BUJAGALI TAX WAIVER MAKES SENSE FOR UGANDA

The story of Bujagali dam best illustrates the saying “No good deed goes unpunished”.

 A little background will put the Bujagali dam issue in better perspective.

At the beginning of the century government unbundled the Uganda Electricity Board (UEB) monopoly into its constituent parts of generation, transmission, distribution. It then leased its assets in generation and distribution and opened up the sector to private investors. Government then created Electricity Regulatory Authority (ERA) to oversee the liberalized sector.

As a result of these reforms about $4b (sh15.2trillion) has been invested in the sector since 2000.

While we now have unlimited power supply, a far cry from the daily loadshedding we were suffering before Bujagali dam was commissioned in 2012, it has come at a price.

"The pricing of finance for these investments have been high and understandably so. The perceived risk of investing in Uganda, which was emerging out of decades of instability, made the cost of finance high...

Now that we have unlimited supply the challenge is how to reduce the end user tariff, especially for business and industry. President Yoweri Museveni has made it his stated aim to bring it down to $5cents a unit of power.

In pursuit of this target government  helped Bujagali Energy Ltd (BEL) refinance their debt, which was helped by government offering a tax waiver on its corporate profit. This helped lower what Bujagali was charging for the power it generated.

The initial five year tax waiver lapsed in 2021/22 and parliament has been reluctant to renew it, giving two annual extensions pending an audit into Bujagali’s finances.

 "The continued refusal to allow the tax waiver has far reaching repercussions not only for our effort to lower local tariffs but also future investment in the sector and the economy at large...

According to the original power purchase agreement, of the $11cents BEL was charging, the larger proportion $6.7 cents went to debt repayment and shareholder return, $2.3 cents for taxes and government repayments and about $1.0 cents for operations, maintenance and administration.

The scope for reduction in the tariff is in refinancing the loan – extending the tenure of the loan or suing for a lower interest rate and waiving taxes. While these two did not bring the tariff below the magical $5cents it was a good start.

A denial of the tax would not necessarily hurt BEL as they would pass it on to the customer, raising the tariff.

But as a part of the condition of refinancing, the government of Uganda was supposed to offer the tax waiver for the duration of the loan, which now ends in 2032.

We may not take it seriously, but for businesses and countries that want to play on the bigger stage, reputational risk is a big deal. Reneging on a contract attracts reputational risk. Reputational risk can add a few percentage points on our loans, which could mean millions of dollars in additional interest payments.

While we appreciate parliament’s attempts at oversight of the electricity sector, we need to keep in mind we are playing in a bigger field, where our laxity on matters of reputation will be frowned upon.

It has happened before.

"The initial developer of the Bujagali dam, US firm AES Nile Power found their project stalled by parliamentary sniping and the heckling of environmentalists. Economic crisis in South America where AES had its other developments forced them to pull out of Uganda in 2002, pushing back the development of the dam. AES Nile Power would have completed construction by 2007, five years after they ground broke in 2002.

Building of the current dam started in 2008 and was completed in 2012.

While for us Africans we don’t take time seriously, in the global environment we operate in, time is money. It should come as no surprise to us that we often times get the short side of the stick in negotiations because we do not take time seriously.

We need to focus on the bigger picture. While BEL will enjoy tax relief, the ripple effect through the economy of cheaper power would be invaluable in improving living standards of Ugandan consumers.