China Eximbank provides $789.33 million preferential buyer’s credit for 600 MW Karuma Hydropower Dam and Associated Transmission lines and Sub-stations Project (Linked to Project ID#36211)

On December 18, 2014 and February 20, 2015, China Eximbank and the Government of Uganda signed two loan agreements worth a total of $1,435,158,682 for the 600 MW Karuma Hydropower Dam and Associated Transmission lines and Sub-stations Project. Then, on February 27, 2015, the Parliament of Uganda ratified these two loan agreements. The first loan agreement with China Eximbank, captured via Project ID#36211, is a buyer’s credit loan (BCL) agreement [No. 140302052015210069] worth $645,821,407.12 that was signed on February 20, 2015 with the following borrowing terms: an annual interest rate of 3.827% (LIBOR plus 3.5% margin), a 1% default (penalty) interest rate, a 15 year maturity, a 5 year grace period, a 0.5% management fee ($3,229,107.04), and a 0.5% commitment fee. Under the terms of the BCL, the Government to Uganda is responsible for on-lending the full amount of the loan to Uganda Electricity Generation Company Limited (UEGCL) and the Uganda Electricity Transmission Company Limited (UETCL). The second China Eximbank loan agreement, captured via Project ID#30919, is a preferential buyer’s credit (PBC) agreement [CHINA EXIMBANK PBC (2014) 46 TOTAL NO. (340)] worth $789,337,275.36 that was signed on December 18, 2014 with the following borrowing terms: a 2% interest rate, a 0% default (penalty) interest rate, a 20 year maturity, a 7 year grace period, a 0.25% management fee (worth $1,973,343.19), and a 0.25% commitment fee. The proceeds from the BCL and the PBC were to be used by the borrower to finance 85% of the total cost of a $1,688,421,979.39 commercial contract between the Government of Uganda’s Ministry of Energy and Mineral Development and Sinohydro Corporation Limited, which was signed on August 16, 2013 and amended on May 6, 2014 and May 15, 2014 (via Addendum No. 1 and Addendum No. 2). The borrower was to use the BCL proceeds to finance 38.25% of the commercial contract cost and the PBC proceeds to finance 46.75% of the commercial contract cost. The Government of Uganda provided a sovereign guarantee for both China Eximbank loans, and the Government of Uganda was obligated under the terms of these loans to open escrow accounts with Stanbic Bank and deposit funds in the accounts over the terms of the loans to facilitate repayment and provide security in the event of default. As of June 30, 2019, the cash balance of one of these escrow (repayment reserve) accounts was UGX 87,154,247,132 ($26,146,274.13). UMEME Ltd. became the major privately owned electricity distributor in Uganda in 2005 after winning a 20-year concession to operate UEDCL's main distribution network. It was involved as a contractual signatory to the Karuma PPA in order to safeguard the repayment mechanism and avoid potential risks of revenues being misallocated. Loan repayments to China Eximbank were to be made through electricity payments under a power purchase agreement (PPA) with UETCL and UMEME Ltd. According to the terms of the loan agreements and the PPA, UEGCL was to supply UETCL all available power capacity on “take or pay” basis, which means that UETCL was responsible for paying for all available electricity generated by the dam, and not only what was needed. However, in 2019, Uganda’s Auditor General discovered that the generation and sales licenses were in contradiction of the PPA and loan agreements because they stated that “the tariff methodology [will] be based on the energy service cost implying that the energy dispatch to UETCL will be influenced by market demand.” According to the Government of Uganda’s Aid Management Platform (AMP), the PBC achieved a 85.4% disbursement rate, with China Eximbank making 24 loan disbursements (worth $674,527,385.55) between 2015 and 2020: a $101,179,038 disbursement on December 24, 2015, a $16,324,648 disbursement on December 25, 2015, a $16,009,159 disbursement on December 28, 2015, a $23,583,642.35 disbursement on April 27, 2016, a $11,850,199 disbursement on July 29, 2016, a $37,208,639 disbursement on September 13, 2016, a $18,949,811 disbursement on December 15, 2016, a $8,637,526 disbursement on April 21, 2017, a $6,927,809 disbursement on June 27, 2016, a $43,705,347.25 disbursement on September 6, 2017, a $28,149,577.68 disbursement on October 18, 2017, a $12,649,419.75 disbursement on November 14, 2017, a $39,929,383.45 disbursement on December 26, 2017, a $48,155,261.48 disbursement on April 13, 2018, a $13,785,395.25 disbursement on May 31, 2018, a $65,799,750.54 disbursement on October 19, 2018, a $7,308,794.90 disbursement on December 25, 2018, a $41,827,450.63 disbursement on February 28, 2019, a $36,212,516.45 disbursement on April 29, 2019, a $13,979,022.20 disbursement on June 20, 2019, a $52,698,924.89 disbursement on November 13, 2019, a $10,010,402.52 disbursement on December 19, 2019, a $14,101,813.11 disbursement on March 20, 2020, and a $5,543,854.10 disbursement on August 18, 2020. According to the Uganda Ministry of Finance, Planning, and Economic Development's Report on Public Debt, Grants, Guarantees and Other Financial Liabilities for Financial Year 2021/2022, as of December 31, 2021, total loan disbursements amounted to $674,527,385.55 and the loan’s amount outstanding (including arrears) was $674,527,385.55. According to the Government of Uganda’s Aid Management Platform (AMP), the BCL achieved a 97% disbursement rate, with China Eximbank making 31 loan disbursements (worth $625,602,535.38) between 2015 and 2021: a $31,356,497 disbursement on December 25, 2015, a $30,767,223 disbursement on January 29, 2016, a $58,068,539 disbursement on March 7, 2016, a $8,341,230.65 disbursement on May 26, 2016, a $9,695,618 disbursement on July 29, 2016, a $30,443,431 disbursement on September 13, 2016, a $15,504,390 disbursement on December 15, 2016, a $7,067,066 disbursement on April 21, 2017, a $5,668,207 disbursement on June 29, 2017, a $22,395,381 disbursement on September 1, 2017, a $13,363,539.75 disbursement on September 8, 2017, a $23,031,472.65 disbursement on October 17, 2017, a $10,349,525.25 disbursement on November 15, 2017, a $32,669,495.55 disbursement on December 19, 2017, a $39,399,759.39 disbursement on April 20, 2018, a $11,278,959.75 disbursement on May 29, 2018, a $53,836,159.53 disbursement on October 18, 2018, a $5,979,923.10 disbursement on December 24, 2018, a $34,222,459.61 disbursement on March 1, 2019, a $29,628,422.56 disbursement on April 29, 2019, a $11,437,381.80 disbursement on June 19, 2019, a $43,117,302.18 disbursement on November 12, 2019, a $8,190,329.33 disbursement on December 20, 2019, a $11,537,847.09 disbursement on March 19, 2010, a $8,362,437.84 disbursement on August 19, 2020, a $16,193,030.50 disbursement on November 5, 2020, a $9,772,888.57 disbursement on August 26, 2021, a $8,920,595.93 on March 17, 2022, a $10,602,602.45 disbursement on May 9, 2022, a $14,822,335.90 disbursement on June 17, 2022, and a $9,578,484 disbursement on August 18, 2022. According to the Uganda Ministry of Finance, Planning, and Economic Development's Report on Public Debt, Grants, Guarantees and Other Financial Liabilities for Financial Year 2021/2022, as of December 31, 2021, total disbursements under the BCL amounted to $581,678,517 and the loan’s amount outstanding (including arrears) was $517,096,376.38. On July 28, 2021, the Government of Uganda and China Eximbank signed a supplementary agreement to the BCL agreement [ID#14030205015210069A], which extended the loan's availability (disbursement) period to allow for $73,915,778.59 of undisbursed funds to be utilized by the borrower (after the original availability period expired on December 24, 2020). The supplementary agreement also specified that, if the loan fully disbursed, the borrower would be responsible for making twenty, semi-annual repayments (worth $32,291,070.36 each) between January 21, 2021 and July 21, 2030. The 600 MW Karuma Hydropower Dam and Associated Transmission lines and Sub-stations Project., which is also known as the Karuma Hydropower Plant and Interconnection Project, will involve the installation of 6 turbines (10 million kilowatts each), which will create a total capacity of 600 MW, making it Uganda's largest power plant. After the first two turbines start generating electricity, the remaining four turbines will be turned on once per month. The project includes dams, water diversion pipes, underground power plants, and transmission lines. The purpose of the Interconnection Project is to evacuate power produced from Karuma Hydropower Plant in Northern Uganda to load centers, which include Lira and Olwiyo in Northern Uganda, and Kawanda in Central Uganda. It will involve construction of a 248km, 400kV, Double Circuit Karuma-Kawanda transmission line; a 78km, 132kV, Double Circuit Karuma-Lira Transmission Line; a 55km, 400kV, Double Circuit Karuma-Olwiyo transmission Line (which will be initially operated at 132kV); a new 400/132kV sub-station interconnecting with Karuma HPP and 400kV line bays; a new 400kV/220kV substation with two new incoming 400kV line bays to interface with the existing Kawanda 220/132kV substation; two new incoming 132kV line bays to interface with the existing Lira 132/33kV substation; and a new 132/33kV Olwiyo substation. The EPC contractor responsible for implementation of this project was Sinohydro Corporation Limited. The construction of the dam and power station officially started on August 12, 2013. As of March 2016, about 30% of the work had been completed. In October 2016, it was estimated that about 1,000 Chinese nationals and about 5,000 Ugandans were working at the power station. As of June 2018, 56 months from the beginning of construction, an estimated 76% of the physical work had been completed. Of the 6,000 workers, 5,300 were Ugandan. As of September 2019, an estimated 95% of construction activities had been completed, which included 100% completion of the Karuma–Lira High Voltage Line, 100% of the Karuma–Kawanda High Voltage Power Line and 98% of the Karuma–Olwiyo High Voltage Line. As of December 2020, the Karuma Hydropower dam had reached a 98.7% physical progress rate, the Karuma-Kawanda transmission line had reached a 99.5% physical progress rate, the Karuma-Lira transmission line had reached a 86.4% physical progress rate, the Karuma-Olwiyo transmission line had reached a 95.5% physical progress rate, and the Karuma, Kawanda, Olwiyo, and Lira substations have reached 99.9%, 99.9%, 93% and 99% physical progress rates, respectively. The COVID-19 pandemic was considered a force major event in that it constrained manufacturing and prevented the shipping of equipment and the travel of experts to facilitate the installation and commissioning of equipment. Other project implementation challenges have included a dispute between the EPC contractor and a sub-contractor, which halted the finalization of the stringing and energizing of a 2.504 km transmission line; UMEME distribution lines without required minimum clearances at Walusi, and Wabigalo; the vandalism of tower materials; accusations of public waste and corruption; the death of a worker due to allegedly unsafe work practices; and accusations that one worker was engaged in ivory smuggling activities. The cost of the project also reportedly ballooned from $1.68 billion at least $2.2 billion.

Additional details

1. In July 2016, the Government of Uganda concluded an an interest rate swap deal with Standard Bank and Standard Chartered on its China Eximbank BCL loan. Under the terms of the deal, the Government of Uganda agreed to pay a fixed interest rate of 2.58 percent (0.79 plus a swap premium of 1.79) on its loan, allowing Standard Bank and Standard Chartered to pay the floating interest, which is dependent on LIBOR. Thus, the Government of Uganda only benefits from the arrangement when LIBOR plus the agreed premium is higher than 2.58 percent. According to the Government of Uganda, the purpose of engaging in this interest rate swap was “to ensure certainty and hedge against future [LIBOR] rate fluctuations. However, as of 2018, the Government of Uganda had not yet benefited from the interest rate swap arrangement because the floating rate remained below 2.58 percent. As a result, the Government of Uganda incurred additional costs that it would not have incurred in the absence of the interest rate swap arrangement. 2. In the China’s Overseas Development Finance Dataset that Boston University's Global Development Policy Center published in December 2020 and the database of Chinese loan commitments that SAIS-CARI released in July 2020, a single, $1.4 billion China Eximbank loan for the 600 MW Karuma Hydropower Dam and Associated Transmission Lines and Sub-stations Project project is identified. However, AidData records two separate China Eximbank loans for this project (a PBC and a BCL) based on the loan agreements themselves. SAIS-CARI also records only one set of borrowing terms: 20 year maturity, 5 year grace period, and 2% interest rate. However, PBC and BCL agreements specify that these loans carry different borrowing terms. The BCL carries an annual interest rate of 3.827% (LIBOR plus 3.5% margin), a 15 year maturity, a 5 year grace period, a 0.5% management fee ($3,229,107.04), and a 0.5% commitment fee. The PBC carries a 2% interest rate, a 20 year maturity, a 7 year grace period, a 0.25% management fee (worth $1,973,343.19), and a 0.25% commitment fee. The PBC agreement can be accessed in its entirety via https://www.dropbox.com/s/znwu46a5h6vsclk/China%20EximBank%20Loan%20-%20Karuma%20Hydropower%20Dam%20and%20associated%20works%20Project%20PBC%20%282014%29%2046%20Total%20No%20340.pdf?dl=0. The BCL agreement can be accessed in its entirety via https://www.dropbox.com/s/rp79c47zockl9gi/China%20EximBank%20Loan%20-%20Karuma%20Hydropower%20Dam%20and%20associated%20works%20Project%20Contract%20No.%20140302052015210069.pdf?dl=0. 3. AidData has calculated the BCL’s all-in interest rate by taking the average 6-month LIBOR rate in November 2014 (0.327%) and adding a 3.5% margin. Therefore, the all-in interest rate is coded as 3.827%. 4. On July 28, 2021, the BCL agreement was amended in order to extend the loan’s disbursement period by two additional years (to allow for $73.915 million of unutilized funds to be utilized by the borrower). The amended agreement [No. 140302052015210069A] can be accessed in its entirety via https://www.dropbox.com/s/kklgyc75pkwedat/Supplementary%20Agreement%20to%20Buyer%20Credit%20Loan%20Agreement%20for%20Karuma%20HPP.pdf?dl=0. 5. The collateralization arrangement that governs the BCL and the PBC is described in detail in Article 6.12 of the PBC agreement and Article 12.k of the BCL agreement. Both loan agreements define the ‘security document’ as ‘each of the agreements and legal documents signed by the relevant parties for the purposes of creating security interests in favor of the Lender and enhancing the credit of the Borrower as stipulated in Article 6.12, including without limitation the On-lending Agreement(s), the Escrow Account, the Repayment Reserve Account Agreement, the Power Purchase Agreement, the Power Sales Agreement and the Assignment Agreement/Debenture. 6. Article 6.12 reads as follows: ‘The borrower undertakes that the repayment of principal and payment of interest and fees under this Agreement shall be credit enhanced and the following arrangements: (1) After this Agreement has been signed by the Borrower and the Lender, the On-Lending Agreement(s) shall be duly signed as provided in this Agreement, in form and substance acceptable to the Lender. (2) The Repayment Reserve Account and the Sales Collection Account shall be opened and maintained with the Lender and the Escrow Account Bank and be subject to the respective escrow arrangement under the Repayment Reserve Account Agreement and the Escrow Account Agreement. The Repayment Reserve Account shall be used to maintain the minimum amount of balance as a debt service reserve as required by the Lender and the Lender shall be entitled to utilized the funds in the Repayment Reserve Account. The Sales Collection Account shall be used to collect the revenues generated from the Project and the required amount of funds in the Sales Collection Account shall be transferred to the Repayment Reserve Account as required by the Lender. (3) All the revenues (proceeds) generated from the Project shall be applied in priority to payment of any and all amounts due and payable under this Agreement. (4) The Borrower shall procure UEGCL as seller and UETCL as purchaser to sign the Power Purchase Agreement in form and substance acceptable to the Lender. (5) The Borrower shall procure UETCL as seller and the relevant distributor(s) relating to the Project as purchaser to sign the Power Sales Agreement in form and substance acceptable to the Lender. (6) The Borrower shall procure each of UEGCL and UETCL as assignor/chargor to sign with the Lender assignee/chargee the Assignment Agreements/Debenture in forma and substance acceptable to the Lender, which which UEGCL and UETCL shall assign and/or pledge, among others, all its assignable rights and interests and revenue under the Power Purchase Agreement and the Power Sales Agreement (as the case may be) to the Lender. (7) The Borrower undertakes to ensure that the successors of permitted assignees and transferee of the parties of the Security Documents shall abide by the provisions of the relevant Security Documents. (8) Notwithstanding the existence of the Security Document, the Borrower shall be fully liable for the payment and repayment obligations under this Agreement. The Borrower’s obligations under this Agreement shall not be affected or undermined by the execution, delivery and performance by the relevant parties of such Security Documents.’ The BCL and PBC define the ‘Assignment Agreement/Debenture’ as ‘each or both (as the context may require) or (i) the assignment agreement/debenture entered into or to be entered into between UEGCL as assignor/chargor and the Lender as assignee/chargee, under which UEGCL shall assign and/or pledge, among others, all its assignable rights and interest under the Power Purchase Agreement to the Lender; and (ii) the assignment agreement/debenture entered into or to be entered into between UETCL as assignor/chargor and the Lender as assignee/chargee, under which UETCL shall assign and/or pledge, among others, all its assignable rights and interests and revenues under the Power Sales Agreement to the Lender, both of which are in form and substance acceptable to the Lender.’ The BCL and PBC define the ‘Escrow Account Agreement’ as the ‘escrow account agreement entered into to or to be entered into among the Lender, the Borrower, and other relevant parties as well as the Escrow Account Bank in respect of opening, maintenance and control of the Sales Collection Account and in form and substance acceptable to the Lender. The BCL and PBC define the ‘Escrow Account Bank’ as the ‘Export-Import Bank of China and/or such other reputable international bank registered in Uganda and approved by the lender.’ The BCL and PBC define the ‘On-Lending Agreement(s)’ as the ‘loan agreement(s) entered into or to be entered into between the Borrower and the lender and UEGCL and UETCL as co-borrowers (whereby the Borrower enters into separate on-lending agreement with each of UEGCL and UETCL respectively); whereby the proceeds of the Facility are on-lent by the Borrower to UEGCL and UETCL to implement the Project.’ The BCL and PBC define the ‘Power Purchase Agreement’ as the ‘power purchase agreement entered into or to be entered into between UEGCL as seller and UETCL as purchaser under the ‘Take or Pay’ terms in connection with the Project, in form and substance acceptable to the Lender.’ The BCL and PBC define the ‘Power Sales Agreement’ as the ‘power sales agreement entered into or to be entered into between UETCL as seller and relevant distributor(s) related to the Project as purchaser under the ‘Take or Pay’ terms in connection with the Project, in form and substance acceptable to the Lender.’ The BCL and PBC define the ‘Repayment Reserve Account’ as ‘the account in the name of the Borrower with the Lender and for the purpose of maintaining the minimum amount of the funds as debt service reserve pursuant to the Escrow Account Agreement.’ The BCL and PBC define the ‘Repayment Reserve Account Agreement’ as ‘the repayment reserve account agreement entered into or to be entered into among the Lender, the Borrower, and other relevant parties in respect of the opening, maintenance and control of the Repayment Reserve Account and in form and substance satisfactory to the Lender.’ The BCL and PBC define the ‘Sales Collection Account’ as ‘the account in the name of UEGCL and/or UETCL or other relevant parties with the Escrow Account Bank and for the purpose of collecting revenues generated from the Project pursuant to the Escrow Account Agreement.’ 7. The revenues generated by this project flow through a ‘cashflow waterfall’ arrangement (usefully described via https://pivotal180.com/project-finance-cash-flow-waterfall/ and https://www.lexology.com/library/detail.aspx?g=26f2629e-2040-4dda-a6d8-6600e478cf7f). 8. Under the terms of the BCL agreement, the borrower is responsible for paying 20 installments of $32,291,070.28 every six months between January 2021 and July 2030. The commencement date of the loan repayment period is December 24, 2020 and the first repayment date is January 21, 2021. 9. The June 2019 escrow account cash balance is drawn from the following source https://www.oag.go.ug/storage/reports/ACC_FIIT_AGCY_2018_19_1649574114.pdf. Conversion to USD based on an exchange rate of 1 UGX = 0.0003 USD. 10. The Government of Uganda’s agreement code for the PBC agreement and the BCL agreement is L-0639. The system identification number in the Government of Uganda’s Aid Management Platform (AMP) is 87299228334.

Number of official sources

25

Number of total sources

51