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Karuma hydroelectric power project set to transform Ugandan economy

Uganda

Dec 06, 2016

 

Uganda’s 600 megawatt Karuma hydroelectric power plant, budgeted to cost USD1.6 billion, is set to transform the east African country’s economy and the lives of its people.

Uganda currently has an installed power capacity of only 810 megawatts. It is estimated that 80% of the Ugandan population does not have access to electricity. The Karuma project will triple the countries’ power capacity along with the number of people with access to electricity.

Beyond the obvious economic and human potential of this project, however, lies an extremely instructive financial development story – “with broad implications for countries across the continent seeking to develop the capital markets to sustain growth for decades to come” says Anne Juuko, Head, Global Markets Stanbic Uganda. 

To fund the Karuma project the Ugandan Ministry of Finance arranged a USD1.4 billion loan from China’s EXIM Bank, with the remaining USD253.26 million being provided by the Government of Uganda.  Under the terms of the 2015 loan agreement, Uganda’s Ministry of Finance is committed to repay an initial tranche of USD789.3 million over 20 years. This is concessional at a fixed rate of 2%. The second USD645 million tranche, to be paid over 15 years, was agreed on commercial terms, requiring risk management. Standard Bank was the lead hedge arranger for this tranche of the loan.

Given the unpredictable nature of large construction projects and the potential rise in US interest rates, it was prudent for the Government of Uganda to consider fixing the interest rate. “This would allow the Ministry to budget accurately, avoiding fiscal surprises due to variations in USD Libor, over the tenor of the loan,” explains Ms Juuko.

Standard Bank was challenged to convert the interest rate repayments from a variable rate linked to USD Libor, to a fixed rate for the remaining 14 years of the loan. “Since Uganda, however, does not have derivatives legislation, Standard Bank worked within existing Ugandan contract law, constructing the legal framework to support the enforceability of derivative terms within Uganda,” explains Reggie Mlangeni, Regional Head East Africa, Client Solutions, Global Markets, Standard Bank. “This proved the critical enabler in securing the hedge that fixed the loan repayment rate.”  

This transaction should provide a template for Ugandan regulators to develop derivatives legislation that will enable future – and potentially bigger – development projects.

“Standard Bank was also able to provide a 14 year price for the hedge, covering the full tenor of the loan whereas other providers could only offer eight year tenors, for example, with variable options to extend at different terms,” says Mr Mlangeni. “This demonstrates Standard Bank’s deep experience in risk management in Africa and its ability to manage the credit risk associated with the transaction. The result was, a holistic solution well within the bank’s risk appetite – yet fully meeting the Ministry of Finance’s need for certainty of cash flows for the full tenor of the loan,” he adds.

This transaction demonstrates how important predictability is in individual project delivery, especially for large projects delivered over many years.  It also shows how important it is that financial institutions like Standard Bank look beyond the immediate needs of each project to strengthening the broader capital market capabilities of the countries in which they operate - deepening and evolving the financial infrastructure of Africa to sustain growth for decades to come.

 “With a presence in 20 countries across the continent, Standard Bank’s universal banking proposition and insight into local nuances provides a better understanding of client’s needs and allows for innovation in meeting client requirements,” says Ms Juuko.

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