Tanesco reforms will cost us Sh33 trillion

Dar es Salaam. The numbers say it loud and clear: There is no easy road to reforming the cash-strapped and inefficient Tanzania Electric Supply Company (Tanesco). We will need a whopping $20.9 billion (Sh33.4 trillion) for that goal to be achieved.

According to a report released recently by the ministry of Energy and Minerals, the government--in collaboration with development partners, Tanesco and private investors--have to mobilise at least $1.9 billion (Sh3.04 trillion) annually for 11 consecutive years to guarantee the successful dismantling of Tanesco’s monopoly.

“The Power System Master Plan identifies short term financing requirements (2012 to 2017) as $11.4 billion--about $1.9 billion per annum--of which 73.5 per cent is for power generation,” says the report signed by Prof Sospeter Muhongo, the minister for Energy.

The report pinpoints four major sources that exist on limited funding--the government, Tanesco, foreign donors and local financial institutions. Private capital investment then becomes an important option to bridge the financing gap, according to the report titled: “Electricity Supply Industry Reform Strategy and Road Map 2014–2025”.

Under pressure to reform

Tanesco has been under pressure to reform for over a decade. It intensified when the third phase government was implementing the parastatals privatisation policy on the advice of the Bretton woods institutions--the World Bank (WB) and the International Monetary Fund (IMF).

In 2002, the government hired Mercados Energeticos Company of Spain, which advised the government to unbundle Tanesco in order to improve efficiency and reduce the government’s burden of subsidising the monopolistic power utility company.

Stone & Webster Consultants were contracted the following year and came up with similar advice.

In 2005, the Presidential Parastatal Sector Reform Commission (PSRC) advised the government to split Tanesco into three companies--one to oversee generation, another to run transmission services and a third to oversee distribution of electricity.

But the government did not endorse the PSRC advice on the grounds that the parastatal had been handling a very sensitive sector of the national economy.

It appears, though, that pressure from the major donors--led by the WB and IMF--rose to the extent that the government gave way in April and commissioned PriceWaterCoopersHouse (PwC), which came up with a proposal in April that would have Tanesco reformed in four phases.

Rationale for reform

The drive to overhaul Tanesco stems from the fact that the power parastatal has operated under the weight of inefficiency, corruption, accumulation of debts due to expensive thermal power and tariff structure--which has been felt by domestic and industrial consumers, according to the 2012 report of Confederation of Tanzania Industries (CTI).

Reading the fourth Economic Update prepared by the World Bank’s lead economist for Burundi, Tanzania and Uganda, on December 21 last year, Mr Jacques Morisset said Tanesco had accumulated $260 million (Sh416 billion) in debts that had to be settled by the government.

In January this year, Tanesco Managing Director Felchesmi Mramba said Symbion Power, Aggreko and Independent Power Tanzania Limited (IPTL) will by the end of this year start converting their power generation machines from expensive fuel-powered to gas-fired energy, which is a lot cheaper.

As at the end of the 2013/14 financial year, Tanesco had accumulated Sh400 billion in debts but that amount was expected to drop this month.

The Communications manager for Energy and Water Regulatory Authority (Ewura), Mr Titus Kaguo, told The Citizen this week that the government still has a big burden subsidising Tanesco because the switch-over from hired thermal power to gas-powered plants is expected by next year.

Phases of reform

Phase one of the reform agenda--known as immediate term--runs from July 2014 to June 2015. The second phase--short term--will be on from July 2015 to June 2018. The third--medium term--covers July 2018 to June 2021 and the fourth--long term--covers July 2021 to June 2025.

The reform model is built on the experience of countries including Kenya, Uganda and Namibia--and it has demonstrated that reforming a power utility parastatal is a long term affair with a multitude of activities.

The main objective of the Tanesco reform is to boost the power generation capacity in the country from 1,585 MW (April 2014) to at least 10,000 MW by 2025 with subsequent expansion of transmission and distribution of electricity.

The PwC report also indicates that this is in line with the national development vision in which the country targets raising per capita income from the current $640 (Sh1.02 million) to $3,000 (Sh4.8 million).

To attain middle income status by 2025, with the economic growth rate at 15 per cent annually, Tanzania needs sound electricity infrastructure that can generate 10,000 MW to cater for a population of 69.5 million by 2025. Speaking with The Citizen on Saturday recently, the head of the government’s communication unit in the ministry of Energy and Minerals, Ms Badra Masoud, said the government was in the preparatory stage working hard to raise the huge amounts of money required to implement the reform process.

The process has already started and phase one activities include assessment of Tanesco’s assets such as human resource, preparation of a task force team and a review of the law. Major stakeholders of the Electricity Industry Reform--including Tanesco, Ewura and Rural Energy Agency--will be involved.

Second term activities include forming two public companies--one for power generation and another for electricity transmission and distribution and approval of private power generation companies to compete with Tanesco.

“Private power generation companies will be allowed to sell electricity to the public company responsible for electricity transmission and distribution,” she said.

She listed the main activities in the medium term as splitting the power transmission and distribution company into two--one responsible for transmission and another for distribution and empowering Tanesco zonal offices to supervise tenders for procurement of resources, preparation of budget, business plans and hiring and firing of personnel.

The main activities in the long term include allowing Tanesco zonal offices to compete with private investors in harnessing sources of energy and signing contracts with private energy dealers in all forms of electricity business.

Ms Masoud added: “But it is important to note that the public companies responsible for power transmission and distribution will retain monopoly as is the case all over the world--including countries in Europe, Asia and America. They have all taken a similar approach.”