What you need to know:
- Tanzania requires $30 billion for power generation in the next 20 years, and this money could be better allocated to other development needs if companies like Songas are given the chance to invest in power generation while Tanesco focuses on transmission and distribution
In the 1990s, Tanzania heavily relied on hydropower for electricity generation, but due to drought, poor maintenance, and mismanagement, frequent power outages became a common issue. To address this, experts proposed utilising natural gas discovered off Songo Songo island as a cost-effective and reliable solution.
To achieve that, the government initiated a public tender in 1993, seeking a private investor to develop the project. The chosen model was a public-private partnership (PPP), considering funding limitations and the belief that private actors would be more invested in the project’s success.
That is what led to the establishment of Songas through the consortium that won the tender.
During that time, Tanzania faced further challenges with power rationing in 1994, prompting the government to engage in fast-tracked negotiations and procure a $163 million 100 MW diesel-based power project from Independent Power Tanzania Ltd (IPTL). The subsequent events and consequences of this decision have been extensively discussed in academic works. Notably, the IPTL deal was inflated, legal disputes caused delays in both Songas and IPTL projects, and to add credibility to IPTL, the government announced the signing of both IPTL and Songas deals on the same day.
Once the legal requirements were fulfilled, Songas successfully completed the pipeline construction in May 2004, and commercial operations commenced in July 2004 with a 20-year contract in place. In addition to powering the Songas plant, which accounted for a significant portion of Tanzania’s electricity production, gas from Songo Songo also served three Tanesco plants and Twiga Cement Factory, resulting in substantial cost savings of $5 billion by 2015, according to TPDC.
By 2015, Songas generated 23 percent of Tanzania’s power while contributing only 8 percent to the overall cost. In contrast, IPTL generated 11 percent of power but accounted for a staggering 25 percent of the total cost. This unsustainable arrangement placed Tanesco under severe financial strain to sustain the IPTL deal, while Songas proved to be a far more efficient and cost-effective solution.
Why is this historical background relevant? Many people tend to associate Songas with the infamous IPTL, Richmond, and Symbion deals. I, too, used to hold that belief. However, to truly understand why Tanzania has struggled with energy scarcity, we must examine our history.
Now, a more pressing issue arises. By 2024, Songas’ contract with Tanesco will come to an end. Despite Songas’ efforts to secure a contract extension, the government has been indecisive for a considerable period. I have been aware of this fact for at least a year and a half, and it leaves me wondering: why the hesitation when Songas has been a significant asset to Tanzania’s energy sector?
A few months ago, I had a meeting with the President of Akuo Africa, a power company that previously won a Tanesco tender, only for it to be unexpectedly withdrawn. I sought to understand the thought process of our officials, so I asked about Tanesco’s required unit power cost. Akuo informed me that Tanesco’s target was 4.5 US cents per unit, encompassing running costs and capacity charges.
This point is worth noting. Power generation has been Tanesco’s greatest challenge, and reducing costs is crucial. Considering that the Power Master Plan suggests 8 US cents per unit, the 5 US cents per unit that Songas has been providing for 20 years should be an attractive offer. Or is it not?
Another aspect to consider is that the Songas deal operates under a Build-Own-Operate arrangement, meaning that when the contract expires, Songas will retain ownership of the assets. As Songas has already collected capacity charges from the government and the infrastructure investment has been effectively paid off, this provides an opportunity to negotiate even more favourable payment terms than before.
Furthermore, gas reserves in Songo Songo are depleting. While production can continue for some time, we have likely reached the tipping point. Therefore, there is no room for alternative investments that could delay the agreement.
Tanzania requires $30 billion for power generation in the next 20 years, and this money could be better allocated to other development needs if companies like Songas are given the chance to invest in power generation while Tanesco focuses on transmission and distribution. Hence, the question arises: why is the government hesitant?
If a company, such as Songas, is not recognised for following best practices, ultimately saving the economy billions of dollars, what more must it do to gain some confidence in this nation? Or are we waiting for conditions to deteriorate, aligning with our historical experiences, before we enter yet another fast-tracked opaque arrangement that will not serve the nation’s interests?