What Washington tribunal verdict means for Tanesco, IPTL billions

Dar es Salaam. An international tribunal has ruled that the private power producer IPTL overbilled Tanzania Electric Supply Company (Tanesco) in capacity charge roughly estimated to be $3.6 million per a month.

In a decision announced last month, the International Centre for Settlements of Investment Disputes (ICSID) tribunal agreed that the amount that Tanesco paid IPTL may have been incorrect and ordered the two parties to jointly recalculate the figure.

The ruling by the Washington-based tribunal will bring temporary relief to Tanesco that was defending itself in a suit filed by Hong Kong’s Standard Chartered Bank (SCB-HK).

Lawyers representing Tanesco at the tribunal were quick to welcome the ruling even though it is one that is likely to introduce new twists and turns in the unending saga involving IPTL owners, Tanesco and the government.

The decision by the Washington tribunal, much as it is in favour of Tanesco, has created room under which the state power utility could still lose up to $100 million in the dispute.

The International Centre for Settlements of Investments Disputes (ICSID) tribunal on February 14, this year, ruled that SCB-HK, which is the claimant, had been assigned IPTL’s rights under the contract as security for a loan.

But, ICSID also said it can only grant declaratory relief to the claimant and not damages as prayed by SCB-HK.

The tribunal said it only had jurisdiction to issue a declaratory award as to the amount owed to the claimant under the contract.

Though Tanesco lawyers, US firm Hunton & Williams in Washington, DC, and Tanzanian firm Mkono and Company, claim they have achieved 90 per cent victory, they have also warned that the government could lose about $100 million following recent developments in IPTL-Pan Africa Power Solutions Tanzania Limited (PAP).

“The tribunal concludes that Clause 3.2.1 of the Security Deed is a valid statutory assignment of IPTL’s rights under the Power Purchase Agreement (PPA) to SCB-HK…This was finally accepted by the Tanesco in oral submission at the hearing on March 14, 2013. By the means of the statutory assignment, SCB HK has become the legal owner of the rights arising under PPA, which must include the arbitration agreements in clause 18.3 of the PPA.”

On February 13, 2014, the permanent secretary in the ministry of Energy and Minerals, Mr Eliakim Maswi’ trashed SCB-HK demands, saying the bank wasn’t party to the long-standing dispute between IPTL and Tanesco.

In his later dated February 13, Ref. No. CBD.88/417/01/25, directed to Mr Joseph Casson of SCB-HK, Mr Maswi writes: “We have carefully studied the contents of the letters…it surprises us that the SCB-HK, which neither a party to the Power Purchase Agreement (PPA) nor to the Implementation Agreement (IA) alleges the breach by the Government of Tanzania or Tanesco.” Mr Maswi further writes: “The GOT believes that SCB (HK) is quite aware that it lacks locus standi to claim, pursue, and or require a part or parties to the said agreement to undertake any associated requirements as it is not a party to the agreements.” The decision is the latest development in a 16-year dispute over the construction and operation of a power plant in Dar es Salaam, which has also generated two other ICSID cases, one brought by Tanesco against IPTL under the same contract, and the other by Standard Chartered in the UK against Tanzania under a bilateral investment treaty.

The 1995 contract between IPTL and Tanesco financed the construction of the plant, which was to supply electricity to Tanesco for 20 years in return for payments according to a tariff that was partly based on the costs of constructing the plant. IPTL would fund 30 per cent of the project through equity contributions, though the form these contributions would take was not defined.

Tanesco ceased making payments in 2007, claiming that the agreed tariff should be recalculated because IPTL had made its equity contribution through shareholder loans rather than subscriptions for shares. Tanesco instead began making monthly payments into an escrow account at the Bank of Tanzania. That led IPTL to request ICSID interpretation proceedings with respect to the 2001 award, though it later discontinued them.

In the interim, IPTL’s debts under a US$105 million loan facility had been acquired by Standard Chartered Bank’s Hong Kong arm, which was assigned the company’s rights under the contract.

The UK bank lodged a new ICSID claim against Tanzania in 2010 under the UK-Tanzania bilateral investment treaty, while its Hong Kong arm brought the contract claim later that same year. In both cases, it argued that it was owed payments of around US$258 million. A panel chaired by US arbitrator William W Park dismissed the treaty case in 2012, holding that the UK bank did not qualify as an “investor” under the BIT.

In its jurisdictional objections to the contract case, Tanesco argued that the claimant has not validly acquired IPTL’s rights under the contract, as the assignment had not been registered under Tanzania’s Companies Ordinance cap 212.

But the tribunal chaired by McRae ruled that, although the assignment had indeed not been completed as required under Tanzanian law, it was irrelevant so long as the tribunal confined itself to issuing a declaratory award as to the amount owing under the contract.

On the merits, the panel went on uphold Tanesco’s arguments that the tariff that had formed the basis for payments to IPTL since 2007 should be recalculated to reflect the fact that IPTL had not paid its equity contribution in the correct form. The tribunal gave the parties three months to agree on a new tariff and report back before it issues the declaratory award.

The tribunal also dismissed a claim by Standard Chartered for losses of around US$30 million arising from charges in the US dollar-Tanzanian shilling exchange rate during the time Tanesco had not made its payments under the contract. The tribunal ruled that these were indirect and were excluded from recovery under the contract.

It accepted the bank’s claim that bonus payments under the contract were recoverable but rejected the bank’s estimate of US$34 million for these, instructing the parties also to seek an agreement on this figure and report back in three months’ time.

Tanesco was represented by US firm Hunton & Williams in Washington, DC, and Tanzanian firm Mkono and Company of Dar es Salaam. Hunton & Williams partner Jay Range told Global Arbitration Review (GAR) he believes the tribunal’s findings would have the effect of reducing the bank’s claim against Tanesco by over US$150 million.

Range says: “We are very happy that the tribunal was able to resolve the issue of whether the tariff was correctly calculated, and to have conducted, as we have argued, that Tanesco has been incorrectly charged for many years. We are looking forward to consulting with experts to find the correct tariff.”

Counsel to Standard Chartered Bank Hong Kong, Herbert Smith Freehills, declined to comment.

Additional report by Global Arbitration Review