TANZANIA'S POWER CRISIS: COMEDY OF ERRORS OR

C O N F I D E N T I A L SECTION 01 OF 03 DAR ES SALAAM 001145

SIPDIS

SIPDIS

DEPT FOR AF/E B YODER, AF/EPS FOR T HASTINGS
ALSO FOR EB AFRICA WATCHER
PASS TO MCC OFFICE FOR G BREVNOV
LONDON, PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 07/10/2016
TAGS: ECON PGOV ENRG EIND TZ
SUBJECT: TANZANIA'S POWER CRISIS: COMEDY OF ERRORS OR
FUNNY BUSINESS?

REF: A. DAR ES SALAAM 01006

B. DAR ES SALAAM 0412

Classified By: Pol/Econ Counselor Mary B. Johnson for reasons 1.4(b,d)

SUMMARY
--------------

1. (C) Hit by another round of severe nationwide power
rationing, Tanzania's 2006 economic prospects are dimmer than
they should be. By the end of 2006, Tanzania's Gross
Domestic Product (GDP) will likely be 5 to 10 percent lower
than it would have been without power rationing. Due to its
sound macro-economic foundation, Tanzania's economy is still
the fastest growing in East Africa and certainly more
resilient than in the past. However, 2006 will record
opportunities lost for Tanzania and President Kikwete's new
government. What is both unfortunate and revealing is that
the new round of power cuts could have been avoided if the
Government of Tanzania (GOT) had taken decisive action during
January/February 2006 energy crisis. Instead, the GOT took
five months to secure an "emergency" power generation deal,
demonstrating that on the "transparent to opaque" scale, the
Ministry of Energy and Minerals (MEM) stands on the shadier
side. Although the GOT's Millennium Challenge Corporation
(MCC) team has almost finalized its compact proposal for a
late 2006 July submission, the energy sector will not be a
central component. With the MEM lacking a sustainable energy
strategy, MCC Washington will follow the World Bank's lead,
providing funds only after key reform measures are met. END
SUMMARY.

Power Rationing Returns: Longest in Tanzania's History
-------------- --------------

2. (SBU) After a two month hiatus, Tanzania's Electric
Supply Company (Tanesco) resumed a power rationing program
across Tanzania's national grid on June 8. The program was
designed to shed 80 Megawatts from the national grid, cutting
power for twelve hours daily (6 a.m. to 7 p.m.),with the
exception of key industries and sensitive areas such as
hospitals and airports. The rationing returned despite
abundant rains in May and early June. The rains registered
higher water flows in the smaller, downstream reservoirs
(Kidatu and Kihansi),but were not sufficient to enable
operation of the country's critical hydropower source, Mtera
Dam in Iringa. As of July 3, Mtera Dam was still one meter
below the dam's minimum supply level of 690 meters.


3. (U) Officials from Tanesco and the Ministry of Energy and
Minerals (MEM) have issued conflicting statements about the
expected duration of power cuts. Tanesco's Managing
Director, Adriaan Van der Merwe, warned that the rationing
would continue until the end of year. On June 8, the Citizen
newspaper called the program, "the longest power rationing
program in the country's history." In contrast, Deputy
Minister of Energy and Minerals, Lawrence Masha, told Econoff
on June 8 that an additional 100 MW of power would be in
place by August 2006 through a leasing power generation
scheme. On June 9, the Citizen quoted Masha's three month
forecast, running a front page headline which read "Blackouts
end in 12 weeks - Govt."


4. (C) Masha's three month timeframe for delivering relief
generation was optimistic, if not misleading. Out of eight
bidders for the short-term leasing facility, the MEM finally
selected Richmond Development Company, a little-known, U.S.
based company. Mohammed Gire, CEO of Richmond Development
Company, told the Ambassador June 9 (before any contract was
signed),that a five month delivery was more realistic given
freight timings. Richmond Development Company signed a
contract with the GOT on or around June 30, agreeing to bring
40 MW on-line by the end of September and the balance (60 MW)
by December. Tanesco's five to six month forecast,
therefore, appears more accurate.

A Foreseeable Shock
--------------

5. (U) Although the local press has characterized the power
cuts as a "shock," energy sector experts, donors and GOT
officials were well aware that power rationing would return

DAR ES SAL 00001145 002 OF 003


in June with the end of the rainy season. Paul Kunert,
Managing Director of Songas, informed the American Business
Association in April 2006 that Tanzania would again face a
power shortage starting in early June, increasing in
magnitude until at least October. In April, the World Bank
also released shortage estimates month to month for 2006,
ranging from a deficit of 30 kilowatt hours in June to 77
kilowatt hours in October. Given the prolonged procurement
process for "emergency" power generation, from February until
June, the return of power shedding should not have come as
any surprise.

Rationing Sheds Economic Gains...
--------------

6. (U) The cost of power cuts for Tanzania's developing
economy are predicted to reach USD 1.1 billion or a 9 percent
reduction in Tanzania's 2006 GDP. This estimated loss is
based on a 2004 World Bank study which determined a loss of
approximately USD 2.00 per kilowatt hour of unserved energy
needs. As the cost of production and service delivery
increases, the toll on Tanzania's overall investment climate
and trade competitiveness is significant, albeit less
quantifiable. According to Haji Semboja of the Economic and
Social Research Foundation, the country is becoming
increasingly dependent on thermal power which will translate
into more expensive locally manufactured products, less
saving for capital expansion and less competitive exports
both in the region and in international markets.


7. (U) A correlation between power shortage and environmental
degradation is also evident as consumers turn to charcoal to
fill their energy needs. President Jakaya Kikwete's
government and concerned donors have emphasized the linkage
between unreliable energy supply and environmental
degradation. The GOT's recently announced 2006/07 budget
reflected the government's attempt to address the impact of
the power crisis on both Tanzania's economy and environment
(Ref A). The removal of the Value Added Tax (VAT) on
petroleum products was one of the budget's bold moves to ease
soaring petrol prices while the reduction of excise duty on
kerosene and waiver of VAT on liquefied petroleum gas were
efforts to mitigate environmental damage.

...And Generates Political Pressure
--------------

8. (C) The continuing power crisis could also entail high
political costs. Deputy Minister of Energy, Lawrence Masha,
noted that he felt the political heat: "If President Kikwete
were to re-shuffle his Cabinet right now, every single person
in this country would understand it was because of the
continuing power shortage." To make matters worse, the
return of power rationing coincided with the World Cup
kick-off. Interruption of various World Cup matches was
politically unpopular enough to warrant consideration among
top officials in the GOT. Masha explained that the original
plan during the first round of power cuts in February 2006
was to install the leased generators before the end of May,
to ensure uninterrupted power during the month of the World
Cup games.


9. (C) The GOT did not meet this goal, begging the question:
What was the hold-up in the GOT's effort to secure short-term
power generation between February and June? Funding was not
the problem. The GOT had funds totaling USD 300 million
specified for the procurement of "emergency" power generation
through IMF debt relief. Rather, the procurement process,
from tendering and negotiations to final selection
exemplified bureaucratic wrangling, poor judgment and a lack
of transparency.


10. (C) For example, after taking over the process from
Tanesco, the MEM narrowed the selection from eight bidders
down to two scarcely known "development firms": APGUM and
Richmond Development Company (Richmond). According to Elijah
Luhanga, Power Engineer at the World Bank, GOT officials
traveled to Germany only to find themselves on a "wild goose
chase" for APGUM's equipment which apparently did not exist.
In late May, MEM invited Richmond for negotiations and
finally signed a contract for the leasing facility in late

DAR ES SAL 00001145 003 OF 003


June (four months after release of the tender). The
selection of Richmond was puzzling primarily because the
company appears to be a one-man operation with little, if
any, prior experience in the power sector. With the
selection of Richmond, the shroud of controversy continues to
hang over the Ministry of Energy's decision making process.

MCC Steers Clear of Energy Sector
--------------

11. (C) The Washington office of the Millennium Challenge
Corporation (MCC) team, led by Country Director, Gretchen
Brevnov, recognized early on that energy was a key impediment
to Tanzania's economic growth. However, MCC soon realized
that the GOT was primarily focused on obtaining additional
power generation, with no long-term sustainable energy
strategy under consideration by the MEM. Without MEM's
willingness to address the energy sector in a holistic,
transparent and sustainable way, the MCC country team turned
its attention to other sectors, such as water and roads,
whose Ministries had developed more coherent, long-term plans
for sustainable service provision.

Comment: Precarious Procurement Process
--------------

12. (C) The same lack of transparency which made the
Millennium Challenge Corporation (MCC) unwilling to focus its
efforts in the energy sector was evident in the GOT's recent
procurement of short-term power generation. The GOT did not
disclose any details regarding its trip to Germany nor of
MEM's selection of Richmond Development Company. Rejecting
any notion of corruption, Masha of MEM has explained the
delayed procurement process as a comedy of errors. Masha
admitted, "Could things have been handled differently? 100
percent, yes. But we are working now to correct the
situation." By 2007, the power deficit should be corrected
with the GOT's addition of 240 MW to the national grid.
However, lingering questions include: will Richmond
Development be able to deliver and is the GOT willing to
address issues beyond generation? In post's view, only if
the GOT seriously addresses issues of sustainability,
management, transparency and sub-par procurement practices
will its energy sector become the efficient and effective
engine needed for continued economic growth.
RETZER