement in all public procurement and provide for the identification, recommendation and approval of all PPP contracts. The Public Private Partnership Centre (PPP Centre), the Public Private Partnership Technical Committee (PPP Technical Committee), the Public Private Partnership Facilitation Fund (the Facilitation Fund) and the Public Procurement Regulatory Authority (PPRA) regulate infrastructure concession in Tanzania. Specifically, the PPP Centre, the PPP Technical Committee, the Facilitation Fund and the PPRA are empowered respectively to assess proposed PPP projects; consider and approve these projects; finance feasibility studies; and regulate all procurement activities carried out by procuring entities i.e. public bodies or any other body established and mandated by the government to carry out public functions e.g. TPDC, EWURA, TCRA, TPA, TANROADS, RAHCO, SUMATRA, etc.

As the settlement of disputes is a critical element in infrastructure concession agreements, the Tanzanian justice system must be continuously improved to boost the confidence of concessionaires, financiers and contractors to participate in various infrastructure projects currently on the drawing board. Also, the government should consider the benefits of enacting concession agreements by special legislation so that the terms of the concession can be customized to meet specific-project requirements.   

In respect of collateral, financing infrastructure projects, save for public infrastructure, involves a comprehensive and intricate security interest package. A mortgage, charge, pledge and lien are all security interests that can be created over available collaterals, such as, real property; movable assets, concession payments, shares, insurance proceeds; accounts receivable, contractual rights, IP rights, etc. The collateral serves to mitigate loss in case of a counterparty default. It should be noted that as part of the security interest package, banks will require consent from counterparties; however, the consent negotiation process can be laborious and even combative.

With regards to financing public infrastructure, some banks may provide loans to contractors on the basis of the pool of “eligible receivables” which the contractor generates on an infrastructure project and which the bank purchases outright. In so doing, the bank relies primarily upon the creditworthiness of the Tanzanian government. According to a recent Sovereign Risk Report published by the Economist Intelligence Unit, Tanzania’s risk score is in the middle of the ‘B’ band, and this is likely to build confidence among prospective foreign investors in participating in infrastructure projects in the country.

Although, in general terms, Tanzanian law favours the creation, perfection and enforcement of security interests over collaterals, banks must be aware of certain limitations to financing infrastructure investments in regulated sectors like telecoms, water, ports, roads, railways, mining, energy/oil and gas. One such limitation involves the Tanzanian government and its regulatory agencies exercising control or influence on private companies operating in these sectors. In particular, banks must be aware of the government’s right to terminate concessions unilaterally at any time whenever the public interest so requires upon payment of fair compensation. A case in point is the termination, in May 2005, of the 10-year agreement signed in 2003 between the Tanzanian government and City Water.

As well, banks must be careful enough to understand how the concession can be terminated and how termination payments will be calculated and remitted. Any such payments to the concessionaire, notwithstanding the reason for termination, should be assigned to the banks or else encumbered. In that regard, besides obtaining consents, appropriate filings with the Business Registration and Licensing Agency (BRELA) and other authorities must made so as to validate and enforce the payments against the Tanzanian government and to exclude them from the concessionaire’s bankruptcy. Perhaps, the government should consider allowing some public infrastructure concessions to be structured in such a way that banks are given limited step-in rights to run the concession, remedy defaults and identify possible buyers prior to the government terminating the concession.

Worthy of consideration too are the tax implications of financing infrastructure investments in Tanzania. Generally, a concession agreement with the Tanzanian government does not override the principles of Tanzanian income tax law unless exempted by way of Government Notice or special legislation. In the absence of a tax exemption, the interest paid by a concessionaire on credit facilities advanced by a local or foreign bank and utilized by the concessionaire for its business operations in Tanzania, is deemed to be Tanzania-source income and is subject to withholding tax. However, in order to minimize the amount of money that the concessionaire would have to pay in withholding taxes, the pertinent debt instruments could be lodged at the DSE to take advantage of a stamp duty and withholding tax exemption granted by law on transactions executed, and debt instruments lodged, at the DSE. This structure could be generally regarded as successful in the financing of infrastructure investments in Tanzania.

Astute investors would see that Tanzania’s infrastructure deficit presents investment opportunities which could be tapped in virtually every economic sector. Actually, if one scrutinized Tanzania’s fact-file one would find a bunch of opportunities which supports Tanzania’s position as a most desirable African investment destination. Tanzania is endowed with vast and mystical tracts of land; and with its large population, the country offers an incredible market and is the gateway to SADC and EAC regional blocs – an additional 370 million-plus people in 20 countries, including South Sudan.

Tanzania aims at attaining a real GDP growth of 7.1 percent in 2015/16 based on the projected growth of 7.0 percent in 2015 and 7.2 percent in 2016 and GDP per capita stood at US$955.1 as at 2014. Exchange rate is currently around TZS2190/US$1. Foreign investors are offered an attractive incentive package including tax relief, such as, deductions for the cost of capital in Tanzania – a country that enjoys robust trade and economic relations with most countries. Numerous multinational firms operate in Tanzania: Heidelberg Cement, Unilever, Diageo, Vodafone, Ericsson, Coca-Cola, AON, Total, Oryx Oil, KLM Airlines, Citibank, Standard Chartered Bank, General Electric International, SAMSUNG, Ernest & Young, etc. Tanzania has total reserves (includes gold, current US$) of US$4,389,705,629 as of 2014, and a robust and fast-growing banking sector that supports investors with working capital and other credit accommodations.

Further, with its abundant natural resources, Tanzania offers opportunities for investments in mining, agriculture, tourism, power/energy, water, roads, railways, seaports, airports, telecoms, tourism as well as other projects as may be approved, from time to time, by the PPP Technical Committee. According to recent media reports, Tanzania has discovered an additional 2.17 trillion cubic feet (tcf) of possible natural gas deposits, raising the country’s total estimated recoverable natural gas reserves to more than 57 tcf.

Serious and concerted anti-corruption drive by the Prevention and Combating of Corruption Bureau (PCCB); the Director of Public Prosecutions (DPP); the Commission for Human Rights and Good Governance (CHRAGG), the Ethics Secretariat; the Public Ethics Commission; the National Audit Office (NAO); the Public Procurement Appeals Authority (PPAA); the Good Governance Coordination Unit (GGCU); and the Financial Intelligence Unit (FIU) is helping restore confidence in the private sector, a key player in mobilizing infra­structure resources critical to Tanzania’s physical and economic security. A special anti-corruption court is also on the cards, following President Dr. Magufuli’s directive to establish the court. Moreover, with companies and businesses in the developed world still reeling from the effects of the global economic downturn, the search for new markets and investment opportunities will continue – and many will find that Tanzania is an incredibly inescapable haven. 

In the new drive to transform Tanzania’s infrastructure, the Tanzanian government would do good to also look to its educated Diaspora to meet infrastructure development goals. World Bank estimates of remittances by Tanzanian Diasporans in 2014 amounted to US$64m. Yet, besides the fiscal contributions, Tanzanian Diasporans have knowledge, skills and expertise and key contacts gained from spending years abroad. By leveraging this, Tanzanian Diasporans are uniquely positioned to scaling Tanzania’s infrastructure sector. What is needed now is a new age of constructive engagement through sustained collaboration with the Tanzania Investment Centre (TIC). Tanzanian Diasporans should identify potential investors from their locations and set up a database to provide a critical international pool of investors who could be invited to actively participate in economic missions to Tanzania.

In association with Tanzanian embassies abroad and relevant government ministries and agencies in Tanzania, Tanzanian Diasporans should be at the forefront of organizing huge infrastructure expos, fairs and conferences in the most economically and financially powerful cities of the world with a view to promoting Tanzania as the preferred destination for infrastructure investments in Africa. Likewise, it would be beneficial for the government to increase efforts towards the establishment of a Tanzania Diaspora Policy aimed at mainstreaming Tanzanian Diasporans into the country’s national development process.  

It is obvious that foreign governments, notably China and Japan; and multilateral financial institutions like the World Bank, European Investment Bank, and the AfDB are the major source of financing for Tanzanian infrastructure. The debate on Tanzanian’s infrastructure deficit has now spotted the role of domestic infrastructure financing, reducing concentration on the growing status of foreign finance sources. Public funding is still inadequate to cover the large infrastructure needs; although, we are currently seeing an increase in domestic resources in Tanzania due to improved tax-revenue collection and the crusade against wastage of government funds.

In conclusion, there's a need for the Tanzanian government to raise additional domestic revenues and expand its revenue sources. Scope exists to develop the Tanzanian capital market since the existing loan market, which depends on short-term deposit funds, is not conducive to long-term infrastructure finance. Tanzania could consider the example of Kenya, which tapped into its local investor base by selling KES24.02bn (US$260m) worth of a 12-year infrastructure bond and giving incentives like the option for bondholders to use the bonds as collateral to obtain bank loans. The use of Diaspora bonds such as those issued by Ethiopia, the placement of infrastructure bonds to the Diaspora, and the use of Islamic financial mechanisms should be explored by Tanzania. More steps which should be taken to ensure the success of the Tanzania Development Vision 2025 as it relates to infrastructure development include, but are not limited to; designing a National Integrated Infrastructure Master Plan, on the basis of which all infrastructure concession projects would be identified and approved respectively by the PPP Centre and the PPP Technical Committee prior to profiling the projects for ease of access by potential concessionaires and investors.

Paul Kibuuka is the Managing Partner of Isidora & Company Advocates. Email: Twitter: @isidoralaw

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