Ugandan authorities have asked private equity firms and financiers to take a haircut on their investments in Bujagali in order to reduce the cost of power produced at the 250MW dam on the River Nile.

Power from the dam owned and operated by Bujagali Energy Ltd (BEL) costs $0.1152 per kilowatt-hour and is set to rise from next year to a peak of $0.15/Kwh by 2022, but the government wants to reduce the cost to $0.05 to lower the end-user tariff and make the country’s industries competitive.

Plans by Sithe Global Power, a subsidiary of US private equity firm Blackstone Group, to sell its 65 per cent stake in BEL to Norway’s SN Power are yet to receive full regulatory approvals pending discussions over the tariff, sources familiar with the matter told The EastAfrican.

Other shareholders in BEL are the Uganda government, Industrial Promotion Services, Jubilee Investment Company and the Aga Khan Fund for Economic Development (which is a majority shareholder in Nation Media Group, publisher of this newspaper).

Energy Minister Irene Muloni declined to discuss details of ongoing talks, but confirmed to this newspaper that President Yoweri Museveni had made reducing the cost of power from Bujagali one of his top priorities and given a six-month deadline, which expires at the end of November, for concrete proposals.

Government officials have outlined a raft of measures aimed at reducing the cost of power at the dam, including de-risking the dam, restructuring and refinancing the debt to a lower interest rate, and reducing the return on investor’s equity.

At the time the Bujagali project attained financial closure in 2007, Uganda had a sovereign credit risk rating of C, but this has since improved to B+ and government officials want the benefits of this lower risk profile translated into the cost of power from the dam.

“We are less risky today than we were then, and the dam has not defaulted on any of the debt payments,” a source familiar with the discussions, who asked not to be identified in order to speak freely, told this newspaper. “In any case, the dam has been profitable since it was commissioned and the benefits of this must now be seen in a lower tariff.”

Cost of power

When Bujagali was commissioned in October 2012, it resolved an electricity generation crisis and was widely hailed as a successful example of a public-private partnership power project but its relatively high construction and financing costs meant that the tariff remained higher than government targets.

READ: Bujagali finally comes on stream, eases power crisis

“The resultant tariff for Bujagali Energy Ltd, among other factors, has led to an increase in the retail electricity prices in Uganda,” a government briefing paper on the discussions says, noting that the current industrial tariff of $0.104/KWh in the country has “impeded industrialisation and adversely affected” the country’s competiveness in manufacturing.

Uganda also generates power from Kiira and Nalubaale hydropower dams upstream from Bujagali, which is cheaper because of the nature of the financing for the dams, which in the case of the latter has since been fully amortised.

The cost of power from Bujagali raises the average weighed tariff rate, which has brought the project under the spotlight. The government proposals seek to restructure and refinance the debt carried by Bujagali in order to lower tariffs that are scheduled to start rising from next year.

Bujagali currently supplies about 46 per cent of Uganda’s generation mix but the take-or-pay nature of BEL’s power purchasing agreement with the government and its higher tariff relative to two older dams means that its costs represent 65 per cent of the weighed average end-user tariff.

A 600MW dam at Karuma and a 183MW dam at Isimba, both under construction downstream on the River Nile, are expected to produce cheaper power according to government projections but the government has identified reducing the cost of power from Bujagali as a key plank in reducing overall end-user tariffs.

Proposals

One option proposed by the government is to extend the tenor of the project debt lifetime by between five and 10 years, which would increase the total debt repayment but reduce the tariff.

A second option is to refinance the project debt and reduce the average weighed interest rate to three per cent. Government documents put the current weighed interest rate at 5.58 per cent although industry sources put the figure at 6.25 per cent.

Government officials met with representatives of the International Finance Corporation (IFC) in Kampala last month to explore this possibility. IFC officials were not immediately available for comment but more meetings are expected this month.

Focus is expected to fall on the interest rate charged on debt from the Netherlands Development Finance Company (FMO, 11.36 per cent), IFC (7.23 per cent) and from French lender Proparco (6.98 per cent). Other lenders include the International Development Agency, KfW, the European Investment Bank, DEG and the African Development Bank.

“At the time of borrowing the cost of money was high, and you then had the financial crisis in the West, which made debt expensive,” a government official said.

“Now we are in a time of zero, and in some cases, negative interest rates where money is cheap; there is no reason why we do not refinance this debt to take advantage of these lower interest rates and bring down the tariff.”

Another proposal, which investors reportedly favour, is to waive corporate income tax on BEL, currently at a rate of 30 per cent. A combination of increasing the debt tenor by 10 years, reducing the interest rate to an average weighed rate of three per cent and a waiver of corporate income tax could reduce the tariff to $0.0765/KWh, close to the government target of $0.05/KWh.

The 30 per cent tax rate will take effect next year after the company enjoyed a tax break for the first 10 years of operations.

Officials from BEL were not available for comment while SN Power had not responded to interview requests by press time.

Sticking points

A cash-strapped Uganda government, is understood to be reluctant to waive corporate income tax from a project that has been profitable since commissioning.

Instead, some technocrats favour a proposal in which investors in Bujagali accept a lower rate of return, stretching the haircut on returns from the debt to the equity side.

Bujagali has a guaranteed internal rate of return (IRR) of 19 per cent over the 30-year lifetime of the project, which some officials would wish to see revised downwards.

This newspaper understands that this is one of the sticking points stalling the ongoing sale of Sithe Global’s stake in Bujagali to SN Power, with the government keen to have BEL shareholders accept a cut in IRR of about 5-7 per cent.

“We are obviously reluctant to disadvantage investors because we have an openly declared open-door policy towards foreign direct investment,” a senior Uganda government official familiar with the discussions told The EastAfrican, “but we also need to stave off the collapse of the wider economy.

“If the government is making some sacrifices in order to reduce the tariff and save the economy, why shouldn’t investors who also need the economy to thrive in order to make money? It is not about imposing conditions; it is about finding a middle-ground.”

However, an industry source that preferred anonymity due to the sensitivity of the ongoing negotiations said it was unlikely that the lenders would be keen on the haircut proposals.

“The lenders would have to be agreeable to the idea of refinancing,” said the source, who is familiar with the discussions. “And in the event that they agree, it would be a very expensive exercise for a nominal benefit and probably antagonise most of the lenders.”