Implications of tariff laws on private investment: Tanzanian power sector

Abstract

This study investigates the tariff provisions in the Electricity Ordinance of Tanganyika and infers their implications for attraction or repulsion of private investment. There were three main strands to the analytical methodology: textual analysis of the Electricity Ordinance, investigation of what is actually taking place on the ground and investigation of opinions of key stakeholders. Furthermore, the act governing telecommunications, a sector that has made significant reforms, was examined in order to discover lessons for power sector legislation reform. The findings show that: (1) tariff is a function of time lapse rather than cost and other market factors; (2) the existing ordinance does not provide mechanisms for tariffs to reflect actual costs; (3) the ordinance has no provisions for meaningful encouragement of mobilisation of financial resources for growth through tariff; and (4) there is too much direct involvement of the political machinery in tariff-setting; this tends to push tariffs down below cost. These findings suggest the following policy options: the 1931 Electricity Ordinance, enacted during colonial times, is so outdated that it is not fit for amendment; instead, its revocation should be considered and a new one enacted. The new law should: (1) reduce direct involvement of the political machinery in tariff-setting by introducing separation between policy formulation (ministry) and policy implementation (regulator); (2) introduce a tariff formula to track movement in costs that are critical to electricity generation in order to maintain the tariff level in real terms; and (3) contain legal provisions granting, through the tariff mechanism, a meaningful encouragement of mobilisation of financial resources for growth. The proposed multi-sector regulator for utilities and a mechanism of appeal and scrutiny by a parliamentary committee is a step in the right direction for it reduces the chances for regulatory capture.