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Tanzania
Ten things to know
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Investing in the African electricity sector – Tanzania – ten things to know
Investing in the African electricity sector – Tanzania
01 | Why consider Tanzania?
Tanzania has approximately 1,041MW of installed
generating capacity, while only 10.5 per cent of the
population have access to electricity. Tanzania’s power
sector suffers heavily from inefficiencies (across installed
generating capacity, transmission and distribution)
and scored only 1.9 out of 7 for quality of electricity
supply in the World Economic Forum’s 2012 Financial
Development Report (beating only Nigeria and
Bangladesh). Tanzania’s low level of development is
reflected in the fact that solid biomass fuel accounts for
90 per cent of total energy consumption.
Tanzania’s generation mix is predominantly based on
hydropower, natural gas imports and expensive emergency
short term liquid fuel generators. It is well recognised that
the state of Tanzania’s power sector is adversely affecting
GDP, with annual GDP slowing from 7 per cent since 2005,
to 6.5 per cent in 2010/11 and just 6 per cent in 2011/12.
Given the current state of the power sector, there is much
room for development. Tanzania is focussing on exploiting
its domestic reserves of natural gas as part of its 25 year
Power Sector Master Plan, to increase installed generating
capacity by 6,000MW, with increases achieved through
the development of hydropower, natural gas and thermal
generating capacity in the near to medium term.
Tanzania currently has a few independent power
production (IPP) projects (approximately 300MW of
capacity in aggregate), including 180MW of gas-fired
capacity owned by Globeleq. The government is also
seeking to develop a number of major power projects,
including the 200MW Kiriwa coal-fired power project and
the 240MW Kinyerezi gas-fired power project.
Generally the Government of Tanzania (GoT) recognises
that there is a need to promote and enhance private
investment in electricity generation, transmission and
distribution projects and Tanzania is taking proactive
steps to encourage overseas investment, including those
identified in section 7 below.
02 | Gas Gas Gas
The availability of a secure and reliable gas supply is a key
ingredient in the successful development of a country’s
power sector. In this regard, exploratory gas drilling in
Tanzania has been highly successful, prompting headlines
that gas discoveries on Tanzania’s east coast are on
02 Norton Rose Fulbright
an Emirati scale. Recoverable natural gas reserves are
estimated to be 33 trillion cubic feet, with gas revenues
that are estimated to be US$70bn as a base case. Current
predictions are that Tanzania could become the world’s
third largest gas exporter.
Among the bigger operators in Tanzania are BG Group,
in partnership with Ophir Energy, which has discovered
more than 7 trillion cubic feet in recoverable reserves from
three offshore blocks, Statoil in partnership with ExxonMobil, which has so far discovered 9 trillion cubic feet, and
Petrobras, in partnership with Shell, which has drilled a dry
well but is still developing two offshore blocks. Statoil has
announced plans to work with BG on the development of a
US$14 billion liquefied natural gas facility, to facilitate the
export of LNG to the Asian markets.
Tanzania is now looking to restructure its state-run
petroleum regulator and the GoT has recently unveiled a
gas policy and draft legislation to help it regulate its vast
natural gas discoveries. On 2 November 2012, Tanzania’s
Ministry of Energy and Minerals (MEM) published the first
draft of the country’s Natural Gas Policy and announced
the start of a consultation period on the document, with a
view to finalising the policy before the end of 2012.
Oil companies have concerns over the Natural Gas Policy
due to the scope it provides to the state-owned Tanzania
Petroleum Development Corporation to be a natural
gas aggregator and control the supply of natural gas.
Additionally the policy makes reference to priority being
given to domestic market supply rather than gas exports,
suggesting that the GoT may reserve a proportion of
future LNG supplies for domestic consumption. This does
not provide comfort to the private sector. Currently oil
companies are lobbying MEM, and there is a wide sense
of frustration at the contents of the Natural Gas Policy and
how it has been released. The Natural Gas Policy should
have been finalised before the end of 2012, and does not
need parliamentary approval to be published. However, it
now looks as if it will be delayed well into 2013, pushing
back implementation of the Natural Gas Utilisation Master
Plan and the Natural Gas Act which are to provide it
with legislative force. There is a growing sense of tension
between domestic needs and international investors that is
heightened by the current fragility of the domestic power
sector. However, this must be viewed alongside Tanzania’s
general keenness for gas exports to help it to become a
middle income country by 2025.
Investing in the African electricity sector – Tanzania – ten things to know
In line with the Natural Gas Policy, the GoT and the
private sector are exploring ways to expand the domestic
infrastructure to increase the amount of available processed
gas. In July 2012 the GoT entered into a US$1.2bn credit
facility with Exim Bank of China for the construction
of a second natural gas pipeline, which will extend for
532km and connect the offshore gas fields at Mnazi Bay
in the south to Dar Es Salaam which is set to commence
commercial operation in 2014. The Tanzanian Energy
Minister has also revealed plans to invest US$598 million
in two gas powered plants with a combined capacity of
630MW.
currently only one Clean Development Mechanism project
registered in Tanzania, which involves biogas extraction
and usage for power generation. As Tanzania is a Least
Developed Country, the CERs issued from CDM projects will
be eligible for compliance purposes under the EU Emissions
Trading Scheme.
04 | What is the structure of Tanzania’s power
sector?
Tanzania has high resources for each of wind, solar,
hydropower, biomass and geothermal:
MEM oversees the power sector as a whole and also
regulates the upstream gas industry. As mentioned above,
MEM has the power to develop and review government
policies in the power and gas sector, and to take all
measures necessary for the structure and organisation
of the power sector. MEM generally acts as the principal
negotiator for the GoT on IPPs, and ensures that any
transaction is beneficial for Tanzania as a whole.
• Geothermal: Tanzania has a potential of 650MW of
geothermal and 50 potential sites have been identified
as suitable for development.
TANESCO is the single vertically integrated national utility.
TANESCO is wholly owned by the GoT and its operations
are regulated by MEM.
• Wind: there have also been recent developments
for wind power, with two potential locations,
Makambako and Singida, with average wind speeds
of eight metres per second. In respect of Singida,
International Finance Corporation announced in
December that it will be partnering with Aldwych
International to develop a 100MW wind farm at a total
project cost of US$285 million.
The power sector is regulated by the Energy and Water
Utility Regulatory Authority (EWURA). EWURA was
established by the Electricity and Water Utilities Regulatory
Authority Act 2001 and is relatively new, having only
become operational in 2006. It is an autonomous multisectoral regulatory authority which, as well as power, also
regulates the petroleum, natural gas and water sectors.
03 | What is the renewable energy potential in
Tanzania?
• Hydropower: Tanzania has a potential hydropower
capacity of 4700MW, only 561MW of which has been
developed so far. Tanzania Electric Supply Company
(TANESCO) has currently identified three phases of
hydropower development at Stiegler’s Gorge totalling
2100MW. In addition, the 358MW Ruhudji hydropower
project is currently under development by a consortium
of investors led by Aldwych International.
• Biomass: various small scale biomass projects are being
developed, particularly as part of agro-energy projects.
• Solar: the mean solar energy density in Tanzania is
about 4.5kW per square metre per day, which indicates
its potential use as an energy source. Some solar
developers are setting up large solar PV projects, but it is
as yet unclear whether they are a cost efficient solution
in Tanzania.
Tanzania has implemented the UNFCCC and has been
undertaking climate change studies since 1993. There is
EWURA awards licences to entities seeking to undertake
a licensed electricity activity under the Electricity Act
2008, approves and enforces tariffs and fees of licensees,
and approves terms and conditions of electricity supply
(including power purchase agreements (PPAs)). EWURA is
generally required to consult with the MEM minister who
has wide powers in relation to the overall supervision of the
power sector.
05 | Electricity tariffs
Comparative studies carried out in East Africa and cited by
Reuters indicate that Tanzania has the lowest electricity
tariffs, relative to Kenya, Rwanda and Uganda, and that
TANESCO is operating at a loss. According to 2008 figures,
tariff rates in Tanzania were 83 per cent of long run variable
costs of generation (compared to 137 per cent in Kenya).
This was highlighted in TANESCO’s application to EWURA
in November 2011, where TANESCO requested to increase
electricity tariffs by 155 per cent. TANESCO’s motivation
for this sudden increase was cited as being the increased
costs of operation of emergency power plants (which have
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Investing in the African electricity sector – Tanzania – ten things to know
been brought on-line since severe droughts in 2010-11), as
well as demonstrating TANESCO’s bankability to potential
funders and investors. TANESCO argued that without such
a tariff increase, it would face a loss of TSh 1,089 billion in
2012. This emphasises TANESCO’s poor creditworthiness.
Low electricity tariffs also create a problem in Tanzania for
potential IPPs, as tariffs must be sufficiently high to enable
developers to cover their costs, meeting debt service and
achieve a reasonable profit. However, increasing consumer
tariffs abruptly when an IPP joins the grid is politically
sensitive, especially with a nation enduring power blackouts on a regular basis.
EWURA approved a tariff increase of 40 per cent in January
2012, and we understand that TANESCO has now appealed
for a further 81.27 per cent increase in its tariff.
06 | Are government guarantees available?
Owing to the poor creditworthiness of TANESCO, potential
investors in projects involving TANESCO face a slow process
of obtaining GoT guarantees in support of TANESCO’s
obligations under PPAs.
Under the Government Loans, Guarantees and Grants Act
1974, as amended by the Government Loans, Guarantees
and Grants (Amendment) Act 2003, the GoT is only
permitted to grant loans in certain circumstances – where
the Minister of Finance is satisfied that it is in the public
interest that the repayment of principal money, interest
and other charges on any loan raised by an organisation of
which the GoT owns the majority of shares requires a GoT
guarantee. There are also further qualifications in respect
of such a loan in the legislation, including that the amount
guaranteed must be ascertainable.
TANESCO’s payment obligations under a PPA are therefore
not specifically covered by the current legislation. In order
to ensure a robust guarantee from the GoT of TANESCO’s
obligations under PPAs that it enters into, parliamentary
approval for the guarantee is required. We understand
that the GoT is currently amending the Public Private
Partnership Act to enable the GoT to provide such a
guarantee, and it is hoped that this legislation will be in
place during 2013. Certainly, given that this is a sector
that the GoT is trying to promote, it is to be hoped that this
enabling legislation will be put in place in the near future.
07 | What foreign investment incentives exist?
Recognising the need to welcome business into Tanzania,
the GoT has implemented a series of legal reforms to clarify
and ease the process of investing in Tanzania.
GoT offers special incentives to investors through the
Tanzania Investment Centre (TIC), which was established
under the Tanzania Investment Act 1997. TIC’s mandate
includes investment facilitation and promotion, and it is
authorised to assist investors to obtain necessary permits,
licences, approvals, registration and other matters required.
TIC has the authority to grant a project company Strategic
Investor Status, where the project company is investing
in a priority sector. Such incentives include a range of tax
benefits, an unrestricted right to repatriate profits and
dividends attributable to the investment, protection against
nationalization or expropriation by the Government (unless
such expropriation occurs under due process of law which
makes provision for the payment of fair, adequate and
prompt compensation), and a right of access to court or
arbitration for the determination of the investor’s interests
and the amount of compensation to which it is entitled.
An example of Strategic Investor Status is an agro-energy
project (such as sugar cane producing bio-ethanol and
electricity), due to the GoT’s policy of “Kilimo Kwanza” or
“Agriculture First”. One of the benefits of Strategic Investor
Status is that withholding tax on interest payable to foreign
banks was removed by GoT in July 2012.
08 | What is the scope of a typical Tanzanian
security package?
In our experience, a typical security package on a project
financed power project in Tanzania would include:
• a mortgage over land – prior to its creation, consent
must be obtained from the Commissioner of Lands,
and the mortgagor must obtain an official valuation
report from the Chief Valuer from Land Office, clearance
from the Land Registry for payment of land tax for the
previous 10 years, and obtain property tax clearance for
the previous 10 years. Once created, the mortgage must
be registered in the Lands Registry for the local district.
If a mortgage is granted by a company, it must also be
registered in the Companies Registry within 42 days,
and failure to do so will render it void against any
creditor. Lastly, the mortgage must be stamped for a
nominal amount;
• chattels mortgage over moveable property – this is
permitted under the Chattels Transfer Act, which defines
the class of assets over which a chattels mortgage
may be created as any moveable property that can be
04 Norton Rose Fulbright
Investing in the African electricity sector – Tanzania – ten things to know
completely transferred by delivery, including machinery
and stock. It must be registered in the Registrar of Titles
within 21 days of creation, and if not it will be void. This
registration must be renewed every five years;
• a debenture over all the company’s assets – the
Companies Act expressly refers to debentures as
creating a charge over uncalled share capital, land, book
debts, floating charge on the undertaking or property
of a company, goodwill and intellectual property. A
debenture must be stamped with nominal stamp duty
payable, and must be registered against the company in
the Companies Registry within 42 days;
• share pledge – this must be stamped with the nominal
stamp duty amount and notification of the charge must
be sent to the company, and its confirmation obtained
that no dealings will be undertaken in respect of the
shares without its consent; and
• guarantee – there is no formal requirement to register a
guarantee, but it is thought prudent to do so under the
Registration of Documents Act.
In terms of enforcement, generally a lender is entitled to
take action under a security document in case of default
by a borrower, and no judgement from a local court or
issuance of an additional document is required. However,
certain regulatory procedures do need to be followed.
An assignment of receivables is enforceable on an event
of default or insolvency, provided that the payer party has
acknowledged the assignment.
10 | Reciprocal enforcement of foreign
judgements and arbitration awards
Tanzania is a signatory to the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards
1958 and therefore recognises and enforces arbitration
awards made in other contracting states, subject to certain
limitations, including public policy grounds. Enforcement
of a foreign arbitration award in Tanzania is achieved by
applying to the High Court for an enforcement order, which
has the effect of rendering the award binding between
the parties.
The Reciprocal Enforcement of Foreign Judgements Act
Revised Edition 2002 provides for the recognition of
judgements obtained in certain foreign courts, notably
including the High Court of England. Persons wishing to
enforce foreign judgements in Tanzania must apply to the
High Court within six years after the date of the judgement
or, where there have been appeals against the judgement,
within six years after the date of the last judgement given in
those proceedings, to have the judgement recognised by the
High Court in Tanzania. In certain circumstances the High
Court may set aside a foreign judgement.
Whilst parties to a contract are free to choose the law
which governs the contract, the freedom to submit to the
jurisdiction of courts outside Tanzania is subject to certain
limitations. Essentially, an agreement that purports to
restrict absolutely the parties from enforcing their rights
by usual legal proceedings in ordinary Tanzanian courts is
void. Therefore, where jurisdiction is granted to a foreign
court, this should be done on a non-exclusive basis.
Security over project documents is provided by way of an
assignment, and Tanzanian law recognises lenders’ step in
rights under direct agreements. However generation licences
cannot be transferred without the consent of EWURA.
09 | Foreign law of contracts
Generally, Tanzanian courts recognise parties’ express
choice for a contract to be governed by a foreign law,
provided that the choice of law is not made by the parties
with the intention of evading a more appropriate legal
system, or if the foreign law that is chosen contravenes
Tanzanian public policy.
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Investing in the African electricity sector – Tanzania – ten things to know
Total package
We have been active throughout Africa as legal advisers
on transactions in the power sector for many years. Power
generation and transmission projects are a core part of
our business. We have extensive experience working with
and advising sponsors, lenders, developers, bilateral and
multilateral organisations and governments in Africa. We
also advise on the regulatory changes which are being
introduced in the energy sector of many African countries.
More generally, teams from across Norton Rose Fulbright
have worked on a wide range of project and trade
financings, mergers and acquisitions, securities offerings,
investment trusts, privatisations and dispute resolutions.
Most of these transactions have involved substantial
due diligence and extensive dealings with the relevant
governmental authorities, companies concerned and local
counsel. Accordingly, we are familiar with the requirements
and structures usually sought by project sponsors, lenders
and governments alike.
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