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Tuesday, April 11, 2017


It was reported from parliament last week that among the tax proposals government is laying on the table is a tax exemption on the income on the Bujagali Hydro Power Project for the next 16 years.

The genesis of this move has to have been the real desire to lower power tariffs as a spur to industrialisation.

As it is now Bujagali dam offers the priciest power of all our dams, mostly because the debt repayment element on our other dams is not a significant cost.

"Two years ago government threatened to buy off the dam as a way to lower the tarrif. At the time industry sources familiar with the subject that Kampala would have to come up with at least $1.4b to pay off the other shareholders on the project Sithe Global and the Aga Khan’s Industrial Promotion Services (IPS) and retire all the debt...

If they could do this with cash they wold have loped off $6.7 cents of the $11cents average tarriff Bujagali is selling power to the Uganda Electricity Transmission Ltd (UETCL). This $6.7 cents is what goes to debt repayments and shareholders.

With its various infrastructure commitments it’s understandable that government did not have that kind of money lying around. So that was a nonstarter.

As it is now of the $11cents sell-price to UETCL, the aforementioned $6.7cents is the largest components followed by $2.3cents for taxes and government repayments and $1.0cent goes towards operations, maintenance and administration.

The next best thing would be to extend the concession period to say another 50 years from the current 30. This would have the net effect of stretching out the debt over a longer period – we would pay more in debt over the longer period but projections show that the tariff will almost half to about $6.6cents.

One other thing would be to pay off all the debt, which comes to just over $500m and this would account for $3.8cents of the tariff. But again there is the sticky issue of where to find the cash. 

"Frenetic attempts last year to refinance the debt – essentially contract newer debt under more favourable terms fell flat as the treasury has very little wiggle room to contract new debt...

Government has resorted to a waiver of income tax on the project until 2033, a situation they probably did not want to find themselves in but really had no choice given the circumstances. If along with this waiver government forgoes its dividends from the project may just bring down to about $7cents a unit.

This might be the breathing space government needs until Karuma and Isimba come in at the desired $5cents a unit. Industry players are dubious that that will happen in the short to medium term.

Clearly the high Bujagali tariff is a function of the source of financing. When the 250MW project was being put together the demand for finance from Asia and the Middle East was at all-time highs, this also affected the mobilisation of plant and machinery. No sooner had they begun work on the dam than the global financial crisis exploded and the credit markets seized up.

As if that is not enough in risk profiling countries – determining their willingness to repay the loan Uganda’s relatively weak fundamentals means projects cannot access money at the low rates that Europe or Asia or even South Africa can.

Our infrastructure needs are urgent. We are still playing catch up for the lost 1970s and 1980s when no new infrastructure was built. This despite the population almost doubling during the period. That we need more infrastructure to generate more growth is hard to dispute.

The challenge as the Bujagali project has shown us is that we are hamstrung in our ability to raise affordable financing for these projects. High cost projects mean the economic benefits may not materialise as fast as we want them to.

If we had more long term savings available in the economy we would have been better placed to structure a better deal.

Which brings us around to the issue of pension reform. Pension reform is necessary not only for NSSF to work better – there are some initiatives they have in mind but can not implement for lack of a legal framework, but also as a means to mobilise more savings for deployment on such projects.

Concerns that foreign pension schemes can fold shop and disappear with our hard earned savings are valid and should not be ignored.

"The worry too that by fully liberalising the market we might not have say over the deployment of the resources, with private managers choosing to invest in real estate and services rather than manufacturing and agriculture – the productive sectors, are valid too...

Managers reporting to headquarters in the US, Europe, South Africa or even Kenya only care about showing a good bottom line in the short run rather than think long term. The law can be written in such a way that these pension managers behave in line with our development agenda.

The writing ios on the wall the issue of mobilising savings can not be put off any longer.



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