Politics and Power Cuts in Tanzania

Erick, a journalist in Dar, asked me "what is the source of power crisis in Tanzania, and how can it be resolved?". I thought, as simple as these questions were, they are the soberest a journalist has ever asked me. And, as such, they deserved reflection and detailed response. Here I write back:

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Dear Erick,

Thank you for your email - and your good questions. I think the discussion on energy has taken an interesting tone and, as ever, characterized by finger pointing. For me, as an MP and the Chairman of Parliamentary Committee on Energy and Minerals, the most important question is how do we get out of current crisis. But, before that, we need to look at how we got here.

A bit of history.

All tragic stories begin with “once upon a time…”

So, once upon a time, there was no power cuts. Yes, those who were connected to the Grid were relatively few, but had power most the time. Today, those connected to the Grid do not get power most of the time. Question is: what happened? The simple answer is: we did not invest in power generation, and transmission and distribution system to keep up with increasing demand. This is the crux of the matter.

Why did we not invest? I will explain a bit. The critical period in the history of electricity in Tanzania was between 1996 and 2006. In 1996, at the height of privatization fever, we decided that TANESCO should also be privatized. So, it was “specified” i.e. put under the list of companies to be privatized. This meant that no investment was undertaken – in generation, in transmission and transmission systems and in human resource in TANESCO – except for a couple of donor-funded projects that were in the pipeline already.

So, while no major investment was undertaken, the following also took place between 1996-2006:

1. Faster growth of the economy – at an annual average of 7 percent. And the drivers of this growth were big energy consumers – mining, construction and telecoms.

2. Initiation and expansion of the donor-driven rural electrification program.

3. Growth of SME sector which relied on power – garages, salons, etc, and medium industry, including packaging and so forth.

So, by 2002, 5 years after the decision was made, TANESCO was still not ready to be privatized. It was therefore decided to bring a private management company to run TANESCO and prepare it for privatization. Enter NetGroup Solutions from South Africa. The management contract was (initially) to run for two years and was funded by the Swedish government. It was further expanded to two more years until 2006. Whether or not NetGroup delivered per contract, and whether or not the engagement was a good idea, are matters of debate until today. In the provision of the contract, there was a bonus (beyond management fee) to be paid to NetGroup if they improved the financial condition of TANESCO. Of course they did so (and got the bonus) by doing two things: they succeeded in collecting massive amounts of unpaid bills – even from the Army, and other notorious defaulters including many government agencies. They even went after Zanzibar! They also heavily relied on hydro (they went even below allowed Mtera depth) for generation so as to minimize the costs. As a result, TANESCO's balance sheet improved. But the decision to rely entirely on hydro had its costs - some of which we are seeing today.

So, in 2006, the decision on the fate of TANESCO was finally made: we will not privatize it. So, in essence, these were lost 8-9 years. Then, from 2006 – now, we entered a new phase: a phase of emergency power, and politicization of power sector. And this is entirely another story. But, it is worth remembering that, during the last five years (2006 – 2011), we have only managed to put up 145MW of our own generation while the new increased demand per annum is 100-120MW. So, while we need to catch up fast and close the gap, we are still falling behind even on the new demand.

So, this is where we are. A country of 43 million people, with meager 1,117MW installed capacity, and production of 630MW as of today. This is miserable, to say the least.

But, the critical question is: how do we get out of here? And, most importantly, beyond the question of power cuts, how do we bring electricity to majority of Tanzanians who have not had it since the beginning of the earth?

What to do end power cuts TODAY?

There are two components to producing electricity: generators and fuel. While we need and can do with more generators, TODAY the crisis is of fuel: not enough gas to run Symbion plant to capacity; in some cases, TANESCO is asked by gas suppliers to lower generation in its own two gas plants because of low gas pressure; no fuel to run IPTL plant; and no water to run hydro turbines.

So, the immediate solution is to sort the fuel issue. Why: because, even if you are able to airlift a 300MW gas power plant to Dar today, you will get Zero power as there is simply no gas. It is not that there is no gas in the country. It is just that we haven’t planned well to get it (from SongoSongo and Mtwara) to where the generators are at critical moment and/or those foreigners controlling our gas have not allowed for this to happen.

So, we should sort fuel issue. To start with, we need to buy fuel for the IPTL plant. While this is painful, it is necessary. The cost of producing one unit of electricity at IPTL is 32 cents, and TANESCO sells electricity for 10 cents. So, basically we are buying power from IPTL at loss. But then again, for one unit of electricity that is not produced, the cost to the economy is US$1.1. So, the costliest power is still cheaper than not having it at all.

In addition, the government should sort out the gas issue. The situation as it stands today is scandalous. The bottom line is that we have gas in Tanzania but we do not control its production, its transportation, its distribution and its price. We might as well be importing it via tankers from Qatar. If, for instance, today we have just enough gas to produce only 100MW of power, it will not be directed to TANESCO gas plants (where we do not pay capacity charges) but to Songas plant (where we buy power and pay capacity charges). I even worry if the upcoming TANESCO (Jacobsen) gas plant to be commissioned in December 2011 will have gas to run on. If it wont, then this will be a scandal because we contracted it and we knew of its arrival 18 months ago. We will deal with gas issue in detail in our Committee report to the Parliament later next month. We will have to make some bold proposals.

In the interim, to cover for the shortage of gas, the government should compel Songas and Symbion to invest in combine-cycle turbines to produce more power from steam coming out of the current gas turbines – and wasted in the air. In other countries, if you use jet engines (as in Symbion and Songas plants), you are compelled by regulation not to “waste steam” that can produce additional power. (TANESCO's Wartsilla gas plants use piston engines that do not produce sufficient steam/force to enable a combine-cycle system). This is just an issue of government being assertive and change the regulation given the current emergency situation.

In the medium term, we seriously need to look at the tariff structure. We need to decide in this country whether electricity is a business or service. The current tariff is not commercially viable. Full stop. EWURA sets the price of tariff after receiving request from TANESCO. Of course they do a diligent job of looking at the cost and whether they are "prudently incurred". But then they call a public meeting to ask people what they think of the tariff request. Then people and politicians go there and bully everyone into a lower tariff. Of course TANESCO could do better to cut some of its costs so as to produce electricity cheaply, but we have to realize that 36 percent of tariff is a result of capacity charges, which TANESCO can do nothing about (at least for now) and therefore the more we do away with these the better, and the more TANESCO gets power from its own sources the more it is able to sell it cheaply. Even the government knows that the current tariff does not work. That is the reason it is subsidizing to the tune of 5bn shillings per year a private company in Mtwara to sell electricity at a price equal to TANESCO!

Not only does the current tariff hurt TANESCO balance sheet, it also discourages private investment in energy sector, particularly in alternative energy. For instance, for a solar generation to be commercially viable, the tariff has to be in the upwards of 20 cents (mostly because of the heavy initial investment), likewise with wind power. No one will come here – only to sell power to TANESCO at price below 10 cents.

People may say that it is impossible for poor people to afford higher tariff. I don’t believe so. Look at how much poor people are spending on phone airtime. And the tariff structure is such that TANESCO sells power at the same rate be it to a barber shop in Namanga or Barrick Gold Mine in North Mara. The tariff should be dynamic and flexible given the volatility in the fuel prices and different capacities of TANESCO customers. There are those who will be willing to pay higher tariff as long as power is steady and reliable. With industries, power, even at higher price, feature very insignificantly to the cost of production but when it is NOT available it is a very significant contribution to losses. For me, for the poor, the prohibitive cost is the electricity connection cost – at 500,000 shillings at a go, most rural people can’t afford it. If the tariff will continue to not reflect the cost of producing power, TANESCO will continue to underperform and investors will be less inclined to come (recently TANESCO announced a tender and the most competitive bidder offered to sell power to TANESCO at 1,028 shillings while TANESCO sells power for 157 shillings!) or will seek to make money off capacity charges.

Now, as we look for solutions to the power crisis, we also need to look at TANESCO (as our sole power producer and distributor at the moment) itself. What do we need to do to it? What is its cost structure? On the ground, and given the assets it owns, this company should be the pride of Tanzania. Last year, it sold power worth about 500bn shillings. Few companies in Tanzania can match that kind of revenue. And it has assets worth $1bn (more than 1.5 trillion shillings) and more than 5,000 employee. It has the potential to triple the assets and revenue in 5 years if the right decisions are made. But, what are those and why aren’t they being made. I will not dwell much on this as this thing will be longer (and will go beyond the issue of power cuts) and I will let my friend Zitto whose Committee deal with parastatal finances to chip in on this. But, suffice it to say that, we have a sleeping giant in TANESCO, and people ought to be much more thoughtful in their calls for its split and/or privatization.

But I agree that TANESCO has to do better. At the moment, it spends 70 percent of its revenue buying electricity from Songas – which only has about 15 percent of installed capacity. This is painful, and needs to change. Also, while it is required by best [utility] industry practice to spend 12 percent of revenue on Repair and Maintenance, TANESCO spent only 2.8 percent of its revenue on R and M between 2005-2008 – and result is lots of broken transformers and service lines and a huge amount of lost electricity. TANESCO needs to invest in transmission and distribution system as part of the solution to the current power crisis. Last year, mainly because of poor transmission and distribution infrastructure, TANESCO lost 21 percent of power it produced and/or bought. This lost electricity amounted to more than 1,200 GWhr – which is more than all electricity used in factories and businessplaces for the entire year, and amounted to about 75 percent of all electricity bought from Songas in the entire year. These are massive losses – which, if curbed, in themselves would have helped with the power situation.

I want to wind up as I am just on a roll – and can’t seem to finish. But last point: we need to manage better private [prospective] investors in energy sector. There is a lot of bureaucracy and red tape within government where people come in with project plans and proposals and end up going in circles in government offices and end up being captured by middlemen and influence peddlers - and eventually corruption kicks in. There are projects that should have been in the pipeline now but were delayed because of bureaucracy and our incapacity to deal with their complexity. Also, we need to be serious on how we handle energy projects. Most energy investors dedicate a team of around 20 people in a single project – lawyers, finance people, etc. Power projects are very complex. I feel that we in government aren’t looking at them as such. We assign 4 or 5 people who already have other tasks in the Ministry to look at these projects and engage these guys. There ought to be a full time project management team at the Ministry that will live and breath power projects everyday and how to get them executed faster and to the benefit of the country. And I also think that there are many clever energy financing avenues that we haven’t explored thoroughly, and have been stuck in the traditional grants, loans and treasury guarantees.

Finally, the government has plans to do 2,780MW by 2015. This is quite an ambition, and will go long way towards covering the gap and catching up with the demand. I like it when we think big and attempt big things. But to achieve it, we need to do better than business as usual.

So, these are some of my thoughts. You also asked me clarify on my comment on Minister Ngeleja. I didn’t want to dwell on people and personalities. As you can see, there are enough issues to fill many paragraphs. As a Member of Parliament, I will continue to ask these questions and advice the government to make the right decisions and policies. As MPs, we will hold the government (via Minister responsible) accountable for its promises in the Parliament, and we will demand answers (including answer to my letter), and the appointing authority will have to judge on his Ministers' performance. But to say that the Minister is a source of power crisis in Tanzania is being simplistic. And I am not one to jump into simple answers. I have realized that part of my problem as a politician is that I am probably too nuanced, and should probably have chosen academia. But I believe that we can do better as a people to embrace nuance and complexity.

As Chairman of Parliamentary Committee on Energy and Minerals, people always ask me when will these power cuts end? In my PERSONAL view, intermittent power cuts will continue until 2013. And this is being optimistic. Leaders will have to be honest that it may be impossible to completely end the current phase of power cuts before the end of the year.

Call me if you have further questions,

Best regards,

January Makamba (MP)
Chairman of the Parliamentary Committee on Energy and Minerals
Dodoma
June 29th, 2011

PS: The views in this email are my own, not Committee's.