China Eximbank provides $482.57 million preferential buyer’s credit for the 183MW Isimba Hydropower Station and the Isimba-Bujagali Interconnection Project

In 2010, the Government of Norway provided a grant worth approximately $3.8 million for a feasibility study of the 183MW Isimba Hydropower Station and the Isimba-Bujagali Interconnection Project. The study was completed by a joint venture of Fichtner and Norplan. Energy Infratech, a company based in India, served as the owner’s engineer for the project until September 2017. The consortium of Artelia Eau & Environment and KKATT Consult was appointed as the owner’s engineer in January 2018. On November 26, 2014, the Government of Uganda and China Eximbank signed a preferential buyer’s credit (PBC) agreement [CHINA EXIMBANK PBC (2014) 33 TOTAL NO. (327) 14202014016565] worth $482,578,200 for the 183MW Isimba Hydropower Station and the Isimba-Bujagali Interconnection Project. Then, on March 12, 2015, the Parliament of Uganda ratified the loan agreement with the following terms: an annual interest rate of 2%, a default (penalty) interest rate of 0%, a 20-year maturity, a 5-year grace period, a 0.25% ($1,206,445.50) management fee, and a 0.25% commitment fee. The proceeds of the loan were to be used by the borrower to finance 85% of the cost of a $567,738,990.96 commercial contract [number MEMD/WRKS/2013-2014/00022/ERD] between Uganda’s Ministry of Energy and Mineral Development and China International Water & Electric Corporation (CWE), which was signed on September 6, 2013 and amended on April 10, 2014 and May 20, 2014. Under the terms of the PBC, the Government to Uganda was 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 Government of Uganda provided a sovereign guarantee for the loan, and the Government of Uganda was obligated under the terms of the loan to open an escrow (or ‘repayment reserve’) account and deposit funds in the account to facilitate repayment and provide security (i.e. collateral) in the event of default. As of June 30, 2019, the cash balance of the escrow (repayment reserve) account was UGX 35,909,807,892 ($10,772,942.36). The China Eximbank loan agreement also required that UETCL and UEGCL conclude a Power Purchase Agreement (PPA) on a ‘take or pay’ basis for the project, and that UETCL and UEDCL and UMEME (or its successors or assignees) conclude a Power Sale Agreement on a ‘take or pay’ basis, in which UMEME or its successor is obligated to make deposits of revenues generated from the project into the escrow account. The loan agreement also specified that any shortfalls in collections and debt service would be met by the Government of Uganda. UMEME, which became the major privately-owned electricity distributor in Uganda in 2005 after winning a 20-year concession to operate UEDCL's main distribution network, was involved as a contractual signatory to the Isimba PPA in order to safeguard the repayment mechanism and avoid potential risks of revenues being misallocated. The fact that UEGCL was to supply UETCL all available power capacity on a ‘take or pay’ basis means that UETCL was to pay 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 agreement 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), this loan achieved a 97% disbursement rate, with China Eximbank making 19 loan disbursements (worth $466,398,955.58) between 2015 and 2022: a $28,386,949.55 disbursement on August 14. 2015, a $72,126,626.59 disbursement on August 17, 2015, a $16,593,182.04 disbursement on November 19, 2015, a $70,494,066.49 disbursement on March 30, 2016, a $44,719,245.87 disbursement on November 8, 2016, a $8,903,102.70 disbursement on December 13, 2016, a $11,634,076.30 disbursement on April 18, 2017, a $9,797,214.32 disbursement on May 26, 2017, a $27,630,000 disbursement on August 8, 2017, a $40,394,439.87 disbursement on November 7, 2017, a $25,338,123.26 disbursement on March 30, 2018, a $9,149,993.75 disbursement on June 26, 2018, a $21,647,503.83 disbursement on November 16, 2018, a $13,983,133.08 disbursement on December 17, 2018, a $10,191,519.25 disbursement on April 4, 2019, a $12,490,242.92 disbursement on June 19, 2019, a $13,684,152.17 disbursement on November 8, 2019, a $2,942,702.21 disbursement on September 17, 2020, and a $26,292,681.38 disbursement on October 27, 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, total loan disbursements amounted to $440,106,274.20 and the loan’s amount outstanding (including arrears) was $391,848,454.20 as of December 31, 2021. The project involved the construction of Isimba hydropower plant, which is located in the village of Isimba on the Victoria Nile, in Kamuli District. It is 4 km downstream of Simba Falls on the River Nile, approximately 50 km downstream of the source of the Nile. The project site is about 21 km from Kayunga Town as the nearest town and about 65 km from Jinja town. Its exact locational coordinates are: 00°46'18.0"N, 33°02'32.0"E (Latitude:0.771667; Longitude:33.042222). The project also supported the construction of a 132kv Isimba power substation, and the construction of a 41km, 132kv transmission line from Isimba to Bujagali. The Isimba power station will be installed with four vertical Kaplan turbine-generator units with a capacity of 45.8MW per unit, thereby providing a combined installed capacity of 183.2MW. The expected outputs from the 183MW Isimba hydropower station and the Isimba-Bujagali interconnection Project include (1) construction of the 183 MW Isimba hydropower plant, (2) construction of a 132kv Isimba power substation, and (3) construction of a 132kv Isimba-Bujagali double circuit steel tower power transmission line that is approximately 41 km in length. CWE was the general EPC contractor responsible for project implementation. However, several subcontractors were also involved, including Artelia Eau & Environment, KKATT Consult, and Energy Infratech. A technical feasibility study, as well as a Resettlement Action Plan (RAP), Environmental Impact Assessment (EIA) and Social Impact Assessment (SIA) for the power plant and transmission line were completed between 2012 and 2014. An SIA undertaken for Isimba dam by the Government of Uganda (GoU) shows that public consultations concerning the project were held in the Kayunga, Kamuli, and Jinja Districts between October and December 2012. The same period is cited for consultations held in connection with the EIA. Field studies of flora and fauna were conducted in March 2013. The EIA was only finished in November 2014 and NEMA granted approval of it on May 19, 2015. The project’s certificate of approval was also issued by the National Environmental Management Authority (NEMA) to the Ministry of Energy and Mineral Development (MoEMD) in May 2015. A formal groundbreaking ceremony for the dam took place on October 5, 2013. However, project implementation did not commence until April 30, 2015. At that time construction was expected to be completed within 40 months (August 30, 2018). Construction ended in November 2018. Test flooding of the reservoir and the start of inundation of the Kalagala Falls Site (KFS) took place between November 2018 and February 2019. The power plant was officially commissioned on March 22, 2019. A series of ‘associated infrastructure works’ — including bridges and a connection road to Kamuli — took place after the commissioning of the power plant. The power plant was expected to generate 183.2 megawatts of electricity a year once it achieved a substantial completion mark on March 31, 2019. A takeover certificate was issued to the EPC contractor (CWE) on April 12, 2019, after the Government of Uganda and CWE agreed that all project defects were to be fixed by September 30, 2019. However, on September 16, 2019, local media reports indicated that CWE was stalling the completion of a bridge associated with the 183 MW Isimba dam project over a $42 million payment dispute with UEGCL. CWE alleged that UEGCL was unfairly withholding payment. UEGCL asserted that the payment was being withheld due to nearly 700 dam construction defects that CWE had failed to repair. In June 2021, during a UEGCL board of directors inspection of the project site, the Executive Director of UEGCL, Eng. Harrison Mutikanga, told the media that he was not happy with CWE’s performance because of delays and quality issues. He said that ‘[r]ight now, water is leaking in the concrete to the powerhouse, the contractor has not installed a floating boom, the generator circuit breaker has not been working for one month and because of that, [and] one of the turbine units is not working.’ He also said that ‘[t]he firefighting system automation is also not working, equipment frequently breaks down, the gate on one of the functioning units was designed to last for 10 years but only two years later, the paint is going off and the rubber that is supposed to control water is coming off.’ Without boom lines, Mutikanga explained that the dam risked being affected by the water hyacinth and floating islands, which could translate into national blackouts. Mutikanga also said the delayed completion of the project had led to government losses: ‘We want a plant that is generating electricity reliably, safely and to also make sure that all systems are working. We want all defects fixed with quality equipment so that we contribute to the government objective of social transformation.’ At the time, Mutikanga also denied allegations that UEGCL had not paid CWE: ‘We have paid them up to 93%. We have also started paying the interest on the loan to EXIM Bank (of China).’ UEGCL Board chairperson Eng. Proscovia Njuki added that: ‘[t]he contractor has not been fast as we thought. At first, they were delayed by COVID-19, but we are here to find out the challenges they are facing so that we address them. An agreement was reached to extend the defects liability period by one year to allow for proper completion of all the snags till March 2021, but with the defects we have extended the contract till March 2022. If by then we find out that some gaps are missing, we shall not issue a final certificate of completion.’ Then, on August 11, 2012, a group of engineers, supervisors, IT specialists, welders, and cleaners—worked frantically to restore power in one of the turbines at Isimba dam. The previous three days were reportedly ‘a nightmare’ after one of the workers opened a wrong gate during routine maintenance works on unit three—one of the four Kaplan axial flow turbines—and then the automated gate jammed, causing a flood that submerged four floors, including the powerhouse. Each of the turbine units has a generation capacity of 45.5 MW but only three had been active after the dam was officially commissioned on March 22, 2019. Uganda's Minister of Energy, Ruth Nankabirwa, and the Permanent Secretary of Uganda's Ministry of Energy, Irene Batebe, pitched camp at the project site. Ms Nankabirwa and her team were ushered into the control room. Across the choppy waters was a group of Australian dam engineers armed with monitors that fed footage to the CCTV room. The images gleaned by the divers were startling. Concrete under the water at the spillway gates continued to wash away and crumbling, among other things. The dam has four spillway gates. A spillway gate is raised and adjustable to allow the controlled release of water downstream whenever water levels in the reservoir—the large lake behind the dam—increase[s], including the probable maximum flood. The wearing of spillway waterway concrete requires a total overhaul. In June 30, 2022 correspondence with Irene Batebe, UEGCL chief executive officer, Harrison Mutikanga, flagged the crumbling waterway concrete, saying it was of ‘great risk to the overall stability of the dam with possible catastrophic consequences’ and that ‘UEGCL considers this risk to be of paramount importance as any delays to correct these failures only serves to increase the likelihood of these risks materialising and exposing government to great financial and reputational risk.’ As of August 2022, Isimba dam remained under the Defects Lability Period (DLP)— the time period specified in the contract during which the EPC contractor is legally required to return to a construction site to repair any defects. The DLP was set to expire in late 2022. CWE was reportedly reluctant to address the lingering defects until the summer of 2022. In September 2022, UEGCL employees warned of major safety issues and identified 10 ‘potentially catastrophic defects’ at the dam that, if it were to burst, could lead to massive flooding. The allegations of poor quality control on the part of the CWE are not new. In 2016, a legal claim was filed against the Isimba project in response to a leaked report that alleged that CWE was using substandard materials for construction of the dam.

Additional details

1. This project is also known as the Isimba Hydropower Project. The Chinese project title is 乌干达伊辛巴水电站 or 乌干达伊辛巴水电站项目. 2. The Government of Uganda’s agreement code for the PBC agreement is L-0637. The system identification number in the Government of Uganda’s Aid Management Platform (AMP) is 8729935467. 3. As of April 7, 2020, the Aid Management Platform (AMP) of the Government of Uganda's Ministry of Finance, Planning, and Economic Development recorded total disbursements through the China Eximbank loan as reaching $426,882,138.19. 4. The China Eximbank loan (PBC) agreement can be accessed in its entirety via https://www.dropbox.com/s/rxlgeyw0ei794pw/China%20Eximbank%20PBC%20Agreement%20for%20the%20Isimba%20Hydropower%20Project.pdf?dl=0. 5. The collateralization arrangement that governs the PBC is described in detail in Article 6.12 of the PBC agreement. The PBC agreement defines 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 Repayment Reserve Account Agreement, the Escrow Account Agreement, the Power Purchase Agreement, the Power Sales Agreement and the Assignment Agreement/Debenture.’ 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 secured by the Repayment Mechanism Agreement 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 by the Borrower and UEGCL and UETCL, 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 Escrow Account Bank and be subject to the escrow arrangement under the 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 as assignee/chargee the Assignment Agreements/Debenture in form 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 or 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 PBC defines 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 PBC defines the ‘Escrow Account Agreement’ as the ‘escrow account agreement entered into to or to be entered into among the Lender, the Borrower, UEGCL and the Escrow Account Bank and other relevant parties, as agreed by the Borrower and the Lender, in respect of opening, maintenance and control of the Escrow Accounts and in form and substance acceptable to the Lender. The PBC definex 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 PBC defines 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, UEGCL and UETCL enter into one on-lending agreement) or separate borrower (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 PBC defines 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 PBC defines 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 PBC defines the ‘Repayment Reserve Account’ as ‘the account in the name of the Borrower with the Escrow Account Bank and for the purpose of maintaining the minimum amount of the funds as debt service reserve pursuant to the Escrow Account Agreement.’ The PBC defines the ‘Repayment Mechanism Agreement’ as ‘the repayment mechanism agreement entered into or to be entered into among the Lender, the Borrower, the End-User, UEGCL, UETCL, and relevant distributor(s) in form and substance acceptable to the Lender, under which the parties agree to, among others, enter into (or procure the relevant parties to enter into) the Escrow Account Agreement and ensure all revenues generated from the Project shall be paid into the Sales Collection Account.’ The PBC defines the ‘Sales Collection Account’ as ‘the account in the name of UEGCL and/or UETCL with the Escrow Account Bank and for the purpose of collecting revenues generated from the Project pursuant to the Escrow Account Agreement.’ 6. 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). 7. In the China’s Overseas Development Finance Dataset that Boston University's Global Development Policy Center published in December 2020, the commitment (loan signature) year is identified as 2015. AidData codes the commitment year as 2014 based on the precise date (November 26, 2014) upon which the loan agreement was signed. 8. 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.

Number of official sources

26

Number of total sources

44