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The East African : May 17th 2015
The EastAfrican 42 BUSINESS MAY 16-22,2015 Buying back Bujagali is an ext≥a bu≥den on Ugandan taxpaye≥s, blow to investo≥s to buy back Bujagali dam from Bujagali Electricity Ltd. This follows recent move by the state to own the main electricity dams. Bujagali was tendered internationally to private companies to build, operate and transfer to the government after 30 years. However, Karuma and R Isimba dams are being constructed and will be owned and managed by the government through Uganda Electricity Generation Company Ltd (UEGCL). It has been the policy are of the Ugandan government over the past 20 years to withdraw from those sectors where private investors are willing to venture. Uganda was the first country in Africa to conduct a comprehensive privatisation programme. It privatised and liberalised sectors traditionally considered the monopoly of the state, among them electricity generation and distribution. This was preceded by privatisation and liberalisation of the broadcasting, banking and telecommunications sectors, which had been the monopoly of the state. This policy has been very successful. The government used to own and manage Uganda Commercial Bank. Riddled with politically inspired loans, it had a huge non-performing assets portfolio and was relying on the state for bailouts. The government sold it for $19 mil- ecently, media reports indicated that the government of Uganda would like ANALYSIS ANDREW M. MWENDA “When you compare Bujagali with Karuma and Isimba on the same parameters, Bujagali comes out with a better tariff than these two dams.” lion to Stanbic Bank. Thirteen years later, it has a value of $700 million on the stock exchange, made Ushs 135 billion ($45 million) in profits in 2014 and paid Ushs 110 billion ($37 million) in taxes. The state was also saddled with a moribund electricity distribution network that was inefficient and loss making. It concessioned it to Umeme, which now has a value of $380 million on the stock exchange, profits of $60 million in 2014 and credibility in the market that is attracting top investors and creditors. The government of Uganda is moving towards the privatisation of major highways. The first private toll road is going to be the Kampala-Jinja highway. This will be constructed and operated by a private investor in partnership with government. This trend has been successful because it addressed the core limitations of the state in Uganda, which include corruption and the inefficiency that results from political contestations in the process of government procurement. It has also released government resources to invest in those areas where the private sector is not will- ing to venture. This is the broader context in which government plans to nationalise Bujagali should be seen. Those advocating this policy reversal argue that it is the best way to reduce the electricity tariff. This is a powerful argument. The tariff is both economically and politically fundamental. Uganda is beginning to attract investors especially in its manufacturing sector. The tariff impacts on competitiveness of manufactured products. As more Ugandans connected to the grid, the electricity tariff has become a basis for political agitation. Therefore, the only justification for buying back Bujagali would be that such a move would reduce the electricity tariff. Theoretically, then the ar- gument for buying back Bujagali sounds attractive. The state would avoid two costs that contribute to the tariff. The first is that private in- vestors borrow at expensive interest rate of 6-8 per cent, which is transferred to the final consumer through the tariff. The government borrowing is either concessionary (0.78 per cent for 40 years with a 10-year grace period) Media reports suggest that the Ugandan government intends to buy back the Bujagali power plant. Pictur or commercial (at 3.5 per cent). With loans forming 70 per cent of the construction costs, interest costs have a big effect on the tariff. The second cost is return to private capital, which in the Power Purchase Agreement (PPA) for Bujagali is 19 per cent per year. Government owned and operated dams are expected to have low tariffs because of low interest rates and zero return on equity. If the electricity tariff is the fount and matrix of this debate, we need to compare the cost of electricity from Bujagali with the cost of electricity that is going to be generated from the two dams the government is building at Karuma and Isimba. One of the factors that influence the tariff is something called “plant factor” — the average capacity utilisation of a dam. For example, although Bujagali has an installed capacity of 250MW, its does not oper- ate at 100 per cent capacity throughout the day. It only reaches full capacity from 7-10pm when electricity consumption is at its peak. Today, Bujagali’s plant factor is 62.5 per cent. Therefore when you com- pare Bujagali with Karuma and Isimba on the same parameters, Bujagali comes out with a better tariff than these two dams. Cost of power Right now, the price of electricity from Bujagali is 11 cents per kilowatt-hour (kWh). If capacity utilisation at Bujagali were 100 per cent, the tariff would fall by 33 per cent to 8 US cents per Kwh. The 11 cents per kWh is also because BEL has a corporation tax holiday for five years. When it kicks in in 2017, the tariff will increase to 14 cents per Kwh. The tariff drops to about 8 US cents in 2022 when the senior debt is re- tired and then drops to 7 US cents in 2027 when the subordinate debt is paid off. In 2042, when the dam is transferred to government, the tariff falls to 1 or 2 US cents per Kwh. Over the period of 30 years of the PPA, the average tariff for Bujagali is 10.1 cents per kWh. It has been argued that Karuma will have a tariff of 5 US cents per kWh. But this can only be possible if the capacity utilisation of the dam is 100 per cent, which is impossible. Dam utilisation at Karuma, when commissioned, will be 40 per cent for the initial years. This is because electricity demand in Uganda will be too low to consume all the power that is generated. At 40 per cent dam utilisation in the initial years that grows to 60 per cent over seven years, the effective tariff would be 20 US cents per kWh over 30 years — the same period Out≥age as Kenya ≥evokes mining licences ove≥ b≥each of conditions By KENNEDY SENELWA Special Correspondent THE CANCELLATION of 65 prospecting and mining licences in Kenya has created uncertainty in the nascent industry with industry players warning that the move will erode investor confidence. The Mining Ministry has revoked licences of individuals and companies, prompting London Stock Exchange-listed Red Rock Resources Plc to issue a warning that the exercise is causing uncertainty in the business environment. The ministry also wants Base Resources Ltd of Australia to pay higher titanium royalties than ini- tially agreed on, with the authorities raising concerns over the sanctity of contracts signed with the government. Documents seen by The EastAfrican show the 2.5 per cent royalty over the first five years of production was contained in the gazetted rate at the time special mining lease No 23 was issued and Base started exports in February last year. The Mining Ministry and Base on February 12, 2014 held the initial meeting where an agreement was signed to enter into negotiations to revise the royalty provisions contained in the special mining lease. The ministry has benchmarked on South Africa and Australia, which have 5 per cent royalty with a long mining history. In Mozambique, Senegal and Sierra Leone, royalty for titanium is 3 per cent. Some investors have threatened to sue the government if efforts to resolve the problem fail. Mining Cabinet Secretary Na- jib Balala said some licences were cancelled on account of expiry. Mr Balala added that some licences had been surrendered while others were in breach of Mining Act and the licence conditions. “Henceforth, any mining or pros- pecting activities by these persons or companies over the areas that are subject of the revoked licence shall be illegal,” he said in Kenya Gazette Notice No. 3264 of May 8, 2015. The ministry on March 24 last year wrote a letter to Base stating the royalty should start at 5 per cent and increase annually to 10 per cent. Base next day responded with a proposal of 3 per cent to 5 per cent over 5 years. The licences revoked include those of Cortec Mining Kenya Ltd that, which is seeking minerals in Samburu, Swenson and Sirmonet Mineral Kenya Ltd, for gemstones in Kwale and Yongtai Mining Company Ltd; for industrial minerals in Kitui. The list also has Balham Trading Company Ltd that was exploring for gypsum in Tana River; Ololunga Mining and Industrial Ltd with an interest in bauxite in Nandi and AQ Kenya Gold Ltd, interested in gold, nickel and iron ore in Turkana. Standard & Mutual, a mining consultancy firm said the cancellations had the potential of making Kenya appear as an unstable investment destination before the full potential of its mining industry was tapped. “The law allows the Cabinet Sec- retary to cancel licences but how the issue is handled matters, as Kenya is competing for investment with other countries and investors require a predictable environment,” said Cliff Otega, Standard & Mutual’s director of mining and metals.
May 10th 2015
May 24th 2015