Generating power and controversy: Understanding Tanzania’s independent power projects

Abstract

Initially conceived of within the broader context of power sector reform in the late 1980s and early 1990s, Independent Power Projects (IPPs) were intended to relieve state utilities of the burden of financing new plants, bring quick, quality power and reduce costs for end-users. Although IPPs have indeed contributed to generation capacity in Tanzania, much of the power that resulted from investments has been supplied neither quickly nor cheaply. Embarking on power sector reform in the early 1990s, Tanzania made IPPs a pillar of its reform strategy. Presently, Songas and IPTL, the country’s two IPPs are helping to reduce load shedding. However, these projects have not been without controversy. One of Tanzania’s IPPs was taken to international arbitration over a dispute related to construction costs. The state electric utility, Tanzania Electric Supply Company Limited (TANESCO), currently pays more than 50% of its current revenue towards combined fuel and capacity charges for the IPPs. Capacity charges for the country’s two IPPs are equivalent to approximately one percent of GDP. The Government of Tanzania (GoT) is intervening to assist TANESCO with its monthly IPP payments at present. With twenty-year Power Purchase Agreements (PPAs) between IPPs and TANESCO, these costs are expected to continue, albeit with some modifications due to refinancing, fuel conversion and further development of the natural gas market. This paper provides a detailed summary of how and why IPPs developed in Tanzania as well as their impact to date. Development outcomes, namely the extent to which the host country is benefiting from reliable, affordable power and investment outcomes, the degree to which investors have made favourable returns and been able to expand market share, are analysed in turn. IPPs offer more than a decade of experiences in private sector investment in developing countries and a detailed understanding of them may be the key to unlocking and sustaining future power investment.