Default of IPTL deal victory for the Tanzanian people

“The Government cannot allow Tanzania’s electricity consumers and the economy to be burdened with extraordinarily high electricity tariffs.” President Benjamin Mkapa, The Express, 28 May 1998

TANESCO's decision to issue a notice of default to the Independent Power Tanzania Limited (IPTL) is a cause for deep satisfaction among those who are concerned with the development of the national economy and the welfare of the Tanzanian people. By the same token, the default notice represents a resounding defeat for those foreign and local interests who are prepared to mortgage the future of the country for their own rather than national interests.

In June 1995, TANESCO signed a Power Purchase Agreement (PPA) with IPTL to add 100 megawatts of generating capacity to the national grid using slow-speed diesel engines.

On April 9th this year, TANESCO issued a Notice of Default on the grounds that "Without informing TANESCO, IPTL unilaterally decided to substitute medium-speed diesel engines for the slow-speed engines stipulated in the PPA."

On 14 May, with the default issue still unresolved, TANESCO and IPTL entered into final tariff negotiations. These failed to arrive at a tariff based on actual, reasonable and verifiable costs. Although IPTL are thought to have made substantial savings from the engine substitution, the cost of the project - over US$163 million - has remained virtually unchanged.

As the capital costs have a direct bearing on the level of tariff to be set, TANESCO and indeed all Tanzanians need to have access to the verifiable costs of the project. If the latter are not made available, IPTL cannot claim to have acted in good faith and their argument to proceed to set tariffs becomes void.

If IPTL fail to account for the total declared cost of the project, TANESCO would have no alternative but to cancel the contract, after which the dispute could only be settled through international arbitration.

Commissioning IPTL would lock Tanzania into a twenty-year contract which would probably double the cost of electricity which could be supplied more cheaply using Tanzania's abundant hydroelectric and enormous untapped natural gas resources. Tanzania would pay IPTL hundreds of millions of dollars whether it generated energy or not..

IPTL succeeded in derailing Tanzania's long-term energy policy, which foresaw the development of the country's enormous natural gas and hydro resources as a substitute for thermal power. Were IPTL to go ahead, the US$350 million natural gas programme might be shelved indefinitely.

It is particularly unfortunate that IPTL tried to promote their project as an example of successful South-South co-operation.

The Government of Tanzania should, as a matter of extreme urgency, establish a mechanism to assure greater transparency and accountability in foreign direct investment, so as to avoid the recurrence of IPTL-type scenarios. This would increase confidence among bona fide investors and deter those interested only in quick and dirty profits.

Transparency International favours the diversification of sources of direct foreign investment in Tanzania or elsewhere in sub-Saharan Africa. By the same token, Transparency International is opposed to all investments which seriously undermine prospects for economic growth and national development.

IPTL supporters have consistently accused the World Bank and other development agencies of opposing their project on the basis of a hidden commercial alliance with private investors. TI-Tanzania Chapter believe that, on the contrary, the donor community should be congratulated for sticking to the principles of transparency and good governance which it espouses, and for taking seriously the policy and financial benchmarks and targets on which donor agreements with the Tanzanian government are based.

Like Tanzania, most African governments are trying to encourage foreign investment, and many are selling off state-owned corporations or entering into management contracts with private companies to supply power and other public goods. If these worthwhile processes are corrupted by opportunistic foreign and local investors in collusion with public officials, then the move towards a viable and competitive market economy will be severely, perhaps definitively, compromised.

The eventual cancellation of IPTL will afford President Mkapa the opportunity to bring to book those in his administration who have supported IPTL despite overwhelming evidence that the project was neither conceived nor executed in the national interest. Such a move would highlight the risks attached to such ventures and would deter those who might be planning more IPTL-type investments in future.

For any press enquiries please contact

Mr. Ibrahim Seushi or Brian Cocksey at TI Tanzania
or e-mail: [email protected]