Privatization of Electricity in Tanzania
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The story of Tanzania, from pre-colonialist period to present
Tanzania, located in East Africa, is one of the least developed countries in the world. According to the UNDP Human Development Index, Tanzania ranked 162 out of 177 countries in the 2004 survey (UNDP:2004, HDI), with one being the most developed. According to the Poverty Reduction Strategy Paper (PRSP) prepared by Tanzanian officials for the World Bank, half of Tanzanians 36.6 million people are characterized as “poor” and one-third live in “abject poverty”(WB: PRSP p.1). Tanzanians have a life expectancy of 43.5 years, a fertility rate of 5.1 births per woman, an HIV prevalence of 8.8%, and a population growth rate of 1.95% (UNDP: 2004). Agriculture makes up half of the country’s GDP, 85% of the exports, and 80% of the labor force (CIA: 2004).
Culturally, Tanzanians are made up of 130 different tribes, each speaking their own mother tongue. The official languages of Tanzania are Kiswahili and English, with English being the main language in commerce, administration, and higher education (CIA: 2004). Kiswahili is a mix of Bantu languages, English, and Arabic, and is indicative of the millennia old history of trade with the outside world. Records of trade routes with the Middle East date back to the 1st century AD (govt web: early history).
Zanzibar and the coastal town of Bagamoya were the hubs of the East African slave trade, active for well over a thousand years (pilot). While the early slave trade with the Middle East existed only on a small scale, transporting around 100 slaves at a time, the appearance of Europeans in the 17th century ratcheted up the trade to a much larger scale and level of organization, at its height moving 15,000 slaves a year out of East Africa (pilot). Serious efforts to end the slave trade began in the 19th century, though the trade continued through the German occupation of then German East Africa in the latter part of the century. In 1919 after World War I, Britain took over German East Africa, renaming it Tanganyika, and permanently put an end to the slave trade (govt web: colonial period ).
Tanganyika attained independence from British rule in 1961 and Zanzibar followed soon after in 1963, ending the existence of the British mandated territory. Tanzania was formed in 1964 by uniting the mainland, Tanganyika, and the islands of Zanzibar. An excerpt from the Tanzanian National Website displays an interesting official interpretation of the lingering effects of centuries of occupation by foreigners (my emphasis):
During the domination of Tanzania by Germans, British and Arabs, the indigenous people were decimated, lost their destiny and cultural identity, were economically exploited and their technology disrupted. However, the worst evil of all committed by colonialists has been their wishful intent to discourage individual initiative to venture, discover, make attempts and to fabricate. The outcome is the current dependency status! (govt web, social organization)
This quote reveals an interesting viewpoint to keep in mind as we enter the discussion of the political climate and the push for privatization and foreign investment in modern day Tanzania.
Politics and Privatization
After independence was established in the sixties, Tanzania entered a long period of socialism where the economy, and hence all private investor-owned property, was nationalized (AETC: 2000, history). In subsequent decades, many of the public enterprises suffered from bad management and a lack of financial viability leading to a failing Tanzanian economy.
In 1992 the government finally reformed its political system, allowing the formation of political parties (ibid). The same year the Tanzanian government announced the establishment of the Parastatal Sector Reform Commission (PSRC) signaling its intention to privatize all of the 390 state-owned enterprises in an effort to rejuvenate the economy, making Tanzania more competitive in the global market (prctz.com). In an effort to attract investors and decrease risk perception, the government signed international treaties committing never to nationalize private property again (AETC: 2001, history). PSRC expanded the policy in 1996 to include private sector participation in utilities and infrastructure ventures (prctz.com). According to the PSRC website, currently 330 public enterprises have been taken over by the private sector. Tanzanian investors have maintained 100% ownership in 135 of those enterprises (WB:PRSP).
Tanzania Electric Supply Company (Tanesco)
One of the biggest parastatals which maintained 100% Tanzanian governmental ownership until recently is the Tanzania Electric Supply Company (Tanesco), responsible for all grid-connected electricity supply in the country. Let’s take a brief look at the history of Tanesco and electricity provision in Tanzania:
1908 – 1st public electricity supply set up by German colonialists, served railway workshops and colonialist neighborhoods
1920 – British take over control of then Tanganyika, establish a Governmental Electricity Department
1931 – Electricity supply handed over to two private enterprises
1) Tanganyika Electric Supply Company Ltd. (Tanesco)
2) Dar es Salaam and District Electric Supply Company Ltd. (Danesco)
1964 – Independence and establishment of Tanzania as a socialist nation, over a period of ten years the government purchases 100% stock in both companies
1968 – The two companies are merged and renamed Tanzania Electric Supply Company Ltd., maintained under governmental control for the remainder of the century (1908-1968 above from AETC: 2000, company profile: Tanesco)
1992 – Liberalization of Tanzanian economy allows for private investor involvement in electricity generation, maintains governmental control of transmission and distribution (prtz:Tanesco)
1995 – Songas was established, an Independent Power Producer project company created to implement the Songo Songo natural gas to electricity project
1996 – PSR policy reformed to allow private sector involvement in utilities and infrastructure ventures
1999 – Tanzanian Government approved a restructuring plan for Tanesco and a new policy for the electricity industry (prtz:Tanesco)
Tanesco is a traditional vertically integrated electric utility, meaning it offers all aspects of power provision: generation, transmission, and distribution of electricity. Tanesco used to have a complete monopoly on all aspects of power provision, but as of 1992, the Tanzanian government began allowing Independent Power Producers (IPPs) to generate power and sell that power to the Tanesco grid for transmission and distribution. Under this organizational structure, there are more opportunities for competition amongst power providers, with the intention of better service for electricity customers.
From the timeline we can see that over the past century the responsibility for electricity provision in Tanzania has transferred back and forth from the public to private sector a number of times. Currently Tanesco is undergoing extensive reforms and restructuring. It is difficult to determine the exact progress of the reforms, but the plan is to unbundle the utility into separate segments for generation, transmission and distribution, with the generation segment being further subdivided into numerous competing companies (reeep: p.1).
The Tanzanian government has stated that it will not pursue full private ownership of utilities (including Tanesco along with the water and telecommunications sector), but rather opt to “lease, concede or sell part of the shares to investors” while establishing an independent regulatory authority to balance the needs of investors, consumers, and the government (prtz.com FAQ #22). The Energy and Water Utilities Regulatory Authority (EWURA) is not yet operational, so for the time being regulation remains under the Tanesco umbrella (reeep: p.1).
Songas is a joint venture company established in 1995 as an IPP to implement the Songo Songo island natural gas to electricity project (tpdc-tz.com:songo_songo). The project has experienced many delays and changes in investing partners. The current organization of the project is a complex web including many partners, illustrated in Figure 1. The majority share in the Songas venture is currently held by CDC Globaleq. The World Bank has lent close to $300 million to fund this project (ibid).
Songas was started by Ocelot Tanzania Inc (now Pan African Energy) and TransCanada Pipeline Limited (TCPL) through a partnership with Tanesco, the Tanzanian government and Tanzania Petroleum Development Corporation (TPDC) (ibid). Pan African Energy is still involved in the project and operates the natural gas wells on and offshore Songo Songo Island (ibid). In August of 2000, TCPL sold its share in the project to Applied Energy Systems (AES), a US based Fortune 500 energy company who was a major sponsor for project construction(msn.com). In 2002 when the world economy was in recession and AES needed to “clean up their balance sheet”, they turned around and sold their majority share in the Songas project to CDC Globaleq (Zubaty:email).
CDC Globeleq is a growing startup company, the private spin-off of the UK government development company, CDC Group plc, formerly Commonwealth Development Corporation (CDC), who remains the sole shareholder of the company (globaleq.com:overview). Globaleq focuses on power generations in emerging markets in Africa, Asia, and the Americas, and seeks out businesses with long term Power Purchase Agreements (PPAs) in developing countries primed for economic expansion (ibid). A PPA is just what it sounds like, an agreement by a utility to purchase all of the power produced at a power plant, regardless of whether or not that power is needed. PPAs are necessary to insure an investor of the financial viability of expending capital costs to construct, operate, and maintain the power plant.
Currently Globaleq holds a 60% share in the Songas venture and operates the Ubungo electricity plant, which produces 115 MW of electricity from 5 natural gas turbines (globaleq.com:songas). 100% of the electricity from Ubungo is purchased by Tanesco under a 20 year PPA (psrctz.com:Tanesco). The electricity from Ubungo constitutes 20% of all electricity consumed in Tanzania and current expansion activities will increase that share to 50% (globaleq.com:pressrelease).
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