How $270-million IPTL deal was planned and executed

Dar es Salaam. The controversial Independent Power Tanzania Ltd (IPTL) takeover deal that involved part of some $270 million from an escrow account was initiated on August 11, 2010, The Citizen can reveal today.

An escrow account is a financial instrument held by a third party on behalf of two others in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled.

Since the two parties, Tanesco and IPTL were involved in a legal tussle in Washington-based tribunal, it was then agreed that an escrow account be opened at the BoT—and Tanesco deposited all payments mean for IPTL pending the determination of the main civil cause in USA.

Some of the key conditions for this escrow account was that if Tanesco wins the case, it would be refunded the extra payments it has made, after an appropriate calculation, agreed by both parties, as directed by

Washington-based tribunal.

According to investigation conducted by The Citizen, the plan was supposed to be executed before the General Election, but was shelved due to what was termed “technical issues”.

Mechmar Corporation (Malaysia) Behard, which used to own 70 per cent of IPTL shares, wrote a letter to former permanent secretary for the Energy and Minerals, David Jairo, proposing that the company’s share be transferred or sold to a company chosen by the government.

The letter was signed by the company’s managing director, Mr Datuk Baharuden Majid, according to details obtained by The Citizen.

“We refer to the discussions held between you and the undersigned in connection with the above subject…as desired by you, we hereby submit Mechmar’s proposal for your consideration,” reads part of the letter.

It further reads: “Mechmar Corp is willing to sell its shares in IPTL to the government of Tanzania or Tanesco or any other entity nominated by the government…Merchmar Corp will also simultaneously assign all its rights in respect of the shareholder loan.”

Mr Majid also adds in his letter: “Merchmar Corp will take such steps and execute such documents or may be required to assuage the concerns of the government of Tanzania in relation to claims of other parties.”

He goes on: “Merchmar Corp will also give an irrevocable undertaking to cooperate and assist the government of Tanzania as well as Tanesco in resisting and defending against any such claims and to assert its own claims.” In the one-page letter, of which The Citizen obtained a copy, Mr Majid further states that his company would be happy to discuss the aspects mentioned above and negotiate the amount of composite.

It is this letter, according to details gathered by The Citizen’s investigative team, that set the pace for the “scramble” for the $270 million escrow monies.

According to our sources, at the time when the Malaysian company offered to sell its shares in ITPL, it had already been liquidated and therefore acted out of legal context.

“This is the letter, which some politicians and dealmakers used to bring into the picture Pan Africa Power (PAP)… it was the basis of the entire deal,” a senior official from the Ministry of Energy and Minerals told The Citizen. The company, which was the majority shareholder, was liquidated after it failed to pay and service a loan it had taken to finance the purchase and installation of the IPTL plants located at Tegeta suburb, Dar es Salaam.

The Citizen understands that in 2005, Danaharta was the sole lender under the Facility Agreement, which loaned Mechmar monies to buy and install IPTL plants in Tanzania.

But following an auction of a distressed debt, in August 2005, Standard Chartered Bank, Hong Kong (SCB HK) acquired from Danaharta, for $76.1 million, which had the face value of $101.7 million, and became the sole lender to IPTL.

Under that transaction, SCB HK was assigned a number of contracts, including the 1997 security deed, the

Implementation agreement and the guarantee agreement concluded between IPTL and Tanzanian government.

From 2006 onwards, IPTL failed to pay the amounts due towards its interest and principal repayments— leading to a default under the Loan Agreement. In December 2009, IPTL and Tanesco were notified of the default by the facility agent under the financing documents.

By the time it was liquidated, the only assets, which Mechmar had, was the Tegeta power plants. This being the case, when the Malaysian company was liquidated by SCB Hong Kong, the only assets that the bank took as guarantee as it fought to recover its millions.

“It’s absurd to see that Mechmar, which had already been liquidated, still having the courage to write to the government of Tanzania offering to sell its power plants in Dar es Salaam, while knowing that the same machines were under receivership by SCB,” a senior counsel who is represents one of the parties told The Citizen.

Reacting to the acquisition of IPTL facilities, which some analysts likened to what transpired during $131 million External Payments Arrears (EPA) scam, one lawyer wrote to The Citizen: “In facts Section 57 of the Companies Act of Mainland Tanzania prohibits companies in the country to use their own funds to fund the purchase of own shares or give loans to shareholders to pay for the acquisition of their shares.”

“In my view, what has been done is the same as defrauding creditors like SCB and others who have been pursuing money loaned to IPTL,” the lawyer says in the letter to The Citizen yesterday.

The Citizen has established that had the deal been properly arranged, the Escrow monies would have been enough to pay the outstanding loans to lenders—with Tanesco getting a balance after a new formula to calculate tariff and capacity charges was put in place as directed by International Centre for Settlement of Investment Disputes (ICSID) tribunal. “Tanesco would have bought the plants or nationalised the facility if the offer from Malaysia was executed by officials with national interests at heart…this would have enabled the company to reduce the capacity charges payments,” says the Dar es Salaam lawyer in his letter.

Instead of that, he notes, taxpayers’ billions have been used to buy assets of foreign company that was liquidated and then the buyer, PAP, given a go ahead to generate and sell power to Tanesco.

The deal took place at the time when two different court battles in Dar es Salaam and Washington—both fighting for Tanesco’s $270 million— involving the liquidated IPTL, the company that has dominated the country’s energy sector for 19 years.

The deal that has been financed by part of $270million from Escrow account, opened at the Central Bank of Tanzania (BoT) some years ago has raised more questions—with some legal experts punching holes in the manner it was sealed.

IPTL claimed that it invested about $165 million to set up Tegeta power plants in 1990s.

Mechmar’s only asset while being liquidated was the Tegeta power plants