76103



CASE STUDY 5: UGANDA - WEST NILE RURAL ELECTRIFICATION PROJECT

 Barriers                Lack of long term debt financing

 Instrument              Two-step financing backed by liquidity guarantee

 Application             Bullet repayment of initial 8-year loan with new 7-year loan with amortization
                         payments on the two loans profiled to match a 15-year loan. Liquidity guarantee of
                         funds for new 7-year loan

 Amount                  n/a


PROJECT BACKGROUND AND OBJECTIVES                            new 3.5 MW hydro generator. The amortisation profile
                                                             of the loan is calculated as if it has a term of 15 years,
The Government of Uganda has set the rural
                                                             but with a bullet payment of the outstanding principal
electrification as one of the main priorities and key to
                                                             at the end of the loan term. At the end of the eight-year
poverty alleviation. However, one of the challenges to
                                                             term, Barclays extends a new seven-year loan to the
increase the rural electrification was the replacement of
                                                             borrower, with a principal equal to the outstanding
the conventional government-led rural electrification,
                                                             principal on the original eight-year loan. The new seven-
with a private sector-led, commercially oriented
                                                             year loan is then repaid under the same amortisation
program. While there was government willingness to
                                                             schedule as previously applied. The effect is to create an
pursue the rural electrification through this program,
                                                             amortisation profile for the borrower equivalent to a 15-
there were no institutional capacity and appropriate
                                                             year loan while ensuring repayment of the first loan in
institutional framework to lead such program. In
                                                             full to Barclays after eight-years.
addition, there was a lack of [local] financing options
necessary to attract private sector to develop such          This arrangement creates a liquidity risk for Barclays in
projects. The existing loans in Uganda were limited by
the national banking regulation to longest maturity of
eight years. However, this maturity makes them
inadequate for most of the renewable energy financing
needs.

INSTRUMENTS USED
Under the West Nile rural electrification project, the
World Bank has devised a means to circumvent this
restriction through the use of a liquidity guarantee and a
two-step financing mechanism.

INSTITUTIONAL ARRANGEMENTS
A commercial lender, in this case Barclays Bank, makes
an eight-year loan to the West Nile Rural Electrification
Company (WENRECO) which holds a 20-year concession
to operate a 1.5 MW thermal generator and construct a




1 | R E F I N e www.worldbank.org/energy/refine
that repayment of the initial eight-year loan is               government would pay for fuel costs for the thermal
dependent on Barclays having sufficient available funds        plant. The most recent reports are that reconstruction
to lend to the borrower at the end of this first loan’s        on the hydro project finally resumed in August 2010
term—as the borrower is reliant on this second loan to         following the appointment of a new contractor and the
repay the outstanding principal on the first loan. The         taking of a 10% stake by the government, with the
liquidity guarantee offered by the World Bank gets             project now expected to commission by end-2011.
around this. For a guarantee fee, the World Bank agrees
to provide the necessary funds to make the second
seven-year loan in the event that Barclays is unable to
do so. The cost of the guarantee fee is passed to the end
borrower in the form of an increased interest charge.

The liquidity guarantee, therefore, offers a low-cost
means of extending the term of the loan to the RE
developer from eight years to 15 years. The same
arrangement could be applied where other restrictions
(e.g., internal credit policies) prevent loans being
extended for the term lengths necessary for RE projects
to be viable.

Even with this guarantee, however, the resulting
commercial loan represents only 10% of the project
cost. However, if successful, it can be expected that the
mechanism can be extended in future.

OUTCOMES
Since the start of its concession, WENRECO has
experienced persistent cash flow difficulties. These led
to suspension of work on the hydro plant in 2008 and, in
March 2009, to the shutdown of the operations of the
thermal generator. WENRECO blamed these difficulties
on delays in the payments of government subsidies that
cover 60% of the project costs, non-payment of
electricity bills and failure to implement tax exemptions.
The government blamed the problems on poor
management while the regulator drew attention to an
overshoot of costs for the mini-hydro project and the
failure of the main fuel supplier to meet its
commitments. In April 2009, a new arrangement was
reported to have been reached whereby the

Further reading
Sunday Vision, WENRECO hit by cash crisis, 2009 – click here
Sunrise, Anger mounts in Arua over Power, 2011 – click here




2 | R E F I N e www.worldbank.org/energy/refine