Uganda Lowers Financial Risk Over Karuma Power Dam

In a country where huge power dam projects have faced public scrutiny over the costs of financing, the government's decision of signing up to an interest rate swap over the Karuma plant breaks new ground in safeguarding against financial risks, writes ALON MWESIGWA.

Ugandans might not find it so hard to pay back the loan for the 600MW Karuma dam construction after government renegotiated the terms for repayment, now to be based on a fixed interest rate than one that floats, according to a statement from the ministry of Finance, Planning and Economic Development.

Referred to as an interest rate swap, the process allows both parties to mitigate any unforeseen risks and reduce the costs of financing the project. Any reduction in costs and risks could mean Ugandans might not pay as high a tariff as they would have if the project was exposed to more risks.

This is the first time that the ministry of finance has concluded a financial transaction in form of an interest rate swap with a primary objective of lowering debt service costs on the Karuma power dam project.

"This is a milestone in government finances," one analyst said.

Stephen Kaboyo, the managing director of Alpha Capital Partners, said: "In light of the never-ending quest to maximise financial resources in an era of limited [options] for increased taxes and lower spending, Uganda's public finance managers are turning to innovative financial management techniques to accomplish such a goal."

The government undertook the swap (IRS) of $645m over 15 years at a fixed rate of 6.08 per cent in order to hedge against future rate fluctuations. The swap was concluded on June 14, 2016, and was undertaken with Stanbic bank covering $345m and Standard Chartered bank taking up the remaining $300m.

"The implication of the interest swap is that as a country we now know for certain our total debt obligation in respect to the project and the related interest payable over the next 15 years as compared to the uncertainties that are caused by a floating interest," Jim Mugunga, the spokesperson at the finance ministry, said.

"It is also yet another major milestone in our efforts to ensure prudent national debt management."

The arrangement would enable the government to pay $146m in interest over the 15 year period as compared to an average of $257m if the interest rate was left floating. The $645m is the first bunch of the money for the construction of the dam. More money for the construction of the transmission lines will be released in the course of the project.

The Karuma power dam will cost $1.4bn borrowed from Exim Bank of China for the construction of the dam and transmission lines. This amount constitutes 85 per cent of the total cost of financing. Uganda contributed 15 per cent of the cost, amounting to $253m, which was mainly used to kickstart the project.

"[This] is the best pricing any entity can get in the current market environment, way below international bond yields," Kaboyo added.

The market price for sovereign bonds is between 7.5 and nine per cent. Exim bank is expected to provide another batch of the money in the course of the project for the transmission lines. Sinohydro Corporation from China is building the dam.

According to analysts, this deal means Uganda is seeking to keep a grip on future interest rate costs as projects such as Karuma benefit from a stable cost.

Most government agreements are signed on variable loan agreements, meaning that cost of money can move up and down unexpectedly. This breeds uncertainty and sometimes costs higher than the government had planned to pay.

Uganda's rising debt levels - at about $10bn or 34 per cent of GDP - have experts worried, especially when government finds it hard to pay interest. According to Kaboyo, the model should be replicated in many other transactions in order to bring down debt service costs and savings. Karuma will be completed in 2019/20.

Source: The Observer

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