TANZANIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# Power

## **Achievements**

Tanzania has also made significant progress in turning around its power sector since the crisis years of the mid-2000s. Tanzania’s national power utility – TANESCO – is a vertically integrated parastatal organization fully owned by the government of Tanzania and regulated by the Ministry of Energy and Minerals. While TANESCO’s revenue collection efficiency is relatively good at 94 percent, system losses at 26 percent in 2005 were about double best practice levels. Recent operational reforms have helped to bring down distribution losses substantially to just over 15 percent by 2010. Under-pricing has also been a major issue, with power tariffs in 2005 towards the lower end of the range observed in the region and covering less than half the historical cost of power development in the sector (figure 5). Some progress has been made in recent years, with the average effective tariff rising from US$0.06 per kilowatt-hour in 2006 to US$0.08 per kilowatt-hour in 2010. As a result, of both of these reforms, the hidden costs of TANESCO fell from 175 percent of revenues (or a staggering 2.4 percent of GDP) in 2006 to 87 percent of revenues (or 1.4 percent of GDP) in 2010. From a macro-economic perspective, these savings are significant amounting to a whole percentage point of GDP; and are comparable in magnitude to the savings achieved by Kenya’s power sector reform in the early 2000s (box 1).

## **Challenges**

Nevertheless, TANESCO’s average effective tariff of US$0.08 per kilowatt-hour in 2010 remains low relative to estimated historic costs of US$0.14 per kilowatt-hour, and even long run marginal costs that have been estimated at US$0.10 per kilowatt-hour (figure 6). The associated hidden costs of 1.4 percent of GDP remain a significant macro-economic savings amounting to more than US$300 million annually. Hence the importance of continuing tariff reforms to close this remaining financial shortfall in the sector.

Tanzania’s power supply sector remains vulnerable to hydrological conditions, and the pressing need to expand and diversify generation capacity. A major drought in the mid-2000s caused Tanzania to face a major supply crisis. The crisis was precipitated by drought that drastically reduced the country’s capacity to generate hydro-power – it’s main source of electric energy. This forced businesses to rely on own generation, increasing the costs of production, complicating the survival of businesses (especially small ones), and generally making the economy less competitive. The crisis led to high levels of power outages resulting in economic losses that have been valued as high as 4 percent of GDP, one of the highest reported in Africa (figure 4). Power outages increased the demand for expensive emergency diesel power generation, which cost the country almost 1 percent of GDP per year. With the end of the drought, reliability of power supply improved. According to occasional enterprise surveys, the number of annual days of power outages reported by firms fell from 63 days in 2005 to 47 days in 2008. Per capita power consumption also increased substantially over this period from 48 to 81 kilowatt-hours per capita per year (table 2). Unfortunately, the drought situation of 2006 was repeated in 2011, with similar consequences.

Furthermore, power supply and electricity access in Tanzania remain extremely low in absolute terms. Both installed generation capacity and power consumption in Tanzania are comparable if not slightly worse than the benchmark for low income countries (table 2). National power consumption at less 8