Countering Corruption in the Energy Sector: After Initial Missteps, Tanzania Shows the Way

The effects of corruption can be felt long after the incidents take place. There’s no better illustration of this than the history of Tanzania’s energy sector. In 1992, the Government of Tanzania was facing an energy crisis, and was in discussions with a Canadian company to develop its natural gas fields with funding from the World Bank. But then, the Tanzanian government received an unsolicited proposal from a Malaysian company, which offered to partner with a local Tanzanian firm to build and operate an emergency diesel-fueled power plant. The government abandoned its discussions with the Canadian company and, in 1995, signed a 20-year power purchase agreement (PPA) with Independent Power Tanzania Limited (IPTL), a joint venture entity formed by these Malaysian and Tanzanian private interests. By 1995, however, the energy crisis had already passed, and it was not at all clear that this PPA was in the government’s interest. In fact, Tanzania’s principal energy regulation agency, the Ministry of Energy and Minerals (MEM), consistently opposed the deal. Yet parties with significant ownership interests in IPTL managed to get the PPA through, in part by bribing senior officials and politicians.

The deal was a disaster, one that had a substantial negative impact on Tanzania’s energy sector for close to two decades. (The initial corrupt deal, together with multiple other improprieties, significantly undermined the financial stability of Tanzania’s energy sector, resulting in lower investment, substantial delays in the construction of more efficient power plants, higher energy costs for consumers, and inadequate expansion of electrification into rural communities.) But, without minimizing the seriousness of the mistakes that were made or the costs that resulted from this corrupt deal, ultimately Tanzania’s efforts over the last decade to hold the corrupt actors accountable and to overhaul its regulatory system provide a roadmap for how countries that have suffered from this sort of corruption, in the energy sector and elsewhere, can respond.

It was readily apparent back in 1995 that the IPTL PPA was tainted by corruption, and this prompted the World Bank to cut its financial support for Tanzania’s energy sector until improprieties were resolved. Though the government’s investigations into the alleged misconduct proved unfruitful, Tanzania’s public utility company, known as TANESCO, initiated arbitration proceedings against IPTL in 1995, seeking to nullify the contract in light of evidence that IPTL had exaggerated the costs of constructing its plant and was substantially overcharging for energy. Although ICSID did not nullify the PPA, the MEM Secretary’s tenacity led to the monthly capacity charges being nearly halved. Over 20 years later, in 2008, TANESCO commenced new ICSID arbitration proceedings against IPTL, again alleging that the plant was greatly overcharging for electricity. During that time all funds payable to IPTL were to be held in an escrow account, payable once a decision was reached. In 2015, seven years after the process commenced, ICSID finally rendered its decision, this time finding in favor of TANESCO. But it turned out that over half of the money that was supposed to be held in the escrow account had been improperly paid out to IPTL’s new majority owner, Pan African Power Solutions (PAP). Yet again, corruption was suspected—this time in the form of bribes to public officials so that they would improperly permit the release of escrow funds to shareholders.

The corruption that tainted the PPA, and the damage that followed, are not unusual in much of the developing world. But the case is notable, and encouraging, for the effective response by the Tanzanian government over the past five years. In contrast to many other corruption stories with a similar beginning, this story has a more encouraging ending: Tanzania not only quickly responded to both allegations of improprieties relating to the escrow account, but it also took steps to substantially overhaul its energy sector in order to improve transparency and accountability.

  • First, after the discovery that money was missing from the escrow account, Tanzania took measures to hold the culpable parties accountable. This was possible in part because by 2015 (in contrast to 1995, when the investigation of the allegations of corruption in the initial contract took place), Tanzania had substantially reformed and strengthened its anticorruption investigation and enforcement system—most notably through the creation of the Prevention and Combating of Corruption Bureau (PCCB) and the National Audit Office of Tanzania (NAOT) as independent investigative agencies. When the escrow scandal came to light, the government enlisted the PCCB and the NAOT to determine why and how the funds in escrow had been released. The investigation, which was conducted publicly, uncovered a series of significant bribe payments to public officials, and as a result several prominent officials—including the Attorney General, the Minister of Energy, and the Minister of Housing—were fired, and the two prominent and influential businessmen who had facilitated the bribes were arrested and are currently being prosecuted. Furthermore, thanks in large part to the transparency of the investigation, public pressure forced then-Prime Minister Mizengo Pinda to resign.
  • Second, Tanzania has overhauled its energy sector with a focus on transparency, competition, and a separation of powers to ensure that corruption scandals do not further disrupt the sector. Not only did the government decline to extend the IPTL contract, but the government made a policy commitment to discontinue emergency power plants more generally. More significantly, clear procurement guidelines, oversight by different agencies, and incentives for low-cost energy have all been implemented to prevent less-capable but politically-connected power producers from getting bloated contracts or other advantages in the future. Prior to the reforms, top officials in the executive branch had considerable discretion to award licenses to independent power producers. Now, companies seeking independent power producer licenses must submit competitive bids to an independent agency, the Energy and Water Utilities Regulatory Authority (EWURA), which is overseen by the Ministry of Energy. This system makes it significantly more difficult to make sweetheart deals behind the scenes. Additionally, in contrast to the IPTL bid, all independent power contracts now require a demonstration of genuine need for additional power.

Tanzania, for all its problems, should be lauded as an example of how to respond to this sort of corruption. The government not only investigated and prosecuted those responsible, but also reformed the regulation of the energy industry to enhance transparency, separation of powers, and stakeholder participation. With this two-pronged strategy, Tanzania has made significant strides towards cleaning up its energy sector and reducing the likelihood of the sort of corruption that tainted the IPTL deal.

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