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.
