A $27 million breach of contract suit filed by the Independent Power Tanzania Ltd (IPTL) against the Tanzania government over unpaid capacity charges could pull the plug on the latter’s plan to purchase the IPTL through a third party.
The suit, filed at the United States District Court, Southern District of New York, has at least for now stalled the ongoing purchase negotiations, said by the government to be in the final stages, with only agreement on technicalities left.
The majority shareholders in IPTL, Mechmar of Malaysia, has however denied knowledge of any such negotiations.
Lawyers from the Attorney General’s chambers are dealing with the issue.
IPTL is demanding $27,169,882.67 for what it terms a “breach of Power Purchase Agreement (PPA)” signed by both parties in 1995.
The above amount, according to the suit, is the undisputed balance that the Tanzania Electricity Supply Company (Tanesco) had not paid as capacity charge since January this year.
Nazir Karamagi, Minister for Energy and Minerals, told The EastAfrican in Dar es Salaam last week that the government was aware of the IPTL suit and is responding with all the evidence available, but did not disclose the nature of the evidence.
Mr Karamagi said the government was studying the case, and that some lawyers have been assigned to sort out the legal technicalities. He also hinted that the process of buying the power plant is in the final stages.
Buying out the IPTL plant would save the government the costs of purchasing power from the plant as well as the capacity charges.
“We are still in the process to purchase the power plant and the discussion are still going on,” Mr Karamagi said without disclosing what stage the negotiators have reached.
But Mechmar Corporation (Malaysia) Bhd, which has 70 per cent shares in the Tanzania plant, has dismissed the notion that Tanzania is negotiating to acquire its majority stake in IPTL.
Datuk Tan Kean Wan, executive chairman of Mechmar, told The EastAfrican from Kuala Lumpur that the company has not been approached by any party regarding the sale of its stake in IPTL.
Mr Wan said the plant is now running at full capacity and is in its sixth year of production as a vital supplier of electricity to Tanzania.
“Should there be an offer, the company will duly consider it in the best interest of the shareholders,” he said. This assertion was echoed by Mechmar managing director Baharuden Bin Abd Majid.
Mechmar had entered into a joint venture with VIP Engineering and Marketing Ltd of Tanzania in 1996 to construct a 100-Megawatt power plant as an independent power producer for a period of 20 years.
VIP Engineering and Marketing holds the remaining 30 per cent stake in the IPTL plant, which has been operating since January 2002. The plant consists of 10 units of Wartsila fuel-fired engines with possible conversion to gas firing.
The purchaser of the power is Tanesco.
Pursuant to the agreement, Tanesco was obliged to make monthly capacity, energy, supplemental and penalty or bonus payments to IPTL, a privately financed 100MW power plant operating in the Tegeta area of Dar es Salaam.
Tanesco is already courting financial instability triggered by the firm’s poor performance, and the IPTL suit is the second one it has faced, having lost another battle in the 1990s.
The minority shareholder of IPTL — VIP Engineering and Marketing of Tanzania — has strongly opposed the court action in the United States.
James Rugemalira, managing director of VIPEM Ltd, who also sits on the board of IPTL in Tanzania, said last week that the case lodged by IPTL was illegal because it was not authorized by any resolution of the board of directors. Mr Rugemalira said as a member of the board of directors, he was not informed of the issue.
He pointed out that the subject matter in the case was sub judice in the High Court of Tanzania, where there are winding up proceedings against IPTL. Therefore, he said, the New York Court has no jurisdiction to hear such a dispute.
According to Mr Rugemalira, VIP Engineering is disassociating itself from the court action, as it was taken in total abuse of court process and complete disregard of the tolerance the government of Tanzania had exhibited in trying to resolve IPTL’s problems.
In the suit, it is alleged that the government, through Tanesco, stopped paying the capacity charges after discovering that IPTL had not injected equity payments since commencement of the project as the determining factor for capacity charge payments.
Analysts say the IPTL deal is considered a bad public-private partnership not just because of the alleged corruption and the high cost of electricity in the deal, but also because the project was approved without a proper feasibility study and without consulting necessary stakeholders.
It is understood that Tanesco was forced to pay a high price for electricity it didn’t really need since its major problem was not insufficient generating capacity but rather a lack of gridlines.
IPTL’s electricity cost 12 US cents per unit compared to the 7 and 9 US cents per unit supplied by Tanesco. This in addition to the $3 million a month in statutory costs that IPTL charge Tanesco.
Additional reporting by Mike Mande