IPTL DEAL [TOTAL NEGLIGENCE!]

By, Brian Cooksey [The author of the article--Dr. Brian Cooksey is the founder of Tanzania Development Research Group (TADREG) as well as Transparency International (TI)] <First posted:08/30/06>

Forty years ago, Malaysia had a more or less similar economic development profile to most of sub-Saharan Africa . Since then, Malaysia has risen to “middle income” status in the international pecking-order, radically reducing poverty in the process, while sub-Saharan Africa remains the poorest, least developed continent in the world. Corruption helps explain why. This chapter describes a Malaysian investment that may bleed Tanzania of hundreds of millions of dollars in bloated payments for electricity that the country neither needs nor can afford.

Tanzania is not in the same class as Nigeria , Congo (former Zaïre) or Kenya as regards political corruption, but grand corruption in government is all too common. Major bribery in contracting and procurement, plus systematic petty corruption among government officials, constitute serious obstacles to foreign investment, economic growth, and social equity as well as undermining political legitimacy. Moreover, the complexity and unpredictability of the state bureaucracy make bribery an often self-defeating practice.

Foreign direct investment into Tanzania was virtually non-existent from the late nineteen-seventies to the late nineties. Most social and economic infrastructure was built with loans and grants from aid agencies. One would imagine, therefore, that a multi-million dollar investment in private power generation would be a most welcome addition to Tanzania 's economic infrastructure. One would be wrong. As it stands, Tanzanian electricity consumers, taxpayers and donor agencies will be lining the pockets of Malaysian investors through corruptly earned rents for the next twenty years.

How this project was hatched, resisted, and eventually commissioned is the subject of this chapter.

Chronology of Main Events:
1994
Drought leads to power shortages as hydro catchment areas run dry. State power utility Tanesco invites emergency solutions, eventually settling for two turbines financed by foreign aid.

1994
Joint venture set up between Mechmar Corporation of Malaysia (70%) and VIPEM of Tanzania (30%) known as Independent Power Tanzania Ltd (IPTL)

August 1994
IPTL sign a Memorandum of Understanding to provide electricity under an Independent Power Project arrangement as a ‘fast track' measure, but a ‘medium to long term solution' is proposed in November.

Nov 1994 – June 1995
IPTL starts negotiations with Tanesco through KTA Tenaga Sdn Bhd (Malaysia-engineering), Fieldstone Private Capital Group (USA-finance), and Long and Co. and Clyde and Co. (UK-legal affairs)

May - June 1995
IPTL and Tanesco sign a 20 year Power Purchasing Agreement (PPA) to build and run a 100 megawatt slow-speed diesel (SSD) power plant at Tegeta, Dar es Salaam at a cost of $163.5 million, including an Engineering Procurement and Construction contract (EPC) price of $126.39, and with a ‘reference tariff' of $4.2 million per month plus 3.25 US cents per kWh of electricity actually produced. The final tariff will depend on actual costs incurred.

February 1995 - January 1996
Without informing Tanesco, IPTL negotiates with Wärtsila to build a cheaper medium-speed diesel (MSD) plant. Wärtsilä's EPC bid increases by 33%, from $85.7 million to $114.2 million, even though the scope of the project falls considerably.

February 1997
EPC contract signed.

May 1997
Mechmar/IPTL obtain $105 million loan from Sime Bank and Bank Bumiputra.

September 1997
Tanesco requests full documentation on actual costs incurred in order to negotiate final power purchase tariffs. IPTL produces the EPC at the end of February 1998.

April 1998
Tanesco issues Notice of Default to IPTL for unilateral substitution of MSD facility.

April-October 1998
Tanesco attempts unsuccessfully to negotiate a lower tariff reflecting the ‘actual, verifiable and prudently incurred cost' to IPTL of building an MSD plant — as opposed to the contracted SSD plant.

November 1998
Tanesco requests arbitration before the International Centre for the Settlement of Investment Disputes (ICSID) after IPTL fails to justify cost structure and payments, including $6.4 million payments to Omni Technical Management Establishment and Prime Consolidated Establishment.

November 1999
IPTL takes Tanesco to court, claiming interim payments of $3.6 million a month. IPTL wins the case in March 1999, but execution of the ruling is stayed pending Tanesco's appeal.

May 2000
Two Tanzanian officials sign affidavits claiming they were offered bribes by IPTL director James Rugemalira. A third admits accepting a bribe.

February 2001
ISCID finds that IPTL was overpriced by $23.5 million but that the contract still stands since TANESCO was aware of the switch from SSD to MSD.

July 2001
Minister for Energy and Minerals announces that IPTL will start generating 100MW of electricity in October 2001, and that the SONGAS natural gas project will start in September.

January 15 2002
IPTL starts supplying power to the national grid for 13 US cents per unit.

March 1 2002
VIPEM petitions the Tanzanian High Court to wind up IPTL.

Dar es Salaam , 6 October 1997
Board members of the local chapter of Transparency International (TI) meet with Robert McNamara and Ahmedou Ould-Abdallah, respectively Co-Chairman and Executive Secretary of the Washington-based Global Coalition for Africa (GCA). GCA is a high-level policy forum linking African governments, their northern partners, and non-government groups working on African development issues. Michael Wiehen, former World Bank director and founder member of Transparency International, is the third member of the team. Their mission is to lobby selected African presidents, including Tanzania 's Benjamin Mkapa, to endorse a major anti-corruption statement and a practical initiative in cleaning up public procurement championed by TI. Mkapa, who became Tanzania 's third post-independence president in October 1995, ran on an anti-corruption ticket and in December 1996 published the report of the anti-corruption commission that he set up on coming to power.

The former Mauritanian diplomat and senior UN official, Ould-Abdallah, expresses surprise at the extent of official corruption in Tanzania and the apparent impunity of the corrupt. ‘Even in my country, they would not have such an easy time of it!' he tells us with feeling. (People are questioning whether Mkapa has the power or the will to deal decisively with corruption, including those named in the commission's report. No senior official has been jailed for corruption to date).

It is McNamara's turn to speak. Already in his eighties, the former president of the Ford Motor Company, US Secretary of Defense during the Vietnam war, and president of the World Bank from 1968 to 1981, is still driven by an obsessive sense of personal mission.

"Have you people heard of this Malaysian power project?" he asks without ceremony. "I saw things like this when I was President of the Bank! This stinks of grand corruption!'" He stabs the air with his right index finger. "I'm going to talk about this at the press conference tomorrow! We agree to monitor the IPTL project and to keep GCA informed of developments. The same day I start to find out more about this 'Malaysian' power project."

About twenty-five journalists turn up at the press conference the following morning, including Nizar Fazal, bookkeeper turned investigative journalist, and fearless anti-corruption campaigner. McNamara fulminates about ‘this power project' that will inflate electricity prices if it goes ahead, but stops short of naming IPTL. Fazal asks, somewhat tongue in cheek, whether the UN could not deploy a mobile military unit to help reinstate African presidents who are overthrown for attempting to fight corruption. McNamara replies that he does not think Tanzania has yet reached this point.

Dar es Salaam , 1994
Let us go back to 1994. The presidency of Ali Hassan Mwinyi, Tanzania 's second post-independence leader, is coming to a close. In terms of fiscal management, Mwinyi's second term has been disastrous. Donor aid is frozen when a $200 million hole appears in an import support scheme plundered by private importers and public corporations in collusion with state-owned banks and government officials. Eventually, donor pressure obliges Mwinyi to sack the Minister of Finance, economics professor Kigoma Malima, who was at the centre of the scam and a related tax exemption racket. Mwinyi's laissez-faire approach to governance has seen a quantum leap in levels of official corruption, fuelled by economic liberalisation that confers respectability on the formerly demonised, Asian dominated, private sector.

There is a long dry spell and the water level in Tanzania 's main dam drops to crisis point. Hydro provides Tanzania with most of its power. Rationing begins. Industrial production slumps. The rich buy generators. Dar's shopping centre sounds like an industrial estate: every other duka has a noisy little generator spewing diesel fumes at passers-by. The government decides there is need for emergency power. A number of local businessmen come up with proposals to solve the crisis. Reginald John Nolan, an Irish businessman, proposes a 109 megawatt turbine manufactured by General Electric. Nolan's bid is based on a ludicrous tariff of 14 cents per unit of power, more than twice the current Tanzanian price and three or four times more expensive than electricity produced by modern diesel generators.

Nevertheless, Nolan's bid progresses well, with the support of some very senior politicians and a positive tender evaluation from Tom Gilette of Bankers Trust, New York . At the eleventh hour, World Bank Resident Representative Motoo Konishi rashly writes a private note to Raphael Mollel, Principal Secretary at the Ministry of Water, Energy and Minerals, advising against Nolan's proposal. The note states that if the Nolan deal goes through, the Bank's reaction ‘would not be pleasant.' Read: the World Bank would pull out of the energy sector, and other donors would probably follow. Mollel shows the note to the Permanent Secretaries in the Treasury and the Ministry of Planning, and to Chief Secretary Paul Rupia, and it soon reaches Tom Callahan, Director of African Affairs on the US Senate Foreign Relations Committee. Callahan promptly writes to Brady Anderson, the US Ambassador to Tanzania , accusing Konishi of libelling ‘an American (sic) businessman and casting doubt upon the integrity of Bankers Trust.' Though the World Bank stands up for Konishi, he is later sacked for his (as it turns out, successful) attempt to block the Nolan deal.

Finally, the World Bank finances two turbines, adding 75 megawatts to the generating capacity of Tanesco , Tanzania 's state-owned power utility.

A month before the Nolan negotiations begin, Malaysian company Mechmar and the Ministry of Energy and Minerals sign a Memorandum of Understanding (MOU) ‘n the spirit of solving the power load shedding problem as soon as possible under the IPP concept, encouraging private participation and in furtherance of South-South co-operation…' Most MOU's do not lead to projects. This one — the first major private investment in Tanzania 's energy sector — does. Nolan's bid fails, despite significant local support and international lobbying on his behalf. Where Nolan failed , IPTL — with an even more outrageous project proposal — succeeds.

Tanzania , 8 September 1997
There is another power crisis. Again, poor rains are blamed for the lack of water to run the hydro dams. Load shedding begins all over again. The power crisis goes on for months. Consumers are without power for up to five days a week. Usually hot and humid, Dar es Salaam swelters in its powerlessness. But the crisis is largely of the government's own making. While the dams are running dry, the four turbines have been mostly idle. They are shut down from March to September 1996, through lack of cash to pay duty on the imported kerosene on which they run, and achieve only about 30% capacity utilisation from October 1996 to September 1997.

TANESCO is broke. Customers owe $55 million. The biggest sinners are government departments and parastatal companies, and the semi-autonomous island of Zanzibar . Lack of maintenance of existing plant further reduces the country's effective power generating capacity. Tanesco fails to respond to an offer from Finland to rehabilitate old diesel generators. While the Treasury refuses to waive the duty on fuel, it grants exemptions to an importer of cooking oil, leading local wags to speculate on whether the Ubungo turbines could be converted to run on cooking oil. Failure to fire up the turbines is the cause of the 1997 crisis, not the drought.[The story continue here>>]

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