Lenders: Renew Bujagali tax holiday, or tariffs rise 

The group of lenders for the Bujagali hydropower project have written to the government of Uganda, warning that should there be any failure to further extend the corporate income tax exemption for the 250MW plant, then electricity tariffs in the country will shoot up.

The lenders – African Development Bank, British International Investment plc, Germany’s DEG, the World Bank’s International Finance Corporation and France’s Proparco – in a joint letter, wish for government to further extend the corporate income tax exemption until their loan is fully repaid.

A parliamentary ad hoc committee had earlier issued a report, saying they would not approve any request for the extension of the tax holiday.

In a rebuttal, the lenders, in a May 26 letter, said: “The [parliamentary] report contains several material elements calling into question the initial contractual framework agreed between the parties (BEL and GoU) and which would jeopardize the objective of tariff reduction… If the Corporate Income Tax (CIT) exemption is not extended, then the CIT component of the tariff will increase, thus losing part of the tariff reduction achieved to date.”

The Bujagali tax holiday ends on June 30, 2023. The lenders wrote the letter to Uganda’s ministries of finance, energy and the attorney general after a parliamentary ad hoc committee released a report in March that, among other things, said they would not approve any extension of the CIT exemption to Bujagali Energy Limited and recommended the renegotiation of the project agreements.

Governments offer tax incentives to allow investors recoup their investments without the burden of paying too much tax. Denying investors a tax holiday usually means that the investor has to devise certain means to recover their investments; in this particular case, push for an increase in the Bujagali tariff.

The parliamentary report has ruffled feathers within the lending community and brought into question the validity of Uganda government’s promise to honour its agreements. Observers predict that should government adopt parliament’s recommendations, many investors would consider Uganda a risky environment to do business.

In 2006, Uganda experienced a long spell of drought, which led to a huge drop in water levels along Lake Victoria. The drop in water levels meant that the two main hydropower projects – Kiira and Nalubaale – could not generate enough electricity.

As a result, a stringent power-rationing schedule was introduced in the country, where certain parts of the country would go an entire day without electricity. The power rationing, largely known as load shedding, nearly brought Uganda’s economy to its knees as many businesses closed shop over the unavailability of electricity.

To mitigate the situation, government introduced the more expensive diesel generators into the energy mix, with state officials sending a message to the public that it is better to have expensive electricity than not have it all.

Renewed attention was placed back on getting the Bujagali hydropower deal signed, that attempt having failed in 2003 after environmental activists criticised the project over its purported dangers to nature.

In 2007, a determined Ugandan government entered into a contract with Bujagali Energy Limited for the construction of the 250MW Bujagali hydropower project. The financing for this contract was split into debt and equity contributions. The total project cost was $903 million, of which $703 million was debt.

The debts were structured as senior loans and subordinate loans. A senior loan carries a lower interest rate compared
to a subordinate loan, and they differ in payment schedules. Borrowers usually take up both sets of loans to spread their risk.

Part of the agreement for the Bujagali hydropower project was for Uganda’s government to pay back the loan in agreed batches over 15 years, on top of a 10-year corporate income tax exemption that would allow the electricity tariff to stay low.

In 2012, the Bujagali hydropower plant was commissioned, and with it, more than 100MW of expensive diesel-generated electricity was stopped, together with a series of government subsidies. There was relief in the market.

But by early 2017, it was clear that government would not be able to meet its debt obligations as payments were behind schedule. At the time, the debt to be repaid was about $478 million. Uganda’s government, together with the lenders, asked for a refinancing of the loan and also agreed to convince parliament to rubberstamp that proposal with an additional five-year extension of the corporate income tax exemption.

In June 2018, the two parties agreed to a new 15-year payment schedule, where the loan would be fully repaid by 2032. Parliament also approved an extra five years for the CIT holiday to end in June 2023. That time has now arrived but the payments still fall short of the approved schedule.

Last year, parliament instituted a committee to look into the Bujagali energy agreements, possibly to find where government faltered. The legislators needed to also understand why the generation tariff for Bujagali was not within the five US cents range that President Museveni desires, and is at eight US cents.

In their report, the MPs, after doing their mathematics of the numbers, said the 19 per cent return on investment that Bujagali Energy Limited enjoys is too high and, therefore, want it knocked down; wailed over the “high” electricity tariffs that consumers still pay; and ultimately called for the renegotiation of the agreements while making it clear that they have no intention of approving any extension of the tax exemption.

Now, the lenders, together with Bujagali Energy Limited, through their lawyers – Kampala Associated Advocates – say whatever calculations the MPs used, they were way off the mark, and showed little appreciation of the gravity of the resolutions they had come up with in their report.

The couple of weeks towards June 30, 2023 have intressed heavy lobbying as government and Bujagali Energy Limited try to break the deadlock over the tax exemption.