Power Sector Reforms in Tanzania:Prospects for Local Private Investment

By Edward E. Marandu

EXECUTIVE SUMMARY

The aim of this work is to investigate whether the ongoing power sector reforms can create a window of opportunity for local investors in rural electrification. The rationale for considering opportunities for local investors is two-fold: first local investors would produce a local constituency to support the reforms and protect national interest; otherwise the reform process could reverse; second, local investors are more likely to serve the poor through investing in rural areas, which may be of little interest to foreign investors.

The study was designed in such a way as to investigate whether local capability to undertake power sector enterprises exists and if it does, whether the existing electricity law facilitates or impedes this. The data used for the study were obtained from interviews of managers of existing private power enterprises, local financial institutions, training institutions, other stakeholders and analysis of the electricity law. For comparative purposes existing private enterprises in the telecommunications sector were interviewed as well as.

The findings make a number of contributions to our understanding of local capability and the role of the current legal framework:

1. It appears that substantial local ownership is possible in tiny power enterprises; in the larger ones it is limited.

2. It seems that terms and conditions of local financial institutions are major constraining factors on ability of local investors to mobilize finance locally.

3. There is ample evidence to support the assumption that on the overall, the technical, managerial and professional capability needed to set up, operate and manage Independent Power Producer (IPP) and Independent Power Distributor (IPD) enterprises exists locally.

4. The existing electricity law appears inadequate with regard creating clear-cut legal provisions for private generators and distributors; thus leaving room for ambiguities.

5. The electricity law is unclear with regard to electricity trading, in the sense of permitting “bulk” purchases of power by private distributors for onward retailing.

6. The existing law is very rigid with regard to tariff adjustment for it allows flexibility within tariff ranges agreed for a medium-term period which could be 7 years or more; thus making tariff adjustments more a function of time lapse rather than reflect costs and other market factors. This could potentially discourage private participation if the costs rise above the range agreed upon.

On the basis of the findings the following policy options emerge:

1. There is a need for instituting realistic and affordable terms and conditions for loans and credits to encourage broad local private investment in generation and distribution.

2. There is a need to define the role of the local technical and managerial personnel in the emerging private power sector with the aim of fully utilising the existing and future capacity.  The definition, clarification and acceptance could be undertaken within the framework of a new electricity law.

3. There is a need for an unambiguous legal provision, which allows private generation and distribution of power.

4. There is need for a clear-cut legal provision permitting bulk purchases of power by the private sector for onward retailing.

The legal provision, which provides for a very rigid price adjustment process need to be repealed and replaced by a provision permitting a tariff formula that automatically adjusts the tariff for changes in market factors. This would provide a meaningful encouragement for mobilisation of financial resources for growth.

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