Following the private sector’s reluctance to invest in the energy sector, government is now luring it with financial incentives.
After a year of brainstorming, government has instituted a new energy company, the Uganda Energy Credit Capitalization Company Limited (UECCC), to manage and administer the country’s energy capitalization trust and extend credit support facilities to private investors.
The company housed at the ministry of Energy and Mineral Development on Amber house is meant to mobilise resources from government as well as other development partners to facilitate private-led energy projects. The trust has already attracted a seed capitalization loan of $6.8m from the World Bank (to be paid back with interest) and Shs1.2bn from government.
The Germany Agency for International Cooperation (GIZ) has also contributed Euros 1m to the fund and an additional Euros 250,000 in technical assistance.
“The purpose of the fund is to enhance the flow of the private sector financing resources towards investments in small-scale renewable energy generation and distribution projects including rural electrification projects,” says Specioza Kimera Ndagire, UECCC’s general manager.
Ndagire notes that the biggest constraint to private investors is funding, yet not even the banking industry has been able to meet the sector’s requirements.
“We all know that the majority of our banks are commercial banks which have depositors’ funds that can be lent on short term, yet the requirements of the energy sector investments is such that they are long-term projects that require long-term funding,” Ndagire says.
However, the establishment of UECCC raises concern as to why government is pampering private investors. An employee in the ministry who didn’t want to be named said that government is already overwhelmed with several companies in the sector.
But Roy Nyamutale Baguma, UECCC’s manager (Transaction Execution) says UECCC’s mission is to be Uganda’s premier driver of private sector financing for renewable energy by providing credit enhancement facilities to participating financial institutions.
“Our approach to work is going to be partnership with participating financial institutions to be able to deliver our mandate. They will provide the interface between us and the project developers,” Baguma said.
The company has introduced a menu of credit enhancement instruments for easy fund accessibility. These include the liquidity insurance facility to enable financial institutions extend the tenure of the loans with the option of drawing on the liquidity between 5-7 years from the loan origination.
This means that if a bank is comfortable lending for five years, UECCC provides that part of the residual loan to cover the required time frame of the project. There is also cash reserving where cash is reserved with the financial institution upfront as an incentive to lure them to lend to private investors in energy.
There is also the partial risk guarantee meant to cover cost overruns during the construction phase of the project.
“The nature of these projects is such that it may not be possible to tell with precise certainty the project course and usually there are unforeseen occurrences. For instance, you might have expected to hit a rock while drilling and you don’t find it there and normally those kinds of situations lead to cost overruns,” Ndagire says.
This instrument is meant to ensure that when a project registers cost overruns, then they can draw on the facility and be able to implement the project as envisaged. There is also a solar finance facility to enable financial institutions provide loans to rural communities to acquire solar systems.
With this facility, the rural communities will get solar systems paid for upfront by the loan and then pay in small instalments. The company further plans to introduce other instruments such as bridge financing facility that covers the interest payment during the construction stage of a project before it starts generating cash flows and it’s repayable on project commissioning.
The company also plans to introduce the subordinated debt finance instrument aimed at addressing the insufficient equity by project developers. It will put in place an interest rate buy down aimed at buying down the interest charged by the banks.
The establishment of UECCC follows government’s establishment of an Energy Fund aimed at financing government-led energy projects such as Karuma (650MW) and Ayago (1,000MW).
With the ever increasing power shortages, government targets to generate about 3,800MW by 2020 to address the shortfalls.
“Government feels there is need to address the various barriers prohibiting development of renewable energy investments. For UECCC, we are trying to address the financial barriers to private sector investors,” Baguma said.