Electricity investment to cost $2b

By Ibrahim Kasita

UGANDA expects to invest $2.35b (about sh55.8 trillion) spread over the next five years in the construction of two hydropower projects and related substation and transmission lines.

The power projects are the proposed 600 megawatts (MW) Karuma and the 183MW Isimba dam. They are expected to address electricity deficit, a critical bottleneck to economic growth.

In a memorandum of economic and financial policies to the International Monetary Fund (IMF), Maria Kiwanuka, the finance minister, pledged to set up a special purpose vehicle to manage the hydropower dams.

This, according to the minister, will ensure that the revenue stream from the operations of the projects is separated from other transactions of the electricity companies and guarantee commercial viability of the projects.

“Given the challenges associated with identifying adequate financing from concessional sources, the Government intends to contract non-concessional loans in amounts consistent with debt sustainability and the absorptive capacity of Uganda,” Kiwanuka said.

“To this end, the Government requests that the ceiling on non-concessional borrowing be adjusted from $1.5b (about sh3.7 trillion) to $2.2b (about sh55.5 trillion) during the programme period.”

Kiwanuka explained that the Government does not intend to use future oil revenues as collateral and will ensure that on completion, the projects generate sufficient returns to repay the costs of the investment through an appropriate policy on electricity tariffs.

The World Bank supports the projects because they would lower production costs, enhance trade and ultimately contribute to poverty reduction.

The IMF said a multiplier analysis shows a growth impact of about one percentage point during the construction phase and further gains in potential output from narrowing the infrastructure gap.

“Given the high import content, the economy is anticipated to absorb the investment without significant impact on inflation or the real exchange rate,” the fund stated in its discussion with Ugandan authorities.

The IMF, however, assessed that international reserves are projected to decline in line with the up-front use of the equivalent to $253m (about sh632.5b) of shilling denominated deposits of the Government to co-finance the projects.

This means the reserves will drop to 3.5 months of imports in this financial year –still an adequate level for Uganda.

Excluding such deposit withdrawals, international reserves would increase by $113m (about sh282b) in this financial year, keeping the reserve coverage at 3.9 months of imports.

“Nonetheless, the budget may need to cover interest payments during the construction period,” the IMF stated. 

“To address concerns about pre-existing operating, losses of the electricity generation and transmission companies, the authorities indicated they will create a performance-oriented special unit within the companies to manage the new projects and ensure their viability.”

According to the IMF, Karuma is expected to be financed with government savings and issuance of domestic debt. The Isimba dam and the road programme will be financed with non-concessionary borrowing.

“A programme of infrastructure investment in electricity and road projects to address the infrastructure gap is at the centre of our growth and development strategy, and we will ensure that the programme is consistent with debt sustainability and the absorption capacity of the economy,” Kiwanuka said.