For the past two decades, Tanzania has been grappling with the decisions it made and the contracts it entered into in the gas sector, questioning their fairness to the country. This debate has unfolded through various committees and reports released over the years.
With gas contributing approximately 60 percent of Tanzania’s power supply, it’s evident that developing the gas sector was indeed a prudent move. However, amidst the urgency of the moment or perhaps deliberate oversight, some contracts in the gas sector were not carefully executed.
One of the key contracts in the gas sector is the agreement between Tanzania and Songas Limited, which is set to expire in July 2024 after 20 years of production since 2004. The Songas project currently contributes about 189 MW, equivalent to 10 percent of the country’s available power.
The overarching question that remains at the moment is what decision Tanzania will make regarding the contract and whether it will succeed in addressing some of the contentious clauses that have been the subject of debate for years.
The Contract
Songas project is operated by Songas Limited, a private company owned by the Tanzania government (40.7%) ,Globeleq (54.1%) and ABC Bank (5.2%). Globeleq is owned by British International Investment (70%) formerly CDC, a UK government development finance institution, and Norfund (30%) a Norway government development finance institution.
Songas was financed through loan and private capital at a ratio of 75:25, with equity being USD 72 million and loan being USD 234 Million. The loan was taken by the government from the World Bank (USD 183 Million) and the European Investment Bank (USD 51 Million) and was provided to Songas.
While this loan was utilized to finance the large chunk of the project, the terms set by the developing partners at that time dictated that the project must be owned by the private sector. Thus, despite the loan being guaranteed and intended for repayment by Tanzania, it was deemed solely as a loan to Songas Limited rather than a capital investment.
This initiative was conducted at a time when the country was heavily indebted, with low exports, and the Tanzania Electric Supply Company Limited (TANESCO) was grossly mismanaged; and most of the development budget was financed by donors. The World Bank project documents cited three reasons why private actors were supposed to lead the project.
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First Tanzania lacked expertise in gas processing plant or pipeline operations, second it argued private investors would bear the construction risks, third, private actors would help with the mobilization of capital from the private sector and fourth was to build private sector confidence in the commercial market for gas in the country.
Even though the project received loan support, there were some questionable details. For instance, regarding equity, the deal was structured so that the private actors’ investment would be repaid with interest rates of 22 percent and 18 percent, paid through capacity charges from TANESCO. This setup essentially made the invested amount seem more like a loan to the project but with much higher interest rates than usual commercial loans.
Analysis from the Controller and Audit General of Tanzania (CAG) showed that by December 2018, Tanzania had paid a sum of USD 103.43 million in principal amounts and USD 152.30 million as interest payable for the shares. This is aside from the fact that the investor was also enjoying the dividends as much as TANESCO.
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Contractual risks
The project was also structured as a build-own-operate rather than a build-operate-transfer. This means that at the end of the project, the project and its assets remain owned by Songas.
The contract stated that after the expiry of the project contracts in 2024, if the government does not engage in discussion for renewal or extension from January 2021, Songas could proceed to find another buyer of its power. Something that the CAG report of 2018/19, has highlighted as a risk business to Tanzania.
“There exists an ambiguity on the ownership of the transferred assets and incurred liability after the completion of the project. The Government is at risk of losing the control and ownership of transferred assets and gas extraction rights to a private power producing company which is not the ultimate goal and objective of the Government,” argued CAG in his report.
This setup has remained a point of controversy for decades, especially because Songas is poised to recover its investment cost and more, through the monthly capacity charges paid by TANESCO.
This structure has forced members of parliament to ask, if Tanzania was the one that financed the majority of the project why isn’t it the one with large shares? Furthermore, the terms of the current contract are also difficult, Tanzania is required to enter into a deal that is consistent with the last contract.
Negotiations?
By 2012, Tanzania was considering developing Stigler’s Gorge Dam. Even though there were plans the project stalled until 2017. Following a visit by Ethiopian dam contractors, the late President John Magufuli announced on June 28, 2017, that the country will embark on building Stiegler’s Gorge dam, a 2,115 MW project in the Rufiji river basin. In his remark, he insisted that the project was long overdue and that the country was tired of being taken advantage of.
As the project was preparing to commence, he made it a point to explain one of the motivations behind the push on the project, was that he was not happy with the terms in the gas sector.
This is what he remarked on September 09, 2018, in Musoma: “We want to build Stiegler’s Gorge, we are going to spend a lot of money but once it’s complete, we will be like Europe.”
“I know there is going to be some resistance, they will say why are you not using gas, but they own all of the gas, if you want to use it, they take the largest cut. This is why even the pipeline to Dar es Salaam is underutilized, only 30 percent. It’s because of the people who want to control us. So we must build this dam, they will not lend us money, but we are going to build it.”
It is worth reflecting that it was in 2016, that Songas for the first time activated the clauses that allowed it to shut down its plant due to non-payment. Underscoring the late Magufuli’s approach to negotiation which was always hardened, sometimes without making sense or caring about cost; it’s worth saying he felt cornered and saw the Stigler’s Gorge dam as an option that made much business sense.
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Fast forward to 2024, the Julius Nyerere Hydro Power Project (JNHPP) went live on February 22, 2024, with a supply of 235 MW and an additional 235MW to enter this year, While the project doesn’t entirely solve the electricity challenge, it ensures an increase in supply.
With the coming negotiations or ongoing negotiations, Tanzania is in a better position than it used to be 20 years ago, it is not desperate. The test for President Samia is for her government to secure a better deal than what was there in the past.
There are two reasons for this, the country needs all the savings it can get to be used for the ongoing projects in the country such JNHPP and Standard Gauge Rail project as well as servicing its debt. The second reason is political, president Samia, success or failure in securing the deal will be compared with her predecessor.
Her predecessor had managed to create a perception that he was the protector of Tanzania’s resources and interests, JNHPP is the evidence of that. So if the agreement remains as it used to be, critics in her party and outside will associate the failure to secure a better deal with a lack of enough drive to protect national interests and corruption.
The positive development is that Samia’s administration has demonstrated a strong understanding and capability to negotiate improved deals in the gas sector. This is evident from the recent agreement with Mauriel&Prom concerning the Mnazi Bay gas project, which managed to increase Tanzania’s shares. Additionally, the government has pledged not to extend the contract beyond its expiration in July 2024 without first negotiating better terms.
Getting a better deal will validate Tanzania’s current approach to negotiating and engaging with investors which favors constructive methods over contentious ones.
Achieving a win-win situation will establish a precedent for more positive business development, but also discourage perceptions that the country is vulnerable to exploitation, something that the majority of the citizens believe.
Tony Alfred K is a writer and analyst working with The Chanzo. He can be reached at tony@thechanzo.com and on X @tonyalfredk. These are the writer’s own opinions, and they do not necessarily reflect the viewpoint of The Chanzo Initiative. Do you want to publish in this space? Contact our editor at editor@thechanzo.com.
