The Ugandan government will waive corporate income tax of at least Ush96 billion ($28 million) per year, extend the tenure of loans on Bujagali and inject new debt and equity as it seeks to reduce the price of electricity produced by the hydropower project, sources say.
The proposals were discussed in New York last month, where President Yoweri Museveni, who was attending the United Nations General Assembly, met investors and lenders to the 250MW project.
Discussions over the Bujagali tariff, which at around $0.11/kWh is one of the highest in the region, have delayed plans by Sithe Global Power LLC, a subsidiary of private equity group Blackstone, to sell its 65 per cent stake in the dam to Norway’s SN Power.
The tariff is set to rise to 13.5 cents/kWh next year when a corporate income tax holiday on the project expires, and remain range-bound to 14.6 cents/kWh until 2023, when 95 per cent of the debt will have been amortised.
With the country’s industrial electricity tariff 58 per cent higher than in Ethiopia, Kenya and Tanzania, President Museveni told the New York meeting that Uganda would not delay or postpone industrialisation until 2023 when the loans are paid off, a source at the closed meeting said, speaking on condition of anonymity.
The EastAfrican reported last month that the government had asked investors and lenders to the project to take a haircut on their return on equity and interest income respectively, in order to reduce the tariff.
Alternative actions
The proposals were received coldly, prompting Sithe Global, in consultation with Ministry of Energy officials, to propose three alternative actions.
First, extending the corporate income tax holiday beyond June 2017 when it is set to expire, will lead to a 3.1cents/kWh reduction in the tariff. Bujagali Energy Ltd would have been liable for corporate income tax of $24.7 million in 2014 and $28.4 million in 2015 according to audited accounts seen by this newspaper — money that Ugandan tax authorities will continue to forfeit in order to keep the electricity tariff low if the proposals are adopted.
Second, the government will encourage more energy consumption in the country, particularly among industries, in order to increase capacity utilisation at Bujagali from about 70 per cent to 84 per cent, shaving another 1.8 cents/kWh off the tariff.
Bujagali currently supplies about 46 per cent of Uganda’s generation mix but the take-or-pay nature of its power purchasing agreement with the government and its higher tariff, relative to two older dams at Owen Falls and Nalubaale, means that its costs represent 65 per cent of the weighed average end-user tariff.
The third proposal is to issue $200 million in new cheaper debt and inject $40 million in new equity over the next five years to ease the aggressive debt amortisation pressure the project is expected to have over the next seven years.
“In effect, this would mean taking new loans because money is cheaper today than it was when the dam was being built, and retiring more expensive existing loans while also stretching out the repayment period,” an official familiar with the discussions said on condition of anonymity.
Cost of electricity
Under the current aggressive amortisation schedule, Bujagali’s debt will drop to $33 million by 2023; the new proposal would see $193 million in cheaper money lent to the project, leaving it with a $226 million debt by the end of the same period.
These proposals, which together would reduce the tariff from 13.6 cents/kWh projected next year to 7.2 cents/kWh, form the basis of President Museveni’s promise to reduce the cost of electricity and doing business in Uganda.
“Recently, in New York, I had a serious discussion with the stakeholders involved in the Bujagali project and agreed on how to bring down the cost of power of that power station,” Museveni said in his Independence Day speech. “By a number of measures, the cost of Bujagali electricity can go down to US 7 cents. Thereafter, we can undertake further measures that can bring down the cost of a unit of electricity to US 5 cents for, at least, the manufacturers.”
Energy Ministry and other government officials did not comment on the extra measures meant to reduce the tariff further. We were also reliably informed that the lead lenders — the International Finance Corporation, the African Development Bank and the European Investment Bank — were yet to review or approve the refinancing proposals.
Lenders to the project are expected to meet government officials with counter proposals before the end of the year.
New money
The government has previously explored the possibility of bringing new money into the project to retire expensive loans but there is no unanimity on the proposal and it is not clear whether the government has the money.
The National Social Security Fund has previously indicated its willingness to invest in the project but it is not clear whether the Fund, which has too much money chasing too few investment opportunities within Uganda, is still an option. The Fund has been contacted for comment.
The ongoing debate about Bujagali reflects a shift in challenges in Uganda from a lack of generation capacity that led to chronic power blackouts and the rolling out of expensive thermal power plants that cost up to $632m in subsidies, to ample supply of expensive electricity.
Bujagali has increased the country’s installed generation capacity to 850MW against a peak demand of about 500MW, with new dams under development at Isimba (183MW) and Karuma (600MW) along the River Nile, among other projects.
Government officials say power from the two new dams will cost not more than 6 cents/kWh and will reduce the average weighed end-user tariffs. However, while only 14 per cent of the population has access to electricity, there are some concerns that tariffs could remain high if demand for electricity, especially from large industrial users, lags behind supply due to the take-or-pay nature of the power purchase agreements.
The share of manufacturing in Uganda’s gross domestic product is eight per cent against an average of 11 per cent for least developed countries. Electricity contributes more than 15 per cent of the cost of manufactured goods in Uganda and has made the country uncompetitive in industry in the region compared with Kenya and, in particular, Ethiopia, which offers large manufacturers a subsidised tariff of 3 cents/kWh.
Any refinancing of Bujagali is likely to benchmark against the terms of Isimba and Karuma, both of which are financed by the China Exim Bank, and which were recently hedged, in a derivative transaction between Uganda Electricity Generation Company Ltd and two local banks, at an interest rate of six per cent.
Officials expect a final decision to be reached by the end of November, at the end of a six-month deadline President Museveni gave Energy Minister Irene Muloni to finalise a tariff-reduction plan for Bujagali.
Source: Daniel K. Kalinaki/ The EastAfrican
