The BujagaliHydropower 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%. It operates as base load in the Uganda electricity system with an average plant factor† of 67%, but the full 250 MW may be required during the evening peak hours. This was the first independent power project (IPP) in sub-Saharan Africa and remains one of the largest, with an investment of some $900m.

Project Development:The success of the plant today belies its notorious and lengthy development history: it took well over 20 years for it to reach financial close. This history can be divided into two distinct phases: 

▪Bujagali I (1994-2003).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 constructthe 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 itselfwas 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. 

▪Bujagali II (2003 onwards).Following AES's withdrawal, the project in effect started again, albeit with the advantage of the technical, design and costing work done for AES. A competitive procurement process took place and the project reached financial close in 2008 and began operations in 2012. This Case Study relates primarily to Bujagali II. In the mid-2000s most of Uganda's electricity was generated by hydro sources, in particular, two dams with a notional capacity of 380 MW but an actual output well below this, exacerbated by 40% distribution losses. Uganda therefore had developed a serious deficiency in generation. Rolling blackouts were the norm and expensive temporary diesel generation had to be brought into the country, resulting in consumer tariff increases making retail tariffs in Uganda amongst the highest in Africa.* It was vital to revive Bujagali after AES withdrew as the best long-term solution to this situation, and to avoid a real constraint on Uganda's economic development. 

Power-Sector Reform:One result of the previous work on Bujagali I was a major reform of the electricity industry in Uganda in 2001. The aims of the reform were to reduce subsidies and hence free up fnance for other development needs, and to improve effciency 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). A regulator (Electricity Regulatory Authority [ERA]) was created to supervise the industry.

 

 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 (see Songas), then by Globeleq alone. It was foated on the Nairobi and Kampala stock exchanges in 2012. Umeme's consumer tariffs are based on full cost recovery. UETCL remains state-owned, and is the public authority in the Bujagali project. 

Bujagali II: Procurement: When the project was restarted after AES's withdrawal, GoU had no choice but to continue 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 p.a. A PPP, even with the government guarantees described below, did not count against this borrowing limit. But apart from the budgetary reason for pursuing this project as a PPP, another key reason for GoU doing the project in the private sector was that 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 II was unusual, being undertaken in two stages. The first stage was procurement of the investors who would develop the project, and the second the procurement of an EPC contractor. The electricity-sector reforms benefited the tender processes as they clearly placed the Bujagali project in a far more fnancially-sound environment. 

In the first procurement stage (beginning in 2004), following a pre-qualification stage bids by prospective investors were evaluated on only four criteria—the bidders' proposed development costs, 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 fnance, 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 affliate 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 effectivelyborne 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 financial close, when there could be no hedging of this currency risk (because Salini could not be certain when or even whether 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 refecting the fxed 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.

▪Dispatch 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. It should be noted that GoU also counter-guarantees the political-risk insurance provided by International Development Association (IDA; the World Bank Group's provider of concessionary fnance to least-developed countries) and the Multilateral Investment Guarantee Agency (MIGA; the World Bank Group's investment-guarantee arm). 

▪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: AKFED and Sithe had different objectives on the equity structure that needed to be reconciled. Sithe did not want to make an investment of less than $100m, which would have given it the largest equity share, but Sithe's business model made it a comparatively short-term investor, since it wanted to sell its shareholding after the project was completed and operating successfully. AKFED, as a long-term investor, did not want to see Sithe controlling the project. A compromise was reached whereby 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. The lenders required that Sithe should not sell its shares until three years after the commercial operation date. It was announced in 2016 that Sithe's shares were to be sold to Statkraft Norfund Power Invest AS (SNPower), a Norwegian state-owned investor in hydropower projects, and an AKFED affiliate. 

Debt Finance: Raising $700m of debt for the project was a major exercise. 

This came from three sources: 

▪three major multilateral DFIs (MDFIs): International FinanceCorporation (IFC; the World Bank Group's private-sector lending arm), the European Investment Bank (EIB; the European Union's DFI) and the African Development Bank (AfDB) 

▪bilateral DFIs from the Netherlands, France and Germany 

▪two private-sector commercial banks, 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. 

While the involvement of the MDFIs was certainly essential, it also gave nongovernmental organisations (NGOs) and other entities objecting to the project a forum to raise these objections. 

This Case Study does not attempt to evaluate the social and environmental issues raised —all that can be said is that they led to a lot of extra cost and staff time for BEL, not least because each of the three MDFIs was approached in succession and undertook separate social and environmental reviews in sequence. 

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 was because the ground condition under the River Nile was not fully evaluated in advance (and more work should probably have been done on this). 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. The company has eight staff, covering billing, accounts, finance and government interface. Although Sithe could have undertaken the O&M rôle, it was always intended to this should be carried out by a third party. 

After a competitive procurement process, Gas Natural Fenosa of Spain was selected. It has about 40 people onsite, of whom three are expatriates. As said above, 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 fxed in Ugandan shillings, whereas UETCL's obligations to BEL are in US dollars. When the project began ERA only allowed Umeme's tariffs, and hence its payments to UETCL, to be adjusted for foreign exchange movements on an annual basis, leaving UETCL with a large currency exposure. ERA now allows quarterly adjustments. 

Cost of Power: BEL brought down the average cost of power considerably as it substituted for the diesel plants, whose cost was in excess of 35¢. Arguably BEL's 11.5¢/kWh is still high when new mini-hydros are being offered at a feed-in tariff of 8.5¢, but in the view of UETCL this represented a fair rate at the time and created trust in Uganda as a country for investment, completely changing the environment, so project developers now are content with much lower returns than was the case in BEL. (Moreover, as mentioned above, in due course the cost will reduce to 6¢.)

In 2015 there was some discussion in GoU circles about buying this 'expensive' project back, but this was ruled out on the grounds of not being cost effective, and diverting funds from necessary new projects to one that was already in existence. Another approach was taken by GoU in 2016: President Museveni announced a target of reducing BEL's cost to 5¢ for industrial users to make Ugandan industry more competitive.' Various suggestions were made to achieve this: 

▪to continue the corporate tax exemption for a further period (without the exemption the tariff would rise to 13.5¢). This is easy to do if GoU wishes, but it reduces tax revenues that are needed for other purposes. 

▪to reduce the cost of the debt. The debt costs are comparatively high, reflecting rates at the time of their commitment around the time of the 2007-2008 financial crisis. The weighted cost of the debt seems to be about 6.25% p.a. However, if the Public-Private Partnerships in Sub-Saharan Africa 24 lenders funded themselves with long-term fixed-rate debt to provide these loans, reducing the cost now could create a loss for them.

▪to extend the repayment of the debt. If the debt is repaid over a longer period its annual cost will go down, even though more interest will be paid in the end. There may be some room for manœuvre here, but the tariff will reduce anyway once the debt is paid off on the original schedule. 

▪to reduce the 19% rate of return for equity investors. However, they would expect some compensation for this. According to press reports GoU was looking for a reduction of 5-7%. 

This was not agreed, and Sithe's share sale was held up as a result. Investors and lenders have discussed these proposals with GoU, but little progress seems to have been made. 

Inauguration:The project was officially inaugurated in October 2012 by President Museveni and the Aga Khan, in the presence of other regional leaders. The President said that the project was a milestone in Uganda's development efforts because it would spur more investment, which would in turn translate into jobs for Ugandans. The Aga Khan noted that Bujagali was not only a transformative development in the economic life of Uganda and the continent but also an inspiring model of how such change can be best accomplished.'We had planners and financiers, engineers and architects, scientists and government officials, suppliers and contractors, consultants, construction workers and community leaders. And we had President Museveni and his government,' he said, adding, 'In a project of this complexity, there are surprises that occur. And when you have a number of participants working together for a five-year period, those surprises have to be addressed by consensus'.

Q.1.

 a) Discuss the reasons why the Government of Uganda adopted a Build-Operate-Transfer Model of a Public Private Partnership arrangement as opposed to funding and running the project itself? (10 marks)

b) Examine the Financing arrangements of this project and make an opinion on whom was the ultimate winner in this deal(15marks)Total 25 marks 

 

Q.2.

a) Discuss the implications of the involvement of Government of Uganda to the success of this project and similar others that subsequently followed(10marks)

b) In your analysis, was this project a success or a failure?Explain your views with support of evidence from the case study (15marks)Total 25 marks

 

 Q.3.

a) Assess the intended rolesof the Special Purpose Vehicle (SPV) -BEL in this project and show whether the Government of Uganda has been able to achieve its intended objectives with its chosen model of project financing(10marks)

b) Identify and justify the presence of each of the parties included in this project (15marks)Total 25 marks