UGANDA:

Bujagali Hydropower

Project

A CASE STUDY ON RISK

MITIGATION THROUGH

PPP STRUCTURING

November 15, 2011

2

Bujagali Project Brief

• 250 MW hydropower project to double Uganda’s generation capacity

• US$900 million non-recourse/largest IPP project financing in SSA

• US$700 million long-term debt:

16-year facility from EIB, AfDB, DEG & IDA PROG Covered:

Barclays/Absa & Standard Charted

20-year facility from IFC, Proparco & FMO

• US$180 million private equity (Blackstone & Aga Khan Foundation) &

US$20 million public equity investment

cont…

3

Bujagali Project Brief

• 30 year BOT concession with availability-based PPA - full & capped

pass-through elements within PPA tariff

• Comprehensive government guarantees of the obligations of

government agencies within the concession arrangements

• Multi-competency government team negotiated the deal with the

private sector and DFI lenders

…cont.

4

Uganda’s Project Crisis in 2005

• Installed capacity 380 MW, effective output 120 MW and peak demand 260 MW -

40% power shortage

• Nearly 100% hydro-power system – subject to river hydrology variations and

regional drought risks

• Power shortage addressed through 100 MW expensive emergency power with an

additional 50 MW on tap - short-term fix at best

• Power sector in a weak operational and financial state – only 55% of the

electricity generated is commercialized

• Average retail electricity tariffs doubled to 17 ¢/kWh despite a large annual

tariff subsidy by the government

• Unsustainable economic trend if the country is to continue have rapid economic

development and attract foreign direct investments

Are there similarities to the current Nigerian power sector?

5

Similarities between 2005 Ugandan

& Current Nigerian Power Sectors

Uganda Nigeria

Regulatory Risk High High

Operational Strength of Sector Weak Weak

Sustainability of Power Tariffs Weak Weak

Unmet Electricity Demand Very High Very High

Level of Investments Low Low

Hydrology (Uganda)/Gas (Nigeria) Risk High High

Fuel Risk Diversification None None

Implementation (Largely Political) Risk High High

Private Sector Equity Interest Low Moderate

Commercial Bank Lender Interest None Moderate

Government Commitment High High

World Bank Group & DFI Commitment High High

6

Similarities between 2005 Ugandan

& Current Nigerian Power Sectors

Uganda Nigeria

Unmet Electricity Demand Very High Very High

Regulatory Risk High High

Hydrology (Uganda)/Gas (Nigeria) Risk High High

Implementation (Largely Political) Risk High High

Government Commitment High High

World Bank Group & DFI Commitment High High

Private Sector Equity Interest Low Moderate

Commercial Bank Lender Interest None Moderate

Level of Investments Low Low

Operational Strength of Sector Weak Weak

Sustainability of Power Tariffs Weak Weak

Fuel Risk Diversification None None

7

Uganda’s Privatized Power Sector Structure in 2005

Electricity Regulatory Authority

Electricity Regulatory

Authority

Uganda Electricity

Generation Company

Nalubaale & Kira Stations

Concessioning

Private Generation IPP

(Aggreko, others)

Electricity Regulatory

Authority

Uganda Electricity

Transmission Company

Transmission operator

System operator

Single buyer

Electricity Regulatory

Authority

Uganda Electricity

Distribution Company

Generation Sector

Distribution & Supply

Concession (UMEME)

Transmission Sector Distribution Sector

C

U

S

T

O

M

E

R

S

8

Bujagali – PPT Contractual Structure

Blackstone

Aga Khan Foundation

GOU

Commercial Lenders:

(Barclays/Standard Bank)

DFI Lenders:

(IFC, EIB, AFDB, Proparco, DEG,

FMO, KfW)

IDA PRG

BUJAGALI ENERGY Ltd

Operator:

(Union Fenosa)

EPC Contractor:

Salini/Alstom

Offtaker:

UETCL

GOU Guarantee

(market risk, hydrology, FX,

Political risk, subsurface)

EPC O&M

PPA

MIGA

GOU Guarantee

9

Broad PPP Remedies Sought by Uganda to Mitigate Risks

Risks Approach

Regulatory RiskHigh level of sustained commitment by

Government to sector reform, privatization

and independent regulationsOperational Strength of Sector

Sustainability of Power Tariffs

Unmet Electricity Demand Transparent and politically acceptable

decision on next priority investmentLevel of Investments

Hydrology (Uganda)/Gas (Nigeria) RiskComprehensive & unambiguous Government

underwriting of certain risks which cannot

be borne by the private sectorFuel Risk Diversification

Implementation (Largely Political) Risk

Private Sector Equity Interest (a) Clear, inclusive & transparent decision

making by Government,

(b) concession & contractual structures that

have been successfully implemented

before, and

(c) equitable risk allocation to all stake-

holders

Commercial Bank Lender Interest

Government Commitment

World Bank Group & DFI Commitment

10

Broad PPP Remedies Sought by Uganda to Mitigate Risks

Risks Approach

Regulatory RiskHigh level of sustained commitment by

Government to sector reform, privatization and

independent regulationsOperational Strength of Sector

Sustainability of Power Tariffs

Unmet Electricity Demand Transparent and politically acceptable decision on

next priority investmentLevel of Investments

Hydrology (Uganda)/Gas (Nigeria) RiskComprehensive & unambiguous Government

underwriting of certain risks which cannot be

borne by the private sectorFuel Risk Diversification

Implementation (Largely Political) Risk

Private Sector Equity Interest(a) Clear, inclusive & transparent decision making

by Government,

(b) concession & contractual structures that have

been successfully implemented before, and

(c) equitable risk allocation to all stake-holders

Commercial Bank Lender Interest

Government Commitment

World Bank Group & DFI Commitment

1. Clear & Practical Policies

2. Sector & Regulatory Framework

3. Sustained Application of Regulations

4. Fuel Supply/ Hydrology

5. Power Off-Taker & Demand

8. Procurement &Construction

9. Operations & Maintenance

7. Financing of Investments

10. Long-Term Implementation

6. Bankability

11

Evolution of Risk Apportioning in PPP

Public

Pri

vate

12

Bujagali: Contractual Structure

O & M contractor:

Union Fenosa

EPC Contractor:

Salini/Alstom

UETCL

GoU

Guarantee

Agreement

Aga Khan Foundation Blackstone

Implementation

Agreement

Power Purchase

Agreement

O&M Contract

Commercial

Lenders

Loans

Project AgreementPRG

Other DFIs

7. Financing/Investments

8. Procurement/Construction

9. Operations/Maintenance

10. Long-Term Implementation

7. Financing

8. Construction

9. Operations/Maintenance

10. Long-Term

Implementation

8. Construction Operations/

Maintenance

Government of

Uganda (GoU)

EPC Contract

Indemnity Agreement

Shareholders’ Financing

Bujagali Energy Ltd.

1. Policies

2. Sector Framework

3. Regulations

4. Hydrology

5. Off-Taker/Market

6. Bankability

13

Was it Worth the Effort… ?

Benefits to the country through Government’s commitment to PPP…

• Doubling of Uganda’s electricity supply – first power in late-2011

• Sustainable boost to economic development of a land-locked country

with limited alternative energy sources

• Dedication to sector reform and the BOT structure paid off

• Demonstration of private sector development of large scale

hydropower investment is possible in riskier investment climate

cont…

14

Was it Worth the Effort… ?

Private sector investor’s commitment on the strength of the PPP…

• Investment of ≈US$20 million pre-financing development capital as part of

US$180 million in long-term equity investment

• US$700 million in ultra long-term debt investment

• Nearly on-schedule delivery of the project within expected cost

• Proven track record paves the way for other private sector involvement in

riskier markets on the basis of a suitable PPP structure

Bold power expansion programs in riskier market places with limited track record are

at least initially going to require a proactive PPP structure to achieve the objectives

cont…

15

PPP Implications for Large-Scale

Private Power Expansion in Nigeria

Public Sector Focus

The next 2 years a cr i t ical phase for Nigeria Power

Pros: Large under-served demand, high willingness to pay, ample gas resources to base a large-scale

expansion & significant equity & debt interest for new investments

Cons: Regulatory concerns lead to bankability issues, poorly commercialized sector, weak

transmission network undermines power trading potential & unreliable gas supply chain

• Deal with policy implications that the privatization of power sector will end up “absorbing” significant part of the

limited private sector capacity for power investments in Nigeria – privatization will not add significant new

generation

• Specifically target limited number of MW for development in the next 3-5 years

• Clearly define contractual & regulatory framework for new private power investments (including FDI). Bujagali-type

PPP contractual structure a must given investment risk vs. generation needs of Nigeria. Next phase could possibly

evolve into a less regimented PPP scheme

• Continue rapid strengthening of transmission network in the public sector – enable power trade

• Guarantee bankability of gas value chain – through rapid public (and private) sector investments in key midstream

gas infrastructure and contractual guarantees for the IPPs

• Credit guarantees from DFIs not an alternative for implementation of bankable concrete measures by Government of

Nigeria

16

Thank You