Unlocking private investments in power generation in Tanzania

The Julius Nyerere Hydroelectric Power Plant (JNHPP), which is expected to generate approximately 2115 megawatts when is completed.

What you need to know:

  • While the government has identified various reasons for the power crisis, it has yet to effectively engage private investors to bridge the gap between supply and demand. At the core of this issue, the question of whether to provide government guarantees for private investments or not is crucial today.

Last week, we explored the issue of insufficient power generation in Tanzania, highlighting the government's narrative of low rainfall, maintenance issues, and delays in the JNHPP project.

While these factors may contribute to the ongoing crisis, the focus on those factors fails to address the broader challenges hindering progress in the power sector. This week, we delve deeper into the roadblocks hindering private investment in the sector, crucial for bolstering generation capacity.

One aspect that demands attention is the role of private investors in bolstering power generation capacity. While the government has identified various reasons for the power crisis, it has yet to effectively engage private investors to bridge the gap between supply and demand. At the core of this issue, the question of whether to provide government guarantees for private investments or not is crucial today.

This issue came to the fore during the Magufuli era, when the government invited private investors to participate in power generation. Unfortunately, potential investors from some nations banded together and submitted similar bids to twist the government’s arms. The response, I am informed, was brutal: not only did the government cancel the respective bid, much to the bidders' surprise, but when asked, one minister took the opportunity to thoroughly rebuke them.

I should admit that I derived a measure of pleasure from hearing this story. Quite often, all that we hear about is the government rolling over to accommodate foreign interests.

It was good to learn that there was some spine in leadership, whatever the motives. That said, after some time of reflection, I think some kind of balance needs to be struck between the expectations of the two sides.

Financing energy projects requires significant resources. The rule of thumb is that a plant of 100MW capacity would cost 100 million dollars in investments. And, thanks to decades of misrule, Tanzania requires gigawatts in investments—approximately about 28 billion dollars in 20 years.

That implies allocating, mitigating, or transferring project risks related to Tanesco’s creditworthiness, changing legal environments, and government interventions to unlock financing.

Sovereign guarantees are generally used to address such risks. These guarantees promise to fulfil obligations if the off-taker defaults, making projects more attractive to investors. However, the government has become more wary of potential financial burdens nowadays. Such commitments can damage the nation’s credit rating, making acquiring much-needed development financing harder. As a result, the government has been pushing for a move away from such guarantees.

But investors find that too risky. After investing huge sums, they don’t want to be told that the power they generate will not be purchased. They don’t want their payments to be withheld for no reason. And they don’t want to become victims of arbitrary political decisions—something that we are specialists in. Given our track record, these are sensible demands, aren’t they?

Is there anything that the government can do to improve its outcomes besides issuing guarantees? Quite a lot. For starters, the government could allow Tanesco to become more independent. I have talked to people who spoke of the time when Tanesco had the power to directly engage institutions such as the World Bank for financing. They were trusted because their counterparts felt that they had the authority to do what they were doing. They were reportedly more competent and more responsible. Today, apparently, nobody knows what Tanesco is doing. All power has been usurped by politicians, thus multiplying the risk that potential investors have to assume.

Beyond sovereign guarantees, the transmission challenge exacerbates the problem, as the existing grid infrastructure is insufficient to accommodate increased power generation capacity. Admittedly, much is being done to expand and modernise the power grid, but progress couldn’t come fast enough to alleviate the crisis.

Many potential subscribers remain off-grid today, thus highlighting the need for further investments in grid infrastructure to effectively harness and distribute power from diverse sources.

Moreover, corruption poses another significant obstacle to attracting private investments. Tanzanians are fond of closed-door and opaque procurement deals, which has done a lot to erode trust in the system. Such practices not only undermine the integrity of the sector but also perpetuate inefficiencies.

In addition to these challenges, one can mention regulatory uncertainty, bureaucratic red tape, and a lack of transparency in decision-making processes as contributing to a hostile environment for investors. We may have some kind of long-term strategy for the power sector, but as we have seen during the Magufuli era, implementation follows the wishes of our political masters. As a result, even the existing strategic plans don’t deter arbitrary political actions.

To unlock the full potential of private investments in Tanzania's power sector, concerted efforts are needed to address the underlying challenges and create an enabling environment for investment.

This includes streamlining regulatory processes, enhancing transparency and accountability, and investing in grid infrastructure to facilitate the integration of diverse energy sources. Next week, we will review what Tanzania can do to improve the business case of private investments in the power sector.