Investing in the African electricity sector Tanzania

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1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare Investing in the African electricity sector Tanzania Ten things to know Attorney advertising

2 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 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 Exxon- Mobil, 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 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 Norton Rose Fulbright

3 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 The Tanzanian Energy Minister has also revealed plans to invest US$598 million in two gas powered plants with a combined capacity of 630MW. 03 What is the renewable energy potential in Tanzania? Tanzania has high resources for each of wind, solar, hydropower, biomass and geothermal: Geothermal: Tanzania has a potential of 650MW of geothermal and 50 potential sites have been identified as suitable for development. 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. 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 There is 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? 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. TANESCO is the single vertically integrated national utility. TANESCO is wholly owned by the GoT and its operations are regulated by MEM. 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 It is an autonomous multisectoral regulatory authority which, as well as power, also regulates the petroleum, natural gas and water sectors. 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 Norton Rose Fulbright 03

4 been brought on-line since severe droughts in ), 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 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 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 ship Act to enable the GoT to provide such a guarantee, and it is hoped that this legislation will be in place during 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 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 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

5 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. Norton Rose Fulbright 05

6 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. Awards and accolades This is a top firm the lawyers have a reputation for being hands-on, and have an innovative and client facing approach. Projects and Energy, Africa wide They cover all asset classes and have exceptional strength in numbers. Asset Finance, Global wide Projects and Energy, Power The team has a real focus on climate change, and has invested hugely in it. The firm is definitely up there when it comes to international emissions trading. Climate Change Tier 2 Projects Tier 2 Power Legal 500 Banking and Finance: Project Finance, South Africa IFLR Law Firm of the Year City AM Awards 2012 Middle East & Africa Renewables Deal of the Year, Lesadi & Letatsi PV Project Finance Awards 2012 African Solar Deal of the Year, KSolar CPS Project Finance Magazine 2012 African Renewables Deal of the Year, Addax Bioenergy Project Finance Magazine 2011 African Power Deal of the Year, Kivuwatt Project Finance Magazine 2011 Rankings, awards and accolades included in this publication pre-date the combination of Norton Rose and Fulbright and Jaworski LLP on June 3, Norton Rose Fulbright

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