Tanzania - Privatization impact assessment

United Republic of Tanzania Privatization Impact Assessment 69628 July 21, 2005  2 Acknowledgements This report is the output of a technical assistance and dialogue mission financed by the Private Participation in Infrastructure Advisory Facility (PPIAF) at the request of the Government of the United Republic of Tanzania. The primary objective of the mission and the report is to support the review of infrastructure privatization in Tanzania commissioned by the President of the United Republic of Tanzania, H.E. Benjamin William Mkapa. Any representations made on the performance of organizations, enterprises and individuals are not meant to be authoritative and conclusive in the legal sense. In addition, please note that this report does not necessarily reflect the views of PPIAF and/or World Bank Management. The PPIAF funded team consisted of: Onno Rühl (Team Leader), John Nellis (Senior Privatization Adviser), Nilgün Gökgür (Privatization Adviser), Roger Christen (Privatization Adviser), Lucy Fye (Senior Private Sector Development Specialist), Vedasto Rwechungura (Program Officer), Aminetou Tidiani (Junior Professional Associate), Wendy Christen and Justin Schwartz (Interns), Yeshareg Dagne (Program Assistant) and Justina Kajange (Team Assistant). The team gratefully acknowledges the cordial and professional collaboration with the Privatization Review Commission consisting of Dr. Marcelina Chijoriga (Chairperson), Dr. Ken Kwaku (Coordinator), Dr. Heavenlight Kavishe (Secretary), Dr. Hawa Sinare, Dr. Ramadhani Dau, Mr. Ali Mufuruki, Col. Joseph Simbakalia. Main authors for the different parts of the report were as follows: Roger Christen TICTS, THA, TRC and TAZARA Nilgün Gökgür TANESCO and TTCL John Nellis DAWASA and Air Tanzania Onno Rühl Executive Summary and General Report  3 Table of Contents Executive Summary 4 General Report 6 I. Context and Methodology 6 II. Infrastructure: The Situation before Privatization 8 III. Country Preparedness for Privatization 9 IV. Capacity for Infrastructure Privatization 11 ` V. Consultations and Communication 13 VI. Consultants and (Development) Partners 14 VII. The Procurement Process 16 VIII. The Big Picture: Sector Policies 18 IX. Transaction Scorecard: A Mixed Picture 21 Case Study 1 The Lease Contract between DAWASA and City Water Services 23 Case Study 2 The Private Participation in Tanzania Electricity Supply Company Ltd. 41 Case Study 3 The Partial Divestiture of the Tanzania Telecommunications Company Ltd. 61 Case Study 4 The Partial Divestiture of Air Tanzania 80 Case Study 5 Tanzania Harbours Authority (THA) 90 Case Study 6 Tanzania International Container Terminal Services (TICTS) 95 Case Study 7 Tanzania Railways Corporation (TRC) 102 Case Study 8 Tanzania-Zambia Railway (TAZARA) 123 Annex 1: Presentations to PRC 131  4 United Republic of Tanzania Privatization Impact Assessment Infrastructure Executive Summary After the earlier and successful privatization of most parastatal enterprises in the industrial and commercial sectors, at the end of the 1990s Tanzania launched the privatization of its infrastructure enterprises. By 2003, five key infrastructure enterprises (TANESCO, power; DAWASA, water; TTCL, telecom; TICTS, the container terminal; and Air Tanzania) had some form of private participation. Largely due to the recent and well-publicized failure of the lease contract for water, but also due to doubts about the telecom and airline sectors, the program for infrastructure privatization is currently perceived as not having lived up to expectations. This led the President of the United Republic of Tanzania to appoint a Privatization Review Committee (PRC) in May 2005. The PRC’s mandate was to review the privatization program for infrastructure so as to learn from experience and recommend the way forward. The present report constitutes the submission of a PPIAF-sponsored team that assisted the PRC in its review. The report follows an outline given by the PRC. Country Preparedness. Around 2000, most infrastructure enterprises were in very bad financial shape and the physical state of their assets was poor. These enterprises therefore represented a marginal business proposition to most prospective private operators. This was exacerbated by the fact that Tanzania’s investment climate, although improving, is not yet internationally competitive; many elements require further work. At the same time, whilst the national privatization policy is sound and well tested, in most infrastructure areas sector policies are spotty, and regulatory agencies are either weak or absent. The formulation and implementation of strong, nationally owned sector policies as well as their implementation is therefore a key priority. Such policies should focus especially on solutions for providing affordable services to presently unconnected Tanzanians. Capacity. Since private participation in infrastructure was a novelty in Tanzania, none of the Government agencies were adequately prepared for the challenges of dealing with private operators. Worse, pre-privatization monitoring of parastatals was weak, resulting in very poor data being available on most enterprises. Capacity for the implementation of privatization transactions was in place due to the fact that the Presidential Parastatal Sector Reform Commission (PSRC) was an experienced and competent privatization agency. The major capacity weakness is post privatization, where line Ministries, the new regulatory agencies, and the new asset holding companies are all in dire need of improved capacity. Until this deficiency is addressed, the Government will always have trouble succeeding in the complex interactions required with private operators in infrastructure; i.e., the critical issues of drafting, negotiating, monitoring and enforcing contracts.  5 Communication. Despite the fact that there is a relatively strong consensus around the policy of greater private sector involvement in infrastructure, the level of communication and debate on privatization of infrastructure has been quite low. This has hampered management of expectations in the program as well as unnecessarily burdened labor relations in privatized firms. The present review creates a welcome platform for launching a much more open debate on infrastructure policy in Tanzania. Consultants and partners. There is evidence that Tanzania has not always got the best consultants and partners, with a special weakness observed in the case of legal advisers. It is important to be vigilant of this, as having the right advice is key to getting good results in negotiating with private partners. Equally, some of Tanzania’s private operators have got away with sending teams that may not have been their best. Greater due diligence in the choice of prospective partners is therefore called for. Tanzania might also review with its development partners the wisdom of specific privatization conditionality, as this can create pressure to complete transactions at the expense of quality. Procurement. Most infrastructure privatization transactions in Tanzania attract limited competition. The Government of Tanzania and its development partners should review whether the procurement procedures used —designed for highly competitive environments— might be revised to allow for greater flexibility. If greater flexibility could be introduced, stronger oversight and control would be necessary to avoid corruption. Preventing asset erosion. Even with greater flexibility in procedures, privatization transactions almost always take much more time than is first planned. In order to avoid further erosion of the already dilapidated assets in firms that are being privatized, one option might be to engage in an interim management contract with a private provider, accompanied by an interim investment plan financed by donors. Scorecard. Based on the eight case studies done for the present review, two transactions in infrastructure in Tanzania—the management contract for TANESCO and the concession for the container terminal—are rated as clear successes. One transaction — the lease for DAWASA— is a clear failure; whilst the partial divestitures of TTCL and Air Tanzania have elements of both success and failure. For the two railroads (TRC and TAZARA) and the harbor authority (TPA), transactions have not yet been completed.  6 United Republic of Tanzania Privatization Impact Assessment Infrastructure I. Context and methodology By the end of the 1980s, Tanzania had around 400 state owned enterprises (SOEs or parastatals), many inefficient and loss-making, sustained only through subsidies from the budget and soft or directed credit. Ultimately, many proved unsustainable1. This led the Government of the United Republic of Tanzania (the Government) to a strategic decision to privatize virtually all SOEs in a program managed by the Presidential Parastatal Sector Reform Commission (PSRC). This program was highly ambitious. Despite the fact that it followed the international drive towards privatization at the time, it was unprecedented in the Tanzanian context. All the same, the degree of consensus around the concept of privatization in Tanzania was and is remarkable, and testifies to the degree of dilapidation in the SOE sector prior to privatization. There was a scarcity of goods in many sectors—beer being perhaps the most startling example—and a generally very low level of services in many key sectors, particularly in infrastructure—meaning the public service commodities; i.e., electricity, water, telecommunications and transport2. The implementation of the privatization program in the non-infrastructure sectors has progressed well. By the early 2000s, the privatization of manufacturing and commercial parastatal enterprises was virtually complete. The program has been a solid success. It has made a significant contribution to Tanzania’s strong macroeconomic performance in the last decade, partly by severely limiting the flow of subsidies to loss making enterprises, and in their place obtaining tax revenues from privatized ones. Moreover, by reversing Tanzania’s previously negative image with international and regional investors, the privatization program has contributed to the dramatic positive turnaround in GDP growth rates over the past six or seven years. However, in the same period, infrastructure enterprises continued to perform poorly (see below) and little headway was made in their reform. Thus, in the early 2000s the Government, through PSRC, has focused its attention on the privatization3 of infrastructure. 1 “A Performance Assessment and Privatisation Impact Study in Tanzania