The government of Uganda is quietly exploring plans to buy back Bujagali dam, a major hydroelectricity project, from a consortium of private investors and developers in a move that would constitute a major reversal in public policy.

According to documents seen by The EastAfrican, the proposal to acquire the 250MW dam is driven by a need to reduce the cost of power it generates and to increase government market share in the electricity generation market.

“The high cost of electricity in Uganda has reached unsustainable levels that are severely eroding local industries’ competitiveness and domestic consumers’ disposable income,” says a confidential brief seen by this newspaper that seeks to justify the buy-back.

By 2019 government of Uganda “will only control 8.75 per cent of the country’s electricity generation capacity, thus it will not be able to effectively impact the overall electricity tariffs that are currently spiralling out of control,” adds the brief.

Harrison Mutikanga, the head of the government-owned Uganda Electricity Generation Company, confirmed that discussions were ongoing to explore the viability of the proposal.

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Located on the River Nile near Jinja, the dam is owned by Bujagali Energy Ltd (BEL), a special-purpose vehicle owned in turn by Industrial Promotion Services, which is part of the Aga Khan Fund for Economic Development, and SG Bujagali Holdings, an affiliate of Sithe Global Power, LLC, part of Blackstone, the US-based private-equity fund.

The Uganda government holds a 4.63 per cent stake in BEL, which has a 30-year build-own-operate-transfer concession over the dam.

Initially delayed by environmental concerns and allegations of corruption, Bujagali was eventually built as a public-private partnership to ameliorate the electricity crisis that Uganda faced in the past decade, and which had forced the government to resort to expensive emergency thermal electricity generation.

Although much cheaper than thermal, the cost of power generated from Bujagali is, at $0.11 per kilowatt-hour, higher than many projects of similar size. Promoters of the reverse-privatisation proposal believe that the cost of finance and the return on investment contribute to the end-user tariffs.

Effective control

“Short of the country raising funds to develop hydro-electric power projects of its own (that will inevitably involve painstaking procurement, significant construction risk and a protracted gestation period), the only other option to increase government’s effective control over the overall average electricity tariffs is for government to acquire existing hydro-electric plants, that are viable for the long-term, owned by private investors,” says the project plan.        

Promoters of the idea said that President Yoweri Museveni “understands the need for this measure and is supportive of its application.”

In early January, President Museveni appeared on the Capital Gang radio talk show in Kampala and expressed concern about the cost of electricity produced at the dam.

“We still have issues with electricity prices because of the distortion caused by the Bujagali project,” he said. “The concession for Bujagali power was not negotiated well. We will sort it out.”

The proposals, seen by The EastAfrican and dated January 2015, are the outcome of discussions at the “highest levels of government,” according to a source familiar with the matter.

It is understood that President Museveni would like to see a generation tariff of around $0.05 per kilowatt-hour — less than half the Bujagali rate — according to several sources familiar with the industry.

Reducing the cost of finance as well as the profit margin under government hands would reduce the Bujagali tariff, according to the promoters of the proposal. Uganda has an average end-user tariff of around $0.17 per kilowatt-hour, which is higher than both Tanzania and Ethiopia.

The two public power dams, Kiira and Nalubaale, have an output of 380MW, less than half the total installed capacity. Proponents of the reverse-privatisation say foreign direct investment in power projects such as Bujagali comes with “hidden costs” of international finance that are passed on to end-users.

“This has fundamentally adverse consequences for Uganda as over 51 per cent of the country’s installed electricity generation capacity is privately owned,” they argue.

Commissioned in October 2012 and with just under three decades of almost guaranteed income ahead of it, Bujagali is an attractive target. Its profit after tax rose from about $32 million in 2011 to $66 million in 2013, according to audited figures provided by the government.  

The briefing paper shows that the promoters of the reverse-privatisation plan believe it would cost about $750 million for the Uganda government to acquire the 95.37 per cent equity in Bujagali it does not own.

However, given rising public debt and a long list of mega infrastructure projects in the pipeline including new power dams, railway lines, an oil refinery and pipeline, it is not clear how much financial space the government would have to pay for the dam.

The EastAfrican has learnt that one option currently under exploration is to tap into the $1.6 billion in assets sitting with the National Social Security Fund (NSSF).

Richard Byarugaba, the NSSF managing director, said preliminary conversations had taken place and that while no firm decisions have been reached — and won’t be reached until a firm business case is made — the fund “is always looking to diversify its investment portfolio” and energy is “one of the areas we are always looking at.”

NSSF is a notable shareholder in Umeme, which runs the electricity distribution concession in Uganda.

The idea, however, is not universally supported. Frederick Kabagambe-Kaliisa, the Permanent Secretary in the Energy Ministry, said the priority in the sector should be building new power dams in the pipeline, not buying back existing projects.

Construction is underway on a 600MW power dam at Karuma and a 187MW dam at Isimba, both on the River Nile. Although funded by Chinese loans, the dams will be owned and operated by UEGCL, on behalf of the government, and are expected to reduce the average generation tariff.

Another option proposed by the promoters is an international infrastructure bond, similar to the one issued by Kenya last year, to raise probably more than a billion dollars.  

However, in an interview with this newspaper before she left the Cabinet last week, finance minister Maria Kiwanuka said her priority was to raise finances for new energy and transport infrastructure projects in the pipeline, not existing projects.

There are currently no public plans for such a bond issue but the minister said spending any proceeds on this project would be “throwing new money at old problems.”

While officials in the Finance Ministry acknowledge the high cost of finance for Bujagali, many privately admit that it accelerated the completion of the long-delayed project while freeing up almost $900 million for investment in other sectors of the economy.

Apart from the financing challenges, the Bujagali proposal is likely to encounter resistance from other quarters as it represents a turn-around in public policy.

As part of its package of reforms agreed upon with the World Bank and the International Monetary Fund, the Uganda government privatised public utilities with the understanding that this would increase efficiency.

As a result, the government-owned Uganda Electricity Board was unbundled into generation, transmission and distribution arms, and some assets concessioned out, including the distribution network and the operation of a legacy power plant at the Owen Falls Dam in Jinja.

The government is keen to attract more private-sector participation in major infrastructure projects and a Public-Private Partnership Bill is currently before parliament.

The reverse-privatisation proposal is likely to raise concern among foreign investors looking to co-build projects in the country, including in the energy sector.

Investors in the energy sector were shaken by a parliamentary resolution last year ordering the government to terminate the 20-year concession granted to Umeme to manage the power distribution network on the basis that it was poorly negotiated and largely in favour of the private company, despite punitive fines for such an early termination.

Neither Energy Minister Irene Muloni, nor officials from BEL were available for comment.
Butwith a 19 per cent return on investment (slightly lower than Umeme’s 20 per cent) the investors in the project are unlikely to welcome the reverse-privatisation bid and it would possibly force the government into a hostile takeover bid.

Under the terms of the deal, Bujagali will be transferred back to the government for one US dollar in 27 years if the reverse-privatisation does not get off the ground.

In January 2012, the Ugandan government abolished electricity subsidies paid to power generators to cushion consumers, after spending $624 million on rebates from 2005, with Ms Muloni noting that the money freed up would be spent on expanding generation capacity.