The latest victim of the global crisis in Tanzania is a gas-to-power project whose developer now wants the government to inject Tsh9.5 billion ($7 million) into its operations.

After having promised to light up rural areas in the southern regions of Tanzania, Artumas Group and Partners (Power) Ltd (also known as AG&P Power Ltd) is asking the Tanzanian government to provide it with funding in order to continue operating.

In a letter to the government that The EastAfrican has seen a copy of, Artumas formally advised the government that the Mtwara Energy Project (MEP) is temporarily in financial distress.

The bad news is that if no financial support is made available to the project by the end of April, it will fail.

Despite the fact that the project is a public necessity and of great importance to the government and to the people of the southern regions, its revenue is insufficient to cover its costs.

Mtwara is an area of strategic economic potential, in that it hosts the third largest port in Tanzania besides other economic activities that include fishing and growing of cashew nuts, sunflowers, sorghum and millet.

Artumas further said the project had managed to survive over the past two years through the financial support of equity shareholders of the company.

The company entered into an Interim Power Purchase Agreement (IPPA) with Tanesco in August 2006 to sell power to the latter.

According to Artumas, the current price to Tanesco under the IPPA at about $0.1195 per KWh only partially covers the cost of power generation service, and anyway the IPPA expired on March 4.

In advance of large-scale gas commercialisation, Artumas says it currently relies exclusively on financial markets for its capital, and that due to the financial crisis, continuation of this shareholder subsidy is no longer possible.

However, industrial experts have questioned the rationale behind the Artumas request for money from government coffers, considering the fact that the investor had promised to invest in rural areas in the south of the country, which was also expected to speed up the country’s rural electrification exercise.

Investigations by The EastAfrican have revealed that the company raised the funds to invest in the project after it had signed development agreements with the government by floating shares abroad.

The shares of the company in Norway have since last year been heading down. The latest report made available to The EastAfrican showed that the shares had peaked at $10.6 (Kroner 70.25) on April 4, 2008, dropping to $0.19 (Kroner 1.25) on March 13 this year. The shares had started trading at $4.7 (Kroner 31.00) on July 8, 2005.

On March 6, the company’s share price was as low as $0.14 (Kroner 0.93). On February 20, the shares had fallen to an all time of $0.12 (Kroner 0.85).

Artumas said that to ensure viable continuation of the project in this interim phase, the MEP be provided with an interim Tariff Equalisation Fund (TEF), to be effective immediately and lasting until the MEP agreements come into full force and effect (the Transfer Date).

The letter, signed by Artumas general manager Salvator Ntomola, said the amount requested is $7 million (Tshs9.5 billion) and could be funded at agreed monthly or quarterly instalments beginning March 2009.

Artumas further said that as with the TEF guaranteed within the long-term MEP Agreements, this interim TEF would also be repayable to the government after the MEP has added sufficient customers in the region to be able to reduce the cost-reflective tariff below the national average tariffs.

The energy firm said that the urgent request was based on facts that included recent signed documents between Artumas, Tanzania Petroleum Development Corporation (TPDC), Tanesco and the government of Tanzania for the MEP, which would become effective later this year, but not be in full force until the first quarter of 2010.

According to the letter, these long-term agreements and current electricity legislation, provide for full cost-recovery tariffs.

It added that during early years of the MEP the unit cost of providing electricity services to customers is high; therefore tariffs would be subsidised through a TEF provided by the government of Tanzania, deferred equity provided by Artumas, and grant provided by the Dutch Government.

“These three specific components would enable Artumas to charge rates that are less than cost-reflective, thereby, minimising rate shock while maintaining financial viability of the project,” said the letter.

However, these subsidies would not be available until the project reaches Transfer Date.

Artumas argues that it has provided power to the region under the IPPA with Tanesco dated August 10, 2006.

A source from government said last week that when the IPPA was signed, it was understood that its tariff wouldn’t provide full cost recovery, but that it was the expectation of all parties that the temporary arrangement would only be needed for six months to a year before the MEP documents came into full force.

The source said due to the complexity of the project, negotiations took longer than expected and the IPPA was extended twice before the current expiration in March 2009.

Losses suffered by Artumas under IPPA aren’t a new phenomenon.

Prior to the IPPA, Artumas said that it believed that Tanesco was incurring similar losses resulting from a combination of high operating costs (mainly fuel costs used in power generation) and low revenue.

“We understand that these losses were as high as $12 million per year and were mostly funded by the government’s subsidies to Tanesco,” added the letter.

It is on this premise that Artumas wants to build its case to be assisted by the government.

However, while Tanesco is a state enterprise, the former is a private company, industry observers noted.

The firm said that the introduction of the IPPA transferred the problem from Tanesco to Artumas.

Artumas agreed to shoulder the problem knowing that it was for a minimal period of up to one year.

The reality now is that the timeframe for Artumas’ shareholders to carry the losses became longer and conditions in the financial markets have changed dramatically, so that raising capital for loss-making ventures .is no longer possible.

The proposed solution by Artumas includes a full cost of service tariff on an extended IPPA at 36 US cents.

This tariff is higher than the tariff Tanesco charges its customers.