Backgrounder

Uganda’s Energy Sector, Bujagali,

and the World Bank Group

An acute electricity crisis threatens Uganda ’s macroeconomic performance.  Only five percent of the population has access to electricity, making for one of the lowest per capita energy consumption rates in the world.

Over the past three years, even those five percent continue to experience chronic power shortages due to increased demand, an unreliable distribution system, and delays in commissioning additional generation capacity.

Hospitals, schools, businesses, and residences suffer through “brown outs” caused by these shortages, which have contributed to a decline in GDP growth to five percent in 2005/6 from around six percent in previous years.  Some businesses are forced to shift production to times when power is available, and many larger businesses have to use costly back-up generators.

Inflation due to higher energy costs, a widening of the trade deficit due to higher oil prices, and increases in diesel fuel import volumes for thermal power plants also epitomize this crisis.

The present situation, with extensive blackouts, is not sustainable and further delays in augmenting Uganda’s electricity generation capacity could further undermine the economy.

Uganda developed an energy sector strategy with the support of the World Bank Group (WBG) and others in June 1999.  It included plans for power sector reforms, supplying the national power grid in the short-, medium-, and long-term, and improving access for the average Ugandan.

A key element of the Government’s power sector reform program has been the concession of power distribution facilities to the private sector as a means to underpin the commercial viability and sustainability of the power sector.  In March 2005, UMEME, the private concessionaire, took over the operations of the distribution system under a concession agreement that includes financial incentives to increase the number of connections, reduce technical and non-technical losses, and increase the collection rate.

The WBG supports Uganda’s power sector strategy because it will improve service delivery and reliability of supply through private ownership and management, and expand access to reliable and clean electricity for households, industries, and social infrastructure such as schools, clinics, hospitals, and water systems.  These measures will contribute to poverty reduction through income- and employment-generation, improving the quality of life in Uganda, and increasing growth in economic activity. 

The Bujagali Hydropower Project is an integral part of this strategy.  The project consists of a 250 MW hydropower facility on the Victoria Nile that will address the medium- and long-term need for economical, large-scale power generation.  The proposed Bujagali project involves the development, construction, and maintenance of a run-of-the-river power plant on a Build-Own-Operate-Transfer basis, eight kilometers north of the existing Nalubaale and Kiira power plants at Dumbbell Island.  The project would recycle water flowing from these upstream hydropower facilities to generate additional electricity.  The project is scheduled to go to the Board on April 26, 2007. 

Bujagali is one element of the WBG’s support of Uganda’s energy sector development.  The World Bank is also processing a $300 million credit, which includes a US$220 million component for power sector development and an US$80 million component for policy-based lending to provide budgetary support to the sector (Power Sector Development Project), and financing US$50 million to develop rural areas’ access to renewable electricity (Energy for Rural Transformation Project).

The WBG supports the Bujagali project because it would help Uganda meet its electricity demand with least-cost power generation.  Once commissioned in 2011, the project would also relieve residual power shortages and substantially reduce the need for more expensive thermal power, as well as the need to abstract additional water from Lake Victoria for electricity. 

Having won a competitive bidding process, the Bujagali project sponsor is Bujagali Energy Limited (BEL), a joint venture between Industrial Promotion Services Ltd. (Kenya ) and the US-based Sithe Global Power, LLC, which have established BEL to implement the project.  IPS (K) is the industrial development arm of the Aga Khan Fund for Economic Development—a member of the Aga Khan Development Network.  Sithe is an international development company that develops, constructs, acquires, and operates strategic power assets around the world.

The project cost of Bujagali is currently estimated at US$799 million.  The private sector lending arm of the World Bank, the International Finance Corporation (IFC), is evaluating an investment of up to US$130 million in the form of A and C Loans in BEL for the development, construction, and operation of the Bujagali facility.  The International Development Association (IDA), the interest-free lending arm of the World Bank, is expected to provide a Partial Risk Guarantee of up to US$115 million for the benefit of the project’s commercial lenders.  The Bujagali project contributes to IFC’s strategy for the power sector in Sub-Saharan Africa, whereby IFC is focusing on the development, from an early stage, of Public Private Partnerships in countries with a clear commitment to sector reform. 

The Multilateral Investment Guarantee Agency (MIGA), the World Bank’s investment risk mitigator, is expected to provide up to US$115 million in equity risk insurance for Sithe Global’s investment.  MIGA has been working closely with IDA to support Uganda’s power sector reform and stability.  The Bujagali project is consistent with MIGA’s strategic priority of supporting infrastructure projects, as well as MIGA’s objective of increasing its exposure in Africa.  The proposed MIGA guarantee will be one of the largest Independent Power Producer projects supported by MIGA in Africa, and should have a positive demonstration effect for other potential foreign investments in the more regulated sectors of Uganda and other countries in the region. 

A previous effort to develop a hydroelectric power project at Bujagali was undertaken by the AES Corporation (AES – a US power company). The World Bank and IFC’s Board of Directors approved the Bujagali project being developed by AES on December 18, 2001. In the end, AES withdrew from the project which led to a termination of the agreements by the Government in September 2003.

Subsequently, the Government initiated a transparent bidding process in adherence with the Government’s procurement guidelines, to seek a new project sponsor for the new Bujagali project.

The economic cost of the delayed development of the Bujagali hydropower project is conservatively estimated during 2006-2010 to be at least US$700 million. When the Bujagali project is commissioned in 2011, it will generate at least 60 percent more annual energy than the thermal (diesel) plants would produce in 2010.   This is an indication of the economic penalty that the long delay in the project’s implementation will have imposed on Uganda.