Financial Solutions: Partial Risk Guarantee Finance, Economics & Urban Department December 2007 Sustainable Development Network Vice - Presidency IDA Partial Risk Guarantee (PRG) to promote Uganda’s first Independent Power Producer Uganda’s first large scale Independent Power Producer (IPP) project, the Bujagali “The Bujagali Hydropower, will double power generation sources in Uganda, thus reducing significantly the severe power shortage prevailing in the country, and fostering project is a model economic growth and wellbeing of its citizens. Supported by the World Bank Group of the kind of (WBG) and other multilaterals, the project reached financial close in December 2007. innovative funding _______________________________________________________________ solutions and IDA provided a Partial Risk Guarantee sponsors are Industrial Promotion Services partnerships that (PRG) for Uganda, in support of the (Kenya) Limited and SG Bujagali Holdings will help resolve Bujagali 250MW hydropower plant project. Ltd, an affiliate of Sithe Global Power, LLC Africas energy The project is being developed on an (USA). The project came at the time when Independent Power Producer (IPP) basis, Uganda was facing major power shortage, crises,” making it one of the largest private sector which was having a significant constraining Obiageli Ezekwesili, WB financed projects in the Sub-Saharan Africa impact on its industrial growth. The total Africa Region VP so far and the first of its kind in Uganda. It is financing requirements for the project developed, built, owned, and operated by equaled to US$ 798 million1. Bujagali Electricity Limited (BEL), whose Awarded the “The Africa Power Deal of the Year 2007” by Euromoney “Project Finance Magazine” Guarantors The Project Government has procured a 150MW of short-term thermal power plants. The Bujagali hydro project consists of 250MW run of the river power plant After unsuccessful attempts to develop with a reservoir for daily storage, an the project in the late 90s, the intake powerhouse complex, and a rock Government of Uganda initiated a new filled dam with a maximum height of bidding process, with the support of the about 30 meters, together with spillway World Bank, seeking a new project and other associated works. It is being sponsor to develop the Bujagali project. constructed on the Nile river, The tender process benefited from a approximately 8 kilometers north of the significantly improved sector Multilaterals and existing Nalubaale and Kiira power environment compared to the previous Bilaterals plants. The project will sell electricity attempt. This included: (a) a reformed to Uganda Electricity Transmission power sector structure, in which an Company Limited (UETCL) under a independent electricity regulator has 30-year PPA, which was signed on been established, and generation and December 13, 2005. The powerhouse distribution have been unbundled and will be constructed to house 5x50MW concessioned to the private sector; (b) Kaplan turbines. The small reservoir increased demand for electricity in the will have an estimated surface area of face of declining generation output; (c) 388 hectares, extending back to the an improved sector financial structure, tailrace areas of the Nalubaale and which is now under stress because of the Kiira dam complex. The proposed current power sector crisis that has project will require 238 hectares of required expensive thermal power land take for the project facilities, of generation and has led to significant which only 80 hectares would be for tariff increases; and (d) improved new inundated areas adjacent to the governance standards. Nile river. The land take includes 113 The current sponsors have been selected hectares required for temporary and following a transparent, international ancillary facilities including temporary competitive bidding process. In turn, the haul roads, coffer dams, storage and sponsors selected the Equipment, quarries. Evacuation of electricity from the proposed project will require the Procurement, Construction (EPC) construction of about 100 kilometers of contractor on a competitive bidding basis and required the contractors to sign up to transmission line, as well as the a Code of Conduct. construction of a substation at Kawanda, and the extension of the Commercial Debt Mutundwe substation. Uganda Power Sector Providers With the new Electricity Act passed by Project Background the Parliament in 1999, the electricity sector in Uganda went through Uganda’s main source of power is from unbundling of the generation, the Nalubaale and Kiira 380 MW’ dam transmission, and distribution. A separate complex, located at the mouth of Lake company was established for each of Victoria. However, electricity output from this dam complex has declined them. Generation and distribution were offered for a 20 year concession, and gradually from around 270MW in 2002 awarded to Eskom Uganda Ltd, and to 120MW on September 2006 in order Umeme Ltd respectively. In addition an to comply with the agreed curve i.e. the independent Electricity Regulatory water discharge regime agreed by all Nile tributary counties. In comparison, in Authority (ERA) was established.. Equity Providers 2006 – 2007 estimated peak demand was The Bujagali project will support Uganda about 350 - 380MW and about 290 MW ’s efforts to meet its electricity demand at base load, thus resulting in persistent with least-cost power generation as and acute power shortages which were compared to other energy options. Once impacting economic growth. To commissioned in 2011, the project will alleviate the shortage of power, the also relieve residual power shortages and substantially reduce the need for more investment guarantee of up to US$115m expensive emergency thermal power. for a 20 year period. This will help contain potential rises in electricity tariffs and allow industrial and Contractual Framework Benefits of the Guarantee commercial users to reduce costs and Key project agreements with Uganda increase productivity, boosting economic • The IDA guarantee reduced the growth. counter-parties are as follows: perceived risk in the project to such an extent as to allow commercial • Implementation Agreement (IA) debt to be mobilized. Project Cost and Financing between BEL and Government of Structure Uganda/UETCL. The IA sets out the • The IDA guarantee improved the The total financing requirement for the terms on which the Government grants to terms of the commercial bank loan project is US$798 1 million, of which BEL the concession to design, finance, to the project company BEL, by US$ 627 million is financed with debt, construct, own, operate, and maintain the enabling access to long term project. and US$ 171 million financed by equity. financing at lower cost, thus allowing such reduction to be The debt equity ratio is around 78:22. • Power Purchase Agreement (PPA) factored in the PPA tariff, therefore The debt facility consists of a between BEL and Government of reducing the cost to end users via commercial loan of US$115 million, Uganda/UETCL. The PPA sets the terms lower tariff. for the production related to and sale of from the Standard Chartered and Absa banks, covered by the World Bank PRG. the electricity for the project contracted • It created new benchmark for capacity. Under the PPA, BEL agrees to private sector investment in Sub- The rest of the financing came from other multilaterals, such as IFC who sell all of its production exclusively to Saharan Africa power generation. committed US$130m in loans, the UETCL and UETCL agrees to purchase • It catalyzed co-financing of over European Investment Bank lend US$140 the project’s contracted capacity. US$750 million, by combining million, and the AfDB US$110m. • Government Guarantee between commercial debt over and above European DFIs financing consists of BEL and Government of DFIs financing. IDA support was French development agency Proparco, only US$115 million, or about 18% Uganda/[UETCL]. Whereas, the with a US$73m loan, DEG/KfW of Government agrees to: (a) guarantee of the total debt financing. Germany with US$45m, and Dutch UETCL’s payment obligations under the financier FMO with US$73m. All senior PPA to BEL; and (b) indemnify BEL for loans have a 16 year door-to-door any loss incurred as a result of UETCL’s maturity. obligations under the PPA becoming The Multilateral Investment Guarantee void, unenforceable or ineffective. Agency (MIGA) provided an equity 1 World Bank, Bujagali Project Appraisal Document (PAD), April 2, 2007 • Engineering, Procurement and contractor (and related parties, such as Construction (EPC) Contract between subcontractors) unlawful; BEL and Salini SPA. The proposed • Government imposed restrictions on project will be built pursuant to a fixed the ability of BEL to be paid or to price, date certain, turnkey EPC receive foreign currency or transfer funds Contract. The EPC contractor, Salini abroad; and SPA (Italy) (with Alstom Power Financing Plan Hydraulique (France) as a key • Failure by the Government to fulfill $ million subcontractor) was selected pursuant to a its payment obligations relating to Debt_____________________ competitive EPC selection process in UETCL’s purchase of power and ___ accordance with the EIB procurement termination payments due by UETCL. IFC 130 rules. EIB 130 The provision of the PRG was Commercial Banks • Operation and Maintenance (O&M) instrumental in catalyzing long term (under PRG) 115 Agreement. The operation and commercial debt in Uganda, and reduced AfDB 110 maintenance of the power plant will be risk for commercial debt without European DFIs 142 conducted by a Sithe Global affiliated increasing government liability to an Total Debt 627 company, incorporated in Uganda. extent that commercial debt could match Equity____________________ DFIs maturities. • Direct Agreements. As usual in PPP projects, the lenders entered into direct The PRG Agreements consist of: the Project Sponsors 151 Government 20 agreements, amongst other, with the Guarantee Agreement, entered into Total Equity 171 parties’ signatory to the PPA, IA, and between IDA and the commercial lenders TOTAL SOURCES 798 Government Guarantee. The to BEL, which defines the scope of Government Direct Agreement includes IDA’s risk coverage and the trigger customary clauses, including mechanics of the guarantee; the Government’s acknowledgements of the Indemnity Agreement, entered into security interests created in the project between IDA and the Government of for the benefit of the lenders and the Uganda, under which the state counter step-in rights of the lenders in the guarantees IDA for any payments made project. under the Guarantee Agreement, and the Project Agreement, entered into between IDA Partial Risk Guarantee (PRG) IDA and BEL, under which the company covenants that it complies with World The IDA PRG guarantees commercial Bank environmental guidelines and other lenders against debt service payment applicable requirements. defaults resulting from the Government’s failure to meet its payment obligations as Lead Financial Officers for this stipulated under the IA and the operation:Mr Suman Babbar Government Guarantee. The proposed (Sbabbar@worldbank.org) and Mr. IDA PRG is non-accelerable; therefore, Raymond Bourdeaux (Tel: (202) 458- principal and interest on the IDA 955; Rbourdeaux@worldbank).. Guaranteed Facility between the For more information on the World Bank commercial banks and BEL would be Guarantee program please visit our web covered by IDA only as they become site www.worldbank.org/guarantees or due. contact: The IDA PRG covers the risk of debt Upali Perera at (202) 458-2801, by service default for the covered lenders email at uperera@worldbank.org or arising from the following categories of events: Chalida Chararnsuk at (202) 458-8111, by email cchararnsuk@worldbank.org. • Political force majeure events; • Changes in law and events making the project contractual agreements unenforceable or void, or making the performance of BEL or its EPC IDA Partial Risk Guarantee for Uganda: Bujagali Hydropower Project Contractual Structure