Case study:BUJAGALI HYDROPOWER (Uganda)

Introduction

The Bujagali Hydropower plant straddles the River Nile some 8 km downstream from Lake Victoria. Completed in 2012, it is a run of the river 250 MW plant that provides up to 50% of Uganda's energy demand. The plant has maintained a high level of reliability: its availability has been in excess of 99%.

Project Development

Studies in the 1980s concluded that large-scale hydropower using the River Nile was the most cost-effective way of increasing Uganda's electricity generation. These led to the US power developer AES Corporation (AES) making an unsolicited bid to construct the project in 1994, following which AES and the Government of Uganda (GoU) signed a memorandum of understanding. In 2003, however, having spent $75m on project development, AES pulled out of the project. There were various reasons behind this: AES itself was under financial pressure following the collapse of Enron Corporation; there was opposition to the project on environmental and social grounds and there were accusations of bribery. The site, works and some plant and equipment reverted to GoU.

Power-Sector Reform

GoU undertook a major reform of the electricity industry in 2001. The aims of the reform were to reduce subsidies and to improve efficiency by bringing in private-sector participation. The state-owned Uganda Electricity Board was split into separate companies covering generation (Uganda Electricity Generation Company Ltd [UEGCL]), transmission (Uganda Electricity Transmission Company Ltd [UETCL]) and distribution (Uganda Electricity Distribution Company Ltd).

UEGCL's two existing hydropower plants are operated by a subsidiary of Eskom (South Africa) under a 20-year concession from UEGCL signed in 2002. The distribution network is operated under a concession with UETCL by Umeme Co. Ltd, originally owned by Eskom and Globeleq, then by Globeleq alone.

Bujagali Hydropower: Procurement

When the project was restarted after AES's withdrawal, GoU had no choice but to pursue the PPP route. The government did not have access to funding on the scale required, partly because the International Development Association (IDA) had imposed a limit of new funding of $200m per annum. Apart from the budgetary reason, the GoU felt it would be done better: investors had equity stakes that they needed to protect by managing it well; incentives for good management in the public sector are not as strong.

GoU's procurement approach for Bujagali was unusual, being undertaken in two stages. The first stage was the procurement of the investors who would develop the project, and the second was the procurement of an EPC contractor. In the first procurement stage (beginning in 2004), following a pre-qualification stage bids by prospective investors were evaluated on only four criteriathe bidders' proposed development costs, the required level of equity return, the cost of supervising the construction of the transmission line, and the O&M costs. These four factors are the main aspects of an IPP project's costs that a developer can control directly. Other costs such as that of the EPC contract, or the cost of finance, are mainly determined by the market. Thus, the EPC contract and the debt were procured separately. The winning bid, with a required equity return of 19%, was made by a consortium led by an affiliate of the Aga Khan Fund for Economic Development (AKFED), already a significant investor in East Africa, with Sithe Global Energy (Sithe) a successful US power-project developer.

In the second procurement stage in 2004-2005, the project company, Bujagali Energy Ltd (BEL) set up by AKFED and Sithe ran an international tender for the procurement of an EPC contractor, which was won by Salini of Italy. This procurement was on an open-book approach, i.e. with all information provided to UETCL. It could be cynically suggested that BEL had no interest in the outcome since the costs would be effectively borne by UETCL. However, there was no reason for BEL not to run a competitive and fair procurement and this seems to have been the case.

Salini priced its bid in euros, which meant that it went up in US dollar terms before the financial close when there could be no hedging of this currency risk (because Salini could not be certain when or even whether the financial close would be reached). Thereafter currency hedging fixed the price in US dollars.

Power-Purchase Agreement

Key terms of the power-purchase agreement (PPA) signed between BEL and UETCL included:

• BEL was responsible for the design, construction, finance and operation of the project.
• The PPA term was 30 years from the completion of construction.
• The tariff primarily consists of a capacity charge reflecting the fixed costs of construction under the EPC contract and agreed O&M costs.
• The current tariff is about 11.5/kWh.It will reduce to about 6 when the debt is repaid.
• UETCL assumed the sub-surface (geotechnical) risk relating to building on the river bed.
• UETCL also took the hydrology risk, i.e. the availability of sufficient water (which has not been a problem for the project so far). UETCL has the right to terminate the agreements and purchase the hydropower plant in case of an extended period of extremely low hydrology.
• Despatch risk remains with UETCL, i.e. the tariff is paid whether or not the power is needed.
• At the end of the PPA the plant can be purchased by GoU for $1.
• UETCL's obligations are guaranteed by GoU which also counter-guarantees the political-risk insurance provided by the International Development Association (IDA) and the Multilateral Investment Guarantee Agency (MIGA).
• BEL was also given a tax holiday, i.e. it was exempted from corporate taxes for the first 10 years of operations.

In addition to the Bujagali project itself, BEL also managed a series of works on behalf and at the cost of UETCL to ensure that the power could be effectively used in the Uganda electricity system. These consisted of the construction of approximately 100 km of 132 kV transmission line, sub-stations and related works.

Equity Structure

Sithe ended up with a $115m shareholding compared with AKFED's $65m (plus a further $20m for GoU in return for providing the land for the project, making $200m of equity in total), but AKFED's class of shares had greater voting rights than those of Sithe.

Debt Finance

Raising $700m of debt for the project was a major exercise. This came from three sources:

• three major multilateral DFIs (MDFIs): International Finance Corporation (IFC; the European Investment Bank (EIB) and the African Development Bank (AfDB)
• bilateral DFIs from the Netherlands, France and Germany
• two private-sector commercial banks, namely, ABSA(Barclays Africa Group and Standard Chartered of UK, with a political-risk guarantee from IDA.

The overall cost of the debt, including fees, was about 6.5% p.a. Most of the debt is repayable over 16 years, with some mezzanine debt repayable over 20 years. In addition, MIGA, provided political-risk insurance for Sithe's equity investment.

Construction

Financial close was reached in 2007. The main issue that arose during construction related to the element of construction risk left with UETCL, namely the sub-surface (geotechnical) risk. This risk actually materialised, and as a result, there was a $50m cost overrun: however, lower interest rates than budgeted largely offset this cost. Overall, the final cost of the plant came in 5% over budget: BEL paid this excess and the tariff payable by UETCL was increased to compensate for this.

Project Operation

BEL reached its commercial operation date in 2012. Although Sithe could have undertaken the O&M rle, it was always intended for this should be carried out by a third party. After a competitive procurement process, Gas Natural Fenosa of Spain was selected. The plant has continued to operate smoothly since 2012. Equally, payments from UETCL are made on time and there have been very few disputes between the parties.

UETCL relies on revenues from Umeme to make its payments to BEL. Umeme's tariffs, and hence its payments to UETCL, are fixed in Ugandan shillings, whereas UETCL's obligations to BEL are in US dollars.

Answer the following questions based on the above case study

1. Using a diagram present the project structure and describe the role of each stakeholder in the deal.(8 marks)

2. Identify the key risks and comment on whether the risk mitigation strategies are adequate.

Refer to the risk allocation matrix developed by Global Infrastructure Hub to check if the risk is fairly shared among the public sector, private partners and the end-users.

You should focus on the following risk exposures: Construction risk, Political Risk, Market (demand) risk, Exchange rate risk and Environmental risk. (30 marks)

3.Why do you think UETCL agreed to assume geotechnical and hydrology risks while both are natural phenomena that are beyond its control? (12 marks)