UGANDA: Bujagali Hydropower Project A CASE STUDY ON RISK MITIGATION THROUGH PPP STRUCTURING

November 15, 2011

Bujagali Project Brief

250 MW hydropower project to double Ugandas 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

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Bujagali Project Brief

cont.

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

Ugandas 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?

Similarities between 2005 Ugandan & Current Nigerian Power Sectors

Uganda Regulatory Risk Operational Strength of Sector Sustainability of Power Tariffs Unmet Electricity Demand High Weak Weak Very High Nigeria High Weak Weak Very High

Level of Investments Hydrology (Uganda)/Gas (Nigeria) Risk

Fuel Risk Diversification Implementation (Largely Political) Risk Private Sector Equity Interest Commercial Bank Lender Interest Government Commitment World Bank Group & DFI Commitment
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Low High
None High Low None High High

Low High
None High Moderate Moderate High High

Similarities between 2005 Ugandan & Current Nigerian Power Sectors

Uganda Unmet Electricity Demand Regulatory Risk Hydrology (Uganda)/Gas (Nigeria) Risk Implementation (Largely Political) Risk Very High High High High Nigeria Very High High High High

Government Commitment World Bank Group & DFI Commitment

Private Sector Equity Interest Commercial Bank Lender Interest Level of Investments Operational Strength of Sector Sustainability of Power Tariffs Fuel Risk Diversification
6

High High
Low None Low Weak Weak None

High High
Moderate Moderate Low Weak Weak None

Ugandas Privatized Power Sector Structure in 2005

Generation Sector Transmission Sector Distribution Sector

Nalubaale & Kira Stations Concessioning

Electricity Regulatory Authority

Uganda Electricity Generation Company

Electricity Regulatory Authority

Transmission operator System operator Single buyer

Uganda Electricity Transmission Company

Electricity Regulatory Authority

Distribution & Supply Concession (UMEME)

Uganda Electricity Distribution Company

Private Generation IPP (Aggreko, others)

C U S T O M E R S

Electricity Regulatory Authority

Bujagali PPT Contractual Structure

Blackstone Commercial Lenders:
(Barclays/Standard Bank)

MIGA

IDA PRG

Aga Khan Foundation

GOU

DFI Lenders:
(IFC, EIB, AFDB, Proparco, DEG, FMO, KfW)

GOU Guarantee

PPA BUJAGALI ENERGY Ltd

GOU Guarantee
(market risk, hydrology, FX, Political risk, subsurface)

Offtaker:
UETCL

EPC

O&M

EPC Contractor:
Salini/Alstom

Operator:
(Union Fenosa)

Broad PPP Remedies Sought by Uganda to Mitigate Risks

Risks Approach
High level of sustained commitment by Government to sector reform, privatization and independent regulations Transparent and politically acceptable decision on next priority investment Comprehensive & unambiguous Government underwriting of certain risks which cannot be borne by the private sector (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 stakeholders

Regulatory Risk
Operational Strength of Sector Sustainability of Power Tariffs Unmet Electricity Demand

Level of Investments
Hydrology (Uganda)/Gas (Nigeria) Risk Fuel Risk Diversification Implementation (Largely Political) Risk

Private Sector Equity Interest

Commercial Bank Lender Interest Government Commitment World Bank Group & DFI Commitment

Broad PPP Remedies Sought by Uganda to Mitigate Risks

Risks Regulatory Risk Operational Strength of Sector Approach
High level of sustained commitment by Government to sector reform, privatization and independent regulations Transparent and politically acceptable decision on next priority investment Comprehensive & unambiguous Government underwriting of certain risks which cannot be borne by the private sector (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

Sustainability of Power Tariffs

Unmet Electricity Demand Level of Investments Hydrology (Uganda)/Gas (Nigeria) Risk Fuel Risk Diversification Implementation (Largely Political) Risk Private Sector Equity Interest Commercial Bank Lender Interest Government Commitment World Bank Group & DFI Commitment

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Evolution of Risk Apportioning in PPP

1. Clear & Practical Policies 10. Long-Term Implementation 2. Sector & Regulatory Framework

Private

9. Operations & Maintenance

3. Sustained Application of Regulations

8. Procurement & Construction

4. Fuel Supply/ Hydrology

Public

7. Financing of Investments

5. Power Off-Taker & Demand

6. Bankability

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Bujagali: Contractual Structure

7. 8. 9. 10. Financing Construction Operations/Maintenance Long-Term Implementation 7. 8. 9. 10. Financing/Investments Procurement/Construction Operations/Maintenance Long-Term Implementation

Government of Uganda (GoU)

Aga Khan Foundation

Blackstone

Shareholders Financing Indemnity Agreement

GoU
PRG Project Agreement

Implementation
Agreement

1. 2. 3. 4. 5. 6.

Policies Sector Framework Regulations Hydrology Off-Taker/Market Bankability

Commercial Lenders Loans

Guarantee Agreement
Power Purchase Agreement

Bujagali Energy Ltd.

UETCL

Other DFIs

EPC Contract

O&M Contract

8. Construction

EPC Contractor: Salini/Alstom

O & M contractor: Union Fenosa

Operations/ Maintenance

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Was it Worth the Effort ?

Benefits to the country through Governments commitment to PPP Doubling of Ugandas 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
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Was it Worth the Effort ?

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Private sector investors 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

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PPP Implications for Large-Scale Private Power Expansion in Nigeria

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

Public Sector Focus

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

The next 2 years a critical phase for Nigeria Power

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Thank You

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