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A new breed of legal support

Power sector reform and regulation key to Tanzania's growth

2018-03-01 06:58:11

By Paul Kibuuka

TANZANIA’s potential is very exciting and this sentiment is shared by many even outside government, but if the country is to reach this potential, its growth is undoubtedly intertwined with its power sector.

One of the major obstacles to transforming Tanzania into a middle-income country by 2025 with a gross domestic product (GDP) per capita (that is, per person) of at least $3,000 is lack of access to adequate, reliable and affordable energy and electric power supply.   

According to the latest Energy Access Situation Report released in April last year by the National Bureau of Statistics and the Rural Energy Agency, just 32.8 percent of all households in Mainland Tanzania have access to electricity, representing an increase of 18 percent of all households connected to electricity in 2011/12. Rural households, comprising the biggest proportion of the country’s population, continued to have less access compared to urban households. 

Without access to adequate, reliable and affordable power supply, it is unlikely that public- and private-sector projects and investments in food manufacturing, clean water, healthcare, education, etc will achieve their intended outcomes in the context of Tanzania’s development vision.

In addition to access, frequent power outages increase operational costs for manufacturers and business operators generally, resulting in price hikes for many goods and services.

The economic costs of power outages are huge. The World Bank, in its 2011 study titled ‘Africa’s Power Infrastructure: Investment, Integration, Efficiency’, estimates that power outages in the countries in sub-Saharan Africa constitute an average of 2.1 of GDP.

Putting in perspective Tanzania’s GDP which hit Sh103.7 trillion mark in 2016, economic costs of power outages in the country stood at approximately Sh2.1 trillion in that period. Incidentally, this is the amount of money that the government planned to borrow in FY2016/2017 from non-concessional sources to finance development projects, but which Finance and Economic Affairs minister Dr Philip Mpango said could not be raised due to constraints in the international financial market, in which many countries in the sub-Saharan region Africa including Kenya and Ethiopia are treated as price-takers. 

Tanzania’s power challenge, though not an isolated case in the region, is exacerbated by a long line of issues—including changing rainfall patterns and droughts; high liquid fuel prices in the world market leading to increases in the cost of thermal power generation; delays in the construction of the $30 billion liquefied natural gas (LNG) project despite reserves of over 57tcf of recoverable natural gas; rapid expansion in the demand for energy and electric power; and a shortage of skills in energy infrastructure arising, in part, from an aging workforce. 

While the picture in Tanzania is far from rosy, it is not all doom and gloom after all. There is no doubt that Tanzania will realise its electrification goals.

The hope is that the way forward includes drawing key insights from power sector reforms and regulations in various countries that have paved the path for reduced dependence on state-owned utilities, encouraged private investment and greater involvement of independent power producers (IPPs), and expanded reasonably-priced energy services while reinforcing economic growth to address Tanzania’s specific needs and challenges.

It should be underscored here that Tanzania opened its power sector to IPPs in 1992 (before the establishment of statutory regulator Energy and Water Utilities Regulatory Authority (EWURA) fourteen years later in 2006), but the country has had a long chequered history with IPPs, including US-based Richmond Development Company LLC which led to the crumbling of the government in 2008.

In South Africa, however, IPPs have been hailed as a great success globally, with official energy statistics showing that the number of participating IPPs is higher than 64, representing over $14 billion in private capital investment.

If there’s a lesson Tanzania can learn from South Africa’s successful experience with IPPs, it’s that an effective legal and regulatory regime, good governance principles, a well-designed and transparent procurement process, as well as, an approach that underscores problem-solving rather than the enforcement of administrative measures without undermining quality and transparency help to create the necessary conditions for attracting private capital investment and for the effective participation of IPPs.

Right here in East Africa, Uganda unbundled its state-owned power utility, the Uganda Electricity Board (UEB), in 2001 and established the Uganda Electricity Generation Company Ltd (UEGCL), the Uganda Electricity Transmission Company Ltd (UETCL), and the Uganda Electricity Distribution Company Ltd (UEDCL) with the goal of creating financial viability and providing reliable power to consumers at reasonable prices.

According to the World Bank, the brave reforms in Uganda recorded positive developments, including reduction in system losses and improved generation capacity. Moreover, the listing on the Uganda Securities Exchange of UMEME Ltd, the company which took control of the distribution network from UEDCL, after the restructuring turned previously loss-making utility operations into profitability.     

There are long-standing concerns about the financial health of Tanzania’s state-owned utility, the Tanzania National Electric Supply Company (TANESCO). Also, as the findings of the Energy Access Situation Report 2016 show, the country has a long way to go to expand access to electricity as 67.2 percent of all don’t have electricity.

Interestingly, Tanzania has drawn some key insights from the positive experiences of South Africa and Uganda as exemplified by its Electricity Supply Industry (ESI) Reform Strategy and Roadmap 2014-20125. The ESI Reform Strategy and Roadmap envisaged the unbundling TANESCO’s generation segment from the transmission and distribution segments by December 2017.

Nevertheless, since reform, whether structural or regulatory, is not a one-off event, the government is highly encouraged to review the reform plans contained in the ESI Reform Strategy and Roadmap now and again with a view to not missing the timelines, while being mindful of the sensitives that, inevitably, are involved in a highly competitive globalized world.

In this context, the investors’ interest that reforms, policies and governmental actions are coherent, consistent and compatible with international standards and best practices should be better balanced with protecting the ‘national interest’ underpinning the reforms, policies and actions.

This is particularly important because private investment capital that goes beyond the traditional financing mechanisms and involves more prudent options, such as, where applicable, corporate bonds, capital markets and investment trusts or securitized loans will be required to bridge the financing gap and drive reforms in Tanzania’s power sector.

Unlocking this capital especially for renewable energy IPPs will help expand generation capacity and increase connection levels to sustainably support industrialization, improve the well-being of all Tanzanians and boost economic growth.

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm. This article was first published in The Citizen on Thursday, 1st March 2018.

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