Johannesburg - For investors considering financing
Tanzania’s proposed 27.6 trillion-shilling ($12.3 billion) borrowing programme,
the government’s handling of its power utility’s debt problems may give pause
for thought.
Last month, President John Magufuli fired the Tanzania
Electric Supply Co.’s chief executive officer and vetoed its decision to
raise electricity prices, ignoring International Monetary Fund advice that
higher tariffs may help improve the company’s financial position. The
state is also facing international arbitration over its failure to pay more
than $35 million owed for power supplied to Tanesco from a gas-fired plant
built by Washington-based Symbion Power.
“The current state of Tanesco is a cautionary tale about
how state-owned enterprises in Tanzania are managed, particularly with respect
to debt,” said Ahmed Salim, a vice president at Teneo Strategy, a Dubai-based
research group. “In order for Tanzania to secure a good credit rating,
institutions like Tanesco have to have the opportunity to reform, even if it
means raising tariffs.”
Symbion didn’t immediately respond to requests for
comment.
The nation with East Africa’s largest deposits of natural
gas after Mozambique plans to spend at least 107 trillion shillings ($47.9
billion) over the next five years on projects including a liquefied natural gas
plant, rail links, and an industrial zone around a planned port at Bagamoyo.
The government is obtaining a credit rating and its borrowing plans include an
$800 million Eurobond and syndicated loans, the Finance Ministry said in
December.
Financial troubles
Tanesco’s travails could increase the premium at which
Tanzania enters the Eurobond market, and weigh on any credit ratings, said Lisa
Brown, an analyst at Rand Merchant Bank, a unit of Johannesburg-based
FirstRand Ltd.
The utility’s debt is estimated at more than $300
million, according to Teneo. In 2013, Tanesco raised $250 million in five- and
seven-year loans. Last year, it asked the World Bank for a $200 million
emergency loan that’s still pending.
“The longer the company remains financially unstable, the
more of a burden they are to the government as they often have to guarantee the
loans,” Brown said. “Because of Tanesco’s financial troubles, and the debt
risks it poses, the company exposes the government, especially when these loans
are taken in foreign currency.”
Energy and Minerals Minister Sospeter Muhongo said the
state will transform Tanesco by reorganizing it into a smaller, more efficient
company, rather than by raising power costs for a country trying to
industrialise. The nation’s abundant natural resources and a growing economy
are guarantees that it can repay debt, he said.
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“Hiking tariffs will bring about high production costs
and consequently very high food and other industrial prices,” Muhongo said by
phone. “We are not in a desperate situation when it comes to our debt.”
The country is ramping up borrowing for projects. In
January, Magufuli asked Turkish counterpart Recep Tayyip Erdogan to help fund a
$7.5 billion rail line to neighbouring states. Days later, Turkish
construction company Yapi Merkezi Insaat and Portuguese building firm Mota-Engil
won the contract for the first of a five-phase project, a 300 kilometre track
for $1.2 billion.
Tanzania and the World Bank also discussed loans of as
much as $1.3 billion last month.
About 43 percent of what Tanzania plans to borrow for its
development program will come from foreign investors, according to a Finance
Ministry proposal in June last year.
‘Plenty of headroom’
The long-term and concessional nature of Tanzania’s debt
makes servicing well within the country’s power, according
to Brown. The gamble is whether it can meet obligations on time. The
risk of distress will be relatively low if Tanzania reduces debt by increasing
domestic revenue and cutting back expenditure, the IMF said in a debt
sustainability report in June.
More than half of Tanzania’s current $19 billion debt is
external, with the total accounting for about 34 percent of gross domestic
product. Over the past six years, its debt-to-GDP ratio has grown by 7
percentage points. The government still has plenty of borrowing headroom with a
public-debt ceiling of 56 percent of GDP, Finance Minister Philip Mpango told
lawmakers in the capital, Dodoma, on January 31.
“Tanzania still has the ability to continue to borrow
domestically and abroad to finance its development activities and also has the
ability to repay maturing loans using internal and external income,” he said.