The East African (Nairobi)

11 September 2007

Tanzania: $240m Historic Bailout for Tanesco

Nairobi — History was made in Tanzania when a syndicate of the country's own local commercial banks and pension funds raised a massive $240 million to fund the recovery of the Tanzania Electric Supply Company (Tanesco) in a deal that has illustrated just how deep the country's capital markets have become.

It is the single largest corporate finance deal ever in East Africa - bigger even than the KenGen IPO in Kenya in 2004 and far surpassing Safaricom's Ksh12 billion ($179 million) bond issue of 2005 in Kenya.

Arranged by Stanbic Tanzania Ltd, the six-year loan amortises after two years and has a government guarantee.

The loan will float over the 182-day Treasury-bill, which means that the interest on the loan will be pegged to the T-Bill rate.

Another aspect that makes the loan secure is the fact that it is a Tanzania shilling loan, which has no exposure to foreign-exchange fluctuations.

Stanbic Bank Tanzania Ltd is the lead arranger of the loan, along with National Microfinance Bank and CRDB Bank as co-arrangers.

The three banks are also co-lenders alongside Tanzania Investment Bank, Exim Bank Tanzania Ltd, Public Service Pensions Fund, Parastatals Pension Fund, National Social Security Fund, Local Authorities Pension Fund and Government Employees Provident Fund.

Even more significant is the fact that Tanzania has circumvented the standard practice among developing countries of borrowing from the World Bank by relying on its own local institutions.

"This deal has demonstrated that companies such as Tanesco, which earn in shillings and have strong cashflow positions, don't have to risk borrowing offshore," said John Ngumi, Stanbic regional director of investment banking.

Tanzania becomes the first country in the region to use resources held by its pension funds to finance infrastructure.

In a sense, the deal is part of a growing trend where companies in East Africa are preferring to finance expansion and recovery through locally sourced, shilling-denominated long-term debt.

The expansion of Uganda's Entebbe Airport is being financed by $40 million long-term debt raised from a local syndicate of banks.

Last year, mobile telephone operator Celtel, raised $75 million in local debt. Since 2004, Stanbic Bank alone has structured and arranged deals that have raised $1 billion to fund the telecommunications, airports and electricity sectors.

Speaking to The EastAfrican, Tanesco managing director Dr Idris Rashidi, the immediate former governor of the Bank of Tanzania, described the deal as a landmark transaction that will pave the way for the return of the utility to its past financial strength.

Part of the money will be used to strengthen the company's transmission and distribution network in order to reduce power losses, to connect new customers and to train staff to improve customer service delivery.

Bashir Awale, Stanbic Bank Tanzania managing director, said the deal was critical to the recovery of the country's electricity sector.

He commended all participating financiers for the commitment to addressing critical country issues. "We all need and want a healthy, performing Tanesco," he said.

Under the recovery plan, Tanesco will embark on an ambitious capital expenditure programme to sustain an average load growth of 15 per cent per annum over the next five years. Also targeted in the plan are new infrastructure, new customers and upgrading of old infrastructure.

The deal comes nine months after the South African management group, Net Group Solutions, which had been contracted to run the company by the government, were kicked out.

Net Group Solutions was contracted to manage Tanesco in 2002 and its contract was extended for a further two years in 2004 but the government, early this year, said that it would not renew the contract with the South African firm.

The government cited unsatisfactory performance by the firm for non-renewal of the contract, but the South Africans countered by saying that they were given the power utility firm to run with their hands tied behind their back as they were not given powers to hire and fire.

To mitigate against the effects of load shedding, the government contracted several rental plants.

Aggreko from the United Arab Emirates was contracted to generate 40 megawatts, while Richmond Development Company from the United States was supposed to generate 100MW.

A third firm, Alstom Power Rentals, also from the US, will instal a power plant in Mwanza by the end of the year to generate 40MW.

The fourth power plant, to be built by Wartsila of Finland and owned by Tanesco, was to start commercial operation by August. The total installed capacity will be 145MW, out of which 100MW will be generated at Ubungo and the remaining 45MW at Tegeta.

Tanesco serves less than one million clients out of a population of 37 million people.

The national electricity coverage is 10 per cent but in most regions is in single digits. Rural coverage is less than two per cent.

The reasons behind this low coverage include the limited reach of Tanesco's grid and the low intensity of connections in the grid areas.

Tanesco is beset with other problems like inadequate financing, absence of policy, regulatory and financing mechanisms for rural electrification in general and alternative off-grid solutions in particular.

Tanzania is endowed with diverse energy sources including biomass, natural gas, hydropower, coal, geothermal, solar and wind power, much of which are untapped.

Woodfuel accounts for up to 92 per cent of total energy supply with about two per cent coming from hydroelectricity and seven per cent from oil-derived products.

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