For investors considering financing Tanzania’s proposed 27.6 trillion-shilling ($12.3 billion) borrowing program, 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 industrialize. The nation’s abundant natural resources and a growing economy are guarantees that it can repay debt, he said.
“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 neighboring states. Days later, Turkish construction company Yapi Merkezi Insaat VE Sanayi As and Portuguese building firm Mota-Engil SGPS SA won the contract for the first of a five-phase project, a 300-kilometer (127-mile) 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 Jan. 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. Click here to read the full report.