China Eximbank provides $920 million preferential buyer's credit for Songo Songo to Dar Es Salaam Gas Pipeline and Natural Gas Processing Plants at Mnazi Bay and Songo Songo Project (Linked to Record ID#59733)

China Eximbank provides $920 million preferential buyer's credit for Songo Songo to Dar Es Salaam Gas Pipeline and Natural Gas Processing Plants at Mnazi Bay and Songo Songo Project On June 20, 2012, the Export-Import Bank of China ('China Eximbank') and the Government of Tanzania’s Ministry of Finance signed a financing agreement for the Songo Songo to Dar Es Salaam Gas Pipeline and Natural Gas Processing Plants at Mnazi Bay and Songo Songo Project.

The PBC (captured via Record ID#59752) was scheduled for semi-annual repayment every January 21 and July 21.

It had a grace period of 84 months from the first loan disbursement date (June 20, 2013) and it was scheduled to be repaid in full 156 months from the end of the grace period. The BCL (captured via Record ID#59733) was scheduled for semi-annual repayment every January 21 and July 21.

It had a grace period of 22 months from the first loan disbursement date (July 24, 2013) and it was scheduled to be repaid in full 132 months from the end of the grace period.

The PBC and BCL proceeds were on-lent from Tanzania’s Ministry of Finance to the Tanzania Petroleum Development Corporation (TPDC), which in turn used the proceeds to finance a September 2011 commercial (EPC) contract with China Petroleum Technology and Development Corporation (CPTDC), a subsidiary of China National Petroleum Company (CNPC).

The PBC and the BCL for the Songo Songo to Dar Es Salaam Gas Pipeline and Natural Gas Processing Plants at Mnazi Bay and Songo Songo Project are both secured with (i.e. collateralized against) all rights under a natural gas sales agreement between the Tanzania Electric Supply Company Limited (TANESCO) and TPDC and cash deposits in three different escrow accounts (managed by Stanbic Bank Tanzania Limited).

According to TPDC’s audited financial statements, the escrow accounts ‘were opened to secure repayment of principal and payment of interest and fees under the loan agreements’.

The three escrow accounts include (1) a Gas Revenue Account for the purpose of depositing all revenue from sales from the gas pipeline; (2) an Operational Account for the purpose of covering the cost of operating the gas pipeline infrastructure; and a (3) Loan Repayment Account for the purpose of providing a source of cash collateral for the two China Eximbank loans.

The Gas Revenue Account and the Operational Account were to remain inactive ('dormant') until the project reached its commercial operations date (COD).

However, TPDC and Tanzania's Ministry of Finance were expected to maintain a minimum cash balance of approximately $60 million in the Loan Repayment Account before and after COD.

Tanzania Petroleum Development Corporation (TPDC) and Tanzania's Ministry of Finance are both required to make deposits into the Loan Repayment Account.

TPDC and Tanzania’s Ministry of Finance maintained a cash balance in the Loan Repayment Account of TZS 42,011,517,702 as of June 30, 2014, TZS 120,509,276,347 as of June 30, 2015 (TZS 2,380,765,097 from TPDC and TZS 118,128,511,250 from Tanzania’s Ministry of Finance), $60,340,466 (TZS 131,473,427,000) as of June 30, 2016 ($1,473,574 from TPDC and $58,866,942 from Tanzania’s Ministry of Finance), $60,340,466 as of June 30, 2017, $60,320,710 (TZS 136,713,000,000) as of June 30, 2018, $60,320,710 (TZS 138,105,000,000) as of June 30, 2019 ($1,473,574 from TPDC and $58,866,942 from Tanzania’s Ministry of Finance), $60,320,710 (TZS 138,527,000,000) as of June 30, 2020 ($1,473,574 from TPDC and $58,866,942 from Tanzania’s Ministry of Finance), and $60,320,710 (TZS 138,673,000,000) as of June 30, 2021 ($1,473,574 from TPDC and $58,866,942 from Tanzania’s Ministry of Finance), $60,320,710 (TZS 138,000,000,000) as of June 30, 2022 ($1,473,574 from TPDC and $58,866,942 from Tanzania’s Ministry of Finance), and $60,320,710 (TZS 140,000,000,000) as of June 30, 2023 ($1,473,574 from TPDC and $58,866,942 from Tanzania’s Ministry of Finance).

China Eximbank conducted a small ‘cash sweep’ (worth $19,806) from one of the escrow accounts between July 1, 2017 and June 30, 2018.

It withdrew these funds ‘as a penalty for [the Government of Tanzania’s] late repayment of due installment.’ The first PBC disbursement took place on June 20, 2013. The first BCL disbursement took place on July 24, 2013. Another loan disbursement (worth $126,495,423.10) took place in August 2014.

The proceeds of the BCL and PBC were earmarked for the following sub-projects: (a) $151,735,000 for the Songo Songo Natural Gas Plant; (b) $197,877,000 for the Mnazi Bay Natural Gas Plant; and (c) $875,715,000 for the Natural Gas Pipeline.

The PBC’s outstanding amount was TZS 353,208,000,000 as of July 1, 2013, TZS 929,156,000,000 as of June 30, 2014, TZS 1,689,444,000,000 as of June 30, 2015, TZS 2,075,037,000,000 as of June 30, 2016, TZS 2,180,592,000,000 as of June 30, 2017, TZS 2,261,433,000,000 as of June 30, 2018, TZS 2,330,382,000,000 as of June 30, 2019, TZS 2,382,841,000,000 as of June 30, 2020, and TZS 2,428,269,000,000 as of June 30, 2021.

As of June 30, 2016, TPDC disclosed in an audited financial statement that it had defaulted on its repayment obligations under the PBC because it had not made an interest payments to the Government of Tanzania.

As of June 30, 2021, TPDC disclosed in an audited financial statement that it had not made any principal or interest payments on the PBC to the Government of Tanzania (despite the fact that the PBC’s grace period expired on June 20, 2020).

The BCL’s outstanding amount was TZS 0 as of July 1, 2013, TZS 165,451,000,000 as of June 30, 2014, TZS 488,968,000,000 as of June 30, 2015, TZS 648,979,000,000 as of June 30, 2016, TZS 717,819,000,000 as of June 30, 2017, TZS 768,040,000,000 as of June 30, 2018, TZS 811,358,000,000 as of June 30, 2019, TZS 845,584,000,000 as of June 30, 2020, and TZS 875,830,000,000 as of June 30, 2021.

As of June 30, 2016, TPDC disclosed in an audited financial statement that it had defaulted on its repayment obligations under the BCL because it had not made an interest payments to the Government of Tanzania.

As of June 30, 2021, TPDC disclosed in an audited financial statement that it had not made any principal or interest payments on the BCL to the Government of Tanzania (despite the fact that the BCL’s grace period expired on May 24, 2015).

The gas pipeline project was designed and constructed to deliver natural gas to Dar es Salaam for use in power generation, industrial applications, household cooking and in propulsion of transport vehicles.

It involved the construction of a 542 kilometer marine and terrestrial pipeline between Songo Songo and Dar Es Salaam as well as two processing plants: one in Songo Songo and another in Mnazi Bay.

The 542-kilometer gas pipeline has four parts: (i) 290-kilometer terrestrial pipeline of 36-inches diameter from Madimba in Mtwara to Somanga Fungu; (ii) 25-kilometer marine pipeline of 24-inches from Songo Songo Island to Somanga Fungu; (iii) 197-kilometer terrestrial pipeline of 36-inches diameter from Somanga Fungu to Kinyerezi in Dar es Salaam; and (iv) 30-kilometer terrestrial pipeline of 16-inches diameter from Kinyerezi to Tegeta in Dar es Salaam.

It passes through 1 marine park, 4 regions, 8 districts, 41 wards and 113 villages.

The capacity of the main (36 inch) pipeline is rated at 784 million standard cubic feet per day, according to the Natural Gas Utilization Master Plan 2016-2045, but can handle up to 1002 million standard cubic feet per day with compression. It is the longest gas pipeline that has ever been constructed in Tanzania.

CPTDC was the EPC contractor responsible for project implementation.

Construction was officially launched on November 8, 2012 and the Tanzanian President inaugurated the constructed pipeline on October 10, 2015. The pipeline was originally scheduled for a completion date in 2014.

Loan repayment was originally expected to depend on gas sales upon completion of the pipeline construction and after the project's commercial operation date (COD).

However, a review of the on-lending agreements, Gas Sales Agreements (GSA), and pipeline construction contract revealed that the pipeline was constructed before pre-identification and pre-signing of gas sales agreements between Tanzania Petroleum Development Corporation (TPDC) and its expected major gas customers.

This anomaly had an effect on loan repayment as actual gas sales came in far below the initial projection of 138.8 million standard cubic feet per day.

In fact, according to a report published by the Government of Tanzania's Controller and Auditor General (CAG), TANESCO was the only gas consumer as of March 2017 -- with a consumption average of 46.61 million standard cubic feet per day instead of the agreed amount of at least 80 million standard cubic feet per day as per the GSA between TPDC and TANESCO.

There are also indications that the China Eximbank loans that were issued for the Songo Songo to Dar Es Salaam Gas Pipeline and Natural Gas Processing Plants at Mnazi Bay and Songo Songo Project have financially underperformed vis-a-vis its original objectives and the original expectations of the lender.

Tanzania's National Audit Office (NAO) warned of 'Financial Distress Facing TPDC Due to Non-Settlement of TANESCO Long Outstanding Bills TZS 248 Billion' in its Annual General Report on the Audit of Public Authorities and other Bodies for the financial year 2016/2017.

More specifically, the NAO noted that 'TPDC and TANESCO entered into a Gas Sales Agreement (GSA) in September 2015 whereby the TANESCO buys natural gas from TPDC for power generation at Kinyerezi, Ubungo II and Symbion Power Plants.

I have noted that between September 2015 and December 2017 monthly invoices totaling to TZS 567,514,961,312.95. (USD 254,448,796.08), were issued by TPDC to TANESCO with respects to the natural gas supplied to TANESCO for power generation.

My audit noted that by December 2017, TANESCO had managed to settle TZS 318,904,743,618.61 (USD 142,982,887.87) equivalent to 56% of the total amount of invoices leaving TZS 248,610,217,694.34 (USD 111,465,908.21) unsettled.

TPDC may not be able to service the loan obtained to facilitate construction of Mtwara-Dar Gas Pipeline from EXIM Bank of China and their respective interests, if TANESCO does not settle this liability.

Failure to repay the loan shall subject the Corporation to a compounded interest of 0.8% charged on the unpaid loan balance which will increase financial cost to TPDC and the Government.

Further, failure to pay the loan shall amount to transfer of TPDC rights under the Gas Sales Agreement (GSA) to EXIM Bank of China as per Clause 2 of the Security Assignment Contractual Rights which forms of the Agreement signed between TPDC and EXIM Bank of China.

The Government through Ministry of Finance and Planning and Ministry of Energy should consider assisting TANESCO in their efforts to settle such long outstanding dues which in turn will help TPDC meet gas purchase and other operational costs.' TPDC’s audited financial statements also indicate that, as the ultimate borrower/end user, it had fallen into arrears by 2017/2018.

TPDC’s audited financial statements for the year ending on June 30, 2018 note that China Eximbank withdrew $19,806 from one of the escrow accounts between July 1, 2017 and June 30, 2018 as a penalty for the borrower’s ‘late repayment of [a] due installment’.

Then, in June 2019, TPDC announced that it was still having difficulty servicing its debts to the Government of Tanzania and it began to lobby for ‘debt relief’ — that is, for the Government of Tanzania to shoulder the responsibility of loan repayment instead of TPDC.