17 July 2014

Tanzania: Tussle Between IPTL, TANESCO Raised Power Bills

THE disputes surrounding Independent Power Tanzania Limited (IPTL) has a long and chequered history.

Our Staff Writer FAUSTINE KAPAMA revisits all court proceedings on the matter and, in this two-part article, reports... ..

THE Independent Power Tanzania Limited (IPTL) was formed on November 1, 1994 for the purpose of constructing, owning and operating a power plant at Tegeta in Dar es Salaam.

In 1995, the company entered into a Power Purchase Agreement (PPA) with Tanzania Electric Supply Company (Tanesco), a state owned company, for supply of power.

Under PPA, the IPTL was to design, construct and operate the power plant to supplement Tanzania's power supply.

The duration of the Agreement was 20 years. The power plant was under the engineering procurement and construction contract between IPTL and Wartsila (EPC Contract). The PPA provided for conversion of the IPTL power plant to operate on natural gas as quickly as practicable, which would reduce overall costs and improve the profitability and efficiency of the company.

Pursuant to the PPA, the IPTL was entitled to receive certain payments from Tanesco after the commencement of commercial operation of the power plant and assured payments for maintaining the power plant in a state of readiness. Under the Agreement, Tanesco was also to give payments for electricity provided pursuant to a tariff calculated to permit investors a reasonable rate of return.

The construction of the power plant was funded through a credit facility extended by a consortium of Malaysian banks. The transaction was memorialized in a 1997 Facility Agreement between IPTL and the banks. Such Agreement provided for a credit facility up to 105m USD.

However, it is alleged that actually only about 84m USD was drawn for construction of the plant. In IPTL, shareholders were Mechmar Corporation (Malaysia) Berhad (Mechmar), a Malaysian firm with 70 per cent shares while a Tanzanian company, VIP Engineering and Marketing Limited (VIP Engineering) held 30 per cent shares therein.

The underling disputes involving IPTL date back to the year 1998 when Tanesco lodged with the International Centre for Settlement of Investment Disputes (ICSID) against IPTL to oppose power tariffs.

On June 22, 2001, the ICSID gave its verdict and determined, among others, that the genuine amount borrowed by IPTL from the Banks was only USD 84.0million and not the whole amount of USD 105.0million.

Thereafter, a dispute among shareholders of IPTL emerged with VIP Engineering, the minority shareholder in IPTL, complaining of being sidelined, mismanagement and diversion of funds by the major shareholder, Mechmar.

Mechmar, Wartsila and other parties, without its knowledge allegedly conspired to incur unnecessary costs to IPTL, resulting in IPTL incurring a greater debt burden than necessary and causing a higher power tariff charged to Tanesco and higher power costs for Tanzanians.

VIP Engineering claimed that Mechmar was running IPTL exclusively for its own benefit, disposing of assets as though it were the sole owner, and in collusion with lenders and Wartsila, allegedly foisted IPTL with debts, but used to enrich Mechmar and its conspirators.

To protect its investments in IPTL, on 25 February 2002, VIP petitioned the High Court of Tanzania for winding up IPTL on grounds of fraud and oppression by the majority shareholder, Mechmar. The proper notice for the winding up proceedings was given according to law, prohibiting and making void all transfers of property, payment, creation or renewal of debts without court's permission.

Following the dispute, VIP Engineering became suspicious that if the money payable to IPTL by Tanesco could be paid to IPTL, then his fellow shareholder, Mechmar could defraud them.

This is because by going with the shareholder agreement, the formation of IPTL was preceded by shareholder agreement between VIP and Mechmar in which the two agreed on the modalities they would run the company.

They agreed that VIP will be responsible of securing all the licences that will be required in order for the company to put up the power plant that was intended to be put up after the incorporation. It was agreed that Mechmar would be responsible for all the financing and administration and day to day management of the company.

It means that all the management activities on the administration were to be done by Mechmar. Upon filing the winding up petition, VIP Engineering feared that if the money is payable by Tanesco under the Power Purchase Agreement, it could be continued to be paid to IPTL and to be handed into the hands of his opponent, Mechmar and then Mechmar could utilize the opportunity to defraud VIP.

September 24, 2003, in a chamber application that was filed in court, VIP Engineering asked the High Court, among other thing, that Tanesco should not pay the money to IPTL, but instead the money should be paid to an Escrow Account that VIP Engineering sought to be established at the Bank of Tanzania.

Mechmar, in its part, in 2003 commenced proceedings in relation to enforcement of an Award requiring VIP Engineering to discontinue the winding up proceedings that had been petitioned before the High Court of Tanzania.

While two proceedings were in force, in 2005 well after the IPTL winding up proceedings had been commenced, Standard Chartered Bank and Danaharta executed a Sale and Purchase Agreement with respect to the 105m USD Facility Agreement with Malaysian banks.

On August 17, 2005, Danaharta purported to novate the IPTL debt to Standard Chartered Bank without fully complying with all the contractual requirements of the Novation Notice, thus rendering the Novation of the IPTL Debt to be void. Then again in 2006, there arose another dispute, this time around between Tanesco and IPTL.

Through the advice of lawyers, Tanesco had thought that it had overpaid IPTL in the sense that capital investment or costs for the plant was overstated. As a result, whenever IPTL raises invoice, Tanesco disputed.

Following the two disputes, in 2006 was eventually agreed that an Escrow Account should be opened at the Bank of Tanzania (BoT), all the monies payable to IPTL be deposited, pending resolution of these two disputes. It was at that point in time the Escrow Account came to be opened at the BoT.

On October 31, 2008, the High Court of Tanzania dismissed Mechmar's petition relating to stopping winding up proceedings for want of prosecution.

Thereafter on December 16, 2008, the High Court appointed a Provisional Liquidator of IPTL in order to investigate the allegations of fraud, conversion of assets, corporate waste, diversion of funds and oppression by Mechmar in IPTL.

The Provisional Liquidator of IPTL, on May 15, 2009, produced his first Interim Report, showing that Tanesco had paid to IPTL a total of US$ 190,558,060.35 as capacity charges which should have more than fully repaid the IPTL Debt to Banks, which had financed the project.

Continues tomorrow...

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