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Does government need to buy Bujagali?

By Andrew M. Mwenda

The argument sounds attractive, but the numbers and the history of nationalisation say different

Recently, media reports indicated that government of Uganda would like to buy Bujagali dam from Bujagali Electricity Limited (BEL). This follows recent trends by the state to own and manage the main electricity dams. Bujagali was tendered internationally to private companies to build, operate and transfer to government after 30 years. However, Karuma and Isimba dams are being constructed and will be owned and managed by the government through Uganda Electricity Generation Company Limited (UEGCL).

It has been the policy of the Uganda government over the last 20 years to withdraw from those sectors where private investors were willing to venture. Uganda was the first in Africa to conduct a comprehensive privatisation program.


It privatised and liberalised sectors traditionally considered the monopoly of the state, like electricity generation and distribution. This was preceded by privatisation and liberalisation of the broadcasting, banking, and telecommunications sectors that had been the monopoly of the state.

This policy has been very successful. 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. Government sold it for $19 million to Stanbic Bank. Thirteen years later, it has a value of $700 million on the stock exchange, made Shs135 billion ($45 million) profits in 2014 and paid Shs110 billion  ($37 million) in taxes. The state also was 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, made profits of $60 million in 2014, and has credibility in the market that is attracting top investors and creditors.

As I write this article, government of Uganda is moving towards the privatisation of major highways. The first private toll road is going to be the Kampala-Jinja express. This will be constructed and operated by a private investor in partnership with government. This trend has been successful because it addresses the core limitations of the state in Uganda i.e. corruption and 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 willing to venture.

This is the broader context in which the government’s plan to nationalise Bujagali should be seen. Those advocating for 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. And as more Ugandans get unto 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, the argument for buying back Bujagali sounds attractive. The state would avoid two costs that contribute to the tariff. The first is that private investors borrow at an expensive interest rate of 6-8%, which is transferred to the final consumer through the tariff. Government borrowing is either concessionary (0.78% for 40 years with a 10-year grace period) or commercial (at 3.5%). With loans forming 70% 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 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 to the cost of electricity that is going to be generated from the two dams government is building at Karuma and Isimba. One of the factors that influence the tariff is something called “plant factor” i.e. the average capacity utilisation of a dam. For example, although Bujagali has installed capacity of 250MW, it does not operate at 100% 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%. Comparative figures and tariffs for Karuma and Isimba are shown in the table.

Therefore when you compare Bujagali against Karuma and Isimba on the same parameters, Bujagali comes out with a better tariff than these two dams.

Right now, the price of electricity from Bujagali is 11 cents per kilowatt-hour (kWh). If capacity utilisation at Bujagali were 100%, the tariff would fall by 33% to 8cents 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, tariff will increase to 14 cents per Kwh. The tariff drops to about 8 cents in 2022 when the senior debt is retired and then drops to 7 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 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 cents per kWh. But this can only be possible if the capacity utilisation of the dam is 100%, which is impossible. Dam-utilisation at Karuma when commissioned will be 40% for the initial years. This is because the electricity demand in Uganda will be low to consume all power that is generated. At 40% dam utilisation in the initial years that grows to 60% over seven years, the effective tariff would be 20 cents per kWh over 30 years – the same period as Bujagali. This is because the loan repayment period would be shorter and capacity utilisation would be lower. Stretched to 50 years at capacity utilization of 62.5%, the Karuma tariff would be 12.5 cents per kWh. Therefore, Bujagali, which was built and is operated by a private investor, is competitive on the tariff.

The construction costs for Karuma dam are $1.4 billion for the dam alone. If you add the cost of the transmission line for 600MW, which is also part of the contract, the total bill goes to $1.7 billion. This makes the cost of a kilowatt of power $2,333. Isimba will cost $530 million to construct the dam, which will generate 187 MW. This makes the cost of a kilowatt of electricity $3,000. The cost of a kilowatt of electricity at Bujagali is $2,450. Karuma is cheaper because at 600MW, it enjoys economies of scale.

If the aim of government in seeking to buy Bujagali is to reduce the tariff, there are better ways to do this without altering government policy towards private investment. For example, government can remove taxes on electricity generation, which contribute 23% of the Bujagali tariff (corporation tax and withholding tax on dividends). The investor would not be asked to calculate this tax into the tariff. If this happened, the tariff would fall to 7.5 cents. Indeed, over the period of the PPA, government of Uganda will earn $1.8 billion in revenue from taxes and fees from BEL. For a government that needs cash to do a million things, it would be foolhardy to borrow $1.5 billion to buy back Bujagali from the current owners.

The effect of government ownership of the dam on the tariff would be negligible yet the opportunity cost of $1.5 billion will be massive. For example, government can use such money to build another dam of 600mw (250% the size of Bujagali). It can train 180,000 doctors, build 225,000 primary school classrooms, tarmac 2,000km of roads (more than two thirds of the total Uganda has right now and build three brand new international airports in each region of the country (West, East and North). There are so many alternative uses of this money that one wonders why government thinks of buying a dam whose tariff is competitive and whose service is paid by the consumer, not the government.

However, the most important thing with plans to nationalise Bujagali is the reputation of Uganda as a destination for private investment. At the time of tendering Bujagali for private development, the government of Uganda did not have money. Its debt sustainability position did not also give it much room to borrow and invest in a dam. It therefore put out an international tender which BEL won competitively. It offered to build the dam at $565m against the second bidder who had bid to build it at $746m. The second major issue was the Internal Rate of Return (IRR), and again BEL gave the best bid. This means that at the time of securing the PPA, BEL had the best offer for Uganda.

It would, therefore, be a serious breach if the government turned around and sought to nationalise Bujagali. We all know what this policy did to Africa in the 1970s. It greatly undermined our countries’ reputation as destinations for foreign investment, a factor that precipitated our continent’s economic collapse. One hopes that those in government arguing for nationalisation see the facts.

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