Documento f The World Bank, InternationalFinance Corporation, and Multilateral InvestmentGuarantee Agency ReportNo: 38421-UG PROJECTAPPRAISAL DOCUMENT ON A PROPOSED INTERNATIONALDEVELOPMENTASSOCIATION PARTIALRISK GUARANTEE INTHEAMOUNT OFUPTO US$ll5MILLION FORA SYNDICATEDCOMMERCIALBANK LOAN AND ONA PROPOSED INTERNATIONALFINANCECORPORATIONFINANCINGCONSISTINGOF: AN "A" LOANINTHE AMOUNT OFUP TO US$lOO MIILIONAND A "Cy'LOANINTHE AMOUNT OF UPTO US$30MILLION AND ONA PROPOSEDMIGA GUARANTEE INTHEAMOUNT OFUPTO US$115 MILLION FOR SPONSOR'S EQUITY TO BUJAGALIENERGYLIMITED FORTHE PRIVATEPOWER GENERATION(BUJAGALI) PROJECT INTHEREPUBLICOFUGANDA APRIL 2,2007 AfricaRegionEnergyTeam, WorldBank; InfrastructureDepartment, IFC;and InfrastructureSector Team, MIGA This document has a restricteddistributionandmay be usedby recipientsonly inthe performanceo ftheir official duties. Its contents may not otherwise be disclosedwithout WorldBank authorization. CURRENCY EQUIVALENTS (ExchangeRate Effective(March 19,2007) CurrencyUnit = UgandaShilling(USh) USh1,759 = US$1 FISCALYEAR Government - July1-June30 BujagaliEnergyLimited - January1-December31 UETCL, UEDCL, UEGCLUMEME - January1-December31 WEIGHTSAND MEASURES 1meter (m) = 3.28 feet 1cubic meter (m3) = 35.31 cubic feet 1gigawatthour (GWh) = 1million kilowatthours 1hectare(ha) = 10,000 m20r2.4711acres 1kilometer (km) = 0.62 miles 1kilowatthour (kWh) = 1,000 watts hour 1megawatt(MW) = 1,000 kilowatts ABBREVIATIONSAND ACRONYMS ADB AfricanDevelopmentBank ADO Automotive Diesel Oil AESNP AES Nile Power AFD AgenceFranqaisede DCveloppement AKFED Aga KhanFundfor Economic Development AMSL Above Mean Sea Level BEL BujagaliEnergyLimited BP Bank Procedures BIU BujagaliImplementationUnit COZ CarbonDioxide CDAP Community DevelopmentAction Plan DEG DeutscheInvestitions- undEntwicklungsgesellschaftmbH DFIs DevelopmentFinanceInstitutions DOTS DevelopmentOutcomeTracking System DSCR Debt ServiceCoverageRatio EIB EuropeanInvestmentBank EIRR Economic InternalRateo fReturn * EPC Engineering-Procurement-Construction ERA ElectricityRegulatoryAuthority FMO NederlandseFinancierings-Maatschappijvoor Ontwikkelingslanden GDP GrossDomesticProduct HFO HeavyFuelOil IA ImplementationAgreement ICSID InternationalCenter for SettlementofInvestmentDisputes IDA InternationalDevelopmentAssociation IDC InterestDuringConstruction IFC InternationalFinance Corporation IPP IndependentPower Producers IPS(K) IndustrialPromotionServices(Kenya) Ltd. KfW KreditanstaltfUr Wiederaufbau MEMD Ministryof Energyand MineralDevelopment MIGA MultilateralInvestmentGuaranteeAgency NAFIRRI NationalFisheriesResourcesResearchInstitute NEMA NationalEnvironmentalManagementAgency NGO Non-GovernmentalOrganization FOROFFICIAL USE ONLY O&M OperationandMaintenance OP OperationalPolicy PAPS ProjectAffected Populations PCDP Public ConsultationDisclosurePlan PEAP PovertyEradicationActionPlan PPA PowerPurchaseAgreement PRG PartialRisk Guarantee Proparco Promotionet Participationpour la CoopkrationEconomique PS PerformanceStandard RAP ResettlementAction Plan RCDAP Resettlementand Community DevelopmentActionPlan REA RuralElectrificationAgency SEA Social andEnvironmentalAssessment SEAP Social and EnvironmentalAction Plan Sida SwedishInternationalDevelopmentAgency SSEA Strategic/SectoralSocial andEnvironmentalAssessment UEB UgandaElectricityBoard UEDCL UgandaElectricityDistributionCompanyLimited UEGCL UgandaElectricityGenerationCompanyLimited UETCL UgandaElectricityTransmissionCompanyLimited UJAS UgandaJoint Assistance Strategy VAT Value Added Tax WTP Willingness To Pay WPH WorldPower Holdings IWorld Bank(IDA): I IActing Vice President: I HartwigSchafer I Country Director: Judy O'Connor CountryManager: GraceYabrudy ISector Manager: I S. vijay Iyer I Task Team Leader: MalcolmCosgrove-Davies IFC: Vice President, Industries: 1 DeclanDuff IRegionalVice President: I EdwardA. Nassim I IndustryDirector: FranciscoTourreilles RegionalDirector: Thierrv Tanoh IIndustryManager: I DariusLilaoonwala I RegionalManager: JeanPhilippeProsper InvestmentOfficers: Adil Marghub,BelenCastuera, RomaniCurtis IMIGA: I IExecutiveVice President: 1 Yukiko Omura I Acting Director, OperationsDepartment: PhilippeValahu Director, Economicsand Policy: FrankJ. Lysy Task Team Leader: JasonZ. Lu This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Uganda:PrivatePower Generation(Bujagali) Project CONTENTS Page ISTRATEGICCONTEXTANDRATIONALE . ................................................................ 1 A. Country and Sector Issues ................................................................................................ 1 B Rationale for WorldBank Group Involvement ................................................................ . 8 C. Higher Level Objectives to whichthe Project Contributes .............................................. 8 D Additionality of WorldBankGroup Involvement............................................................ . 9 I1 PROJECTDESCRIPTION . ............................................................................................... 9 A.Bank Group Instruments................................................................................................. 10 B.Project Development Objective andKey Indicators....................................................... 14 C. Project Components........................................................................................................ 15 D.LessonsLearnedandReflected inthe Project Design.................................................... 17 E.Alternatives ConsideredandReasons for Rejection....................................................... 18 I11 IMPLEMENTATION . .................................................................................................... 19 A.PartnershipArrangements .............................................................................................. 19 B Institutional andImplementation Arrangements ............................................................ . 19 C .Monitoring and Evaluation of OutcomesResults........................................................... 22 D.Sustainability .................................................................................................................. 22 E Critical RisksandPossibleControversial Aspects ......................................................... . 22 F.LoadCreditlGuarantee Conditions andCovenants......................................................... 25 I V APPRAISAL SUMMARY . .............................................................................................. 25 A Economic Analysis ......................................................................................................... . 25 B Financial Analysis ofBujagaliEnergy Limited(BEL) .................................................. . 29 .. C.Financial Analysis of the Ugandan Power Sector.......................................................... -31 D.Technical......................................................................................................................... 36 E.Fiduciary ......................................................................................................................... 40 F.Social.................................. ............................................................................................ 40 G.Environment (Environmental Category: A) ................................................................... 43 H.SafeguardPolicies .......................................................................................................... 47 I.PolicyExceptionsandReadiness..................................................................................... 47 Annex 1:Countryand Sector Background ......................................................................... 48 Annex 2: Major RelatedProjectsFinancedby the Bankand/or Other Agencies ...........58 Annex 3: ResultsFrameworkandMonitoring ................................................................... 59 Annex 4: DetailedProjectDescription ................................................................................ 61 Annex 5: ProjectCosts andFinancingPlan ........................................................................ 67 Annex 6: ImplementationArrangements ............................................................................ 69 Annex 7: BujagaliEnergyLtd: TechnicalandFinancialCapabilitiesof Sponsors ........72 Annex 8: Procurementand Governance ............................................................................. 74 Annex 9: EconomicAnalysis ................................................................................................ 78 Annex 10: LakeVictoriaHydrology .................................................................................... 96 Annex 11:BujagaliEnergyLimitedFinancialProjections ............................................. 100 Annex 12: FinancialPerformanceoftheUgandaPower Sector ..................................... 102 Annex 13: IDA GuaranteeAgreements ............................................................................. 124 Annex 14: MIGA Guarantee .............................................................................................. 129 Annex 15: SafeguardPolicyIssues ..................................................................................... 131 Annex 16: ProjectPreparationand Supervision .............................................................. 159 Annex 17: Documentsin the ProjectFile .......................................................................... 161 Annex 18: Statementof IBRD LoansandIDA Credits ................................................... 163 Annex 19: Countryat a Glance .......................................................................................... 165 Annex 20: Maps ................................................................................................................... 166 UGANDA PRIVATE POWER GENERATION (BUJAGALI) PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTEG Date: March 29,2007 Team Leader: Malcolm Cosgrove-Davies Country Director: Judy M.O'Connor Sectors: Power (100%) Sector Manager/Director: SubramaniamV. Themes: Infrastructure services for private Iyer sector development (P) Project ID:PO89659 Environmental screening category: Full Assessment Lending Instrument: IDA Guarantee, IFC "A" Loan, IFC "Cy'Loan, andMIGA Guarantee Investment Officers: Adil Marghub/ Acting Director, Operations Department: BelenCastuera Philippe Valahu IndustryDirector: Francisco Tourreilles Director, Economics and Policy: Frank J. Lysy IIndustryManager: Darius Lilaoonwala Task Team Leader: Jason Z. Lu IFC Project ID: 24408 For Loans/Credits/Others: (US$m) 115 IDA PRG, 100 IFC A Loanand 30 IFC C Loan, 115 MIGA Guarantee FINANCING PLAN- US$OOO 1 YOof Total- Equity Project sponsors 151,570 19.0 Government 20,000 2.5 TotalEquity -171,570 21.5 - P Debt IFC 130,000 16.3 EIB 130,000 16.3 Commercial Banks (under IDA PRG) 115,000 14.4 ADB 110,000 13.8 EuropeanDFIs (*) 142,010 17.7 627,010 78.5 L ~~ (*)Thegroup of EuropeanDFIsincludesProparco,AFD, DEG, KfW, and FMO Borrower:BujagaliEnergy Limited Guarantor: Republic of Uganda ResponsibleAgency: Ministry of Energy andMineral Development Terms of Financing for (US$rn): IBRD/IDA Guarantee: FinalMaturity: 16 Amortization Profile: Tailored Grace Period: Upto 50 months Financing availablewithout [ ] Yes [XINo Guarantee: IfYes, estimatedCost or NIA Maturitv: Estimated Financing Cost or 16 years Maturity with Guarantee: Bank Group Participation: [XI IFC [XI MIGA Project implementationperiod: Start: 2007 End: 2011 Expected effectiveness date: July 2007 Does the project depart from the CAS incontent or other significant respects? Re$ PAD I.A No Does the project require any exceptions from Bank policies? Re$ PAD I K I [ ]Yes [XINo Have these beenapprovedby Bank management? _ _ NA I s approval for any policy exception sought from the Board? [ ]Yes [XINo Does the project include any critical risks rated "substantial" or "high"? Re$ PAD IILE , [ ]Yes [XI N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD I K I [XIYes No Project development objective Re$ PAD ILB, TechnicalAnnex 3 The project's mainobjective i s to provide least-cost power generation capacity that will eliminate power shortages at the time o f its commissioning. The proposed project would represent an increase o f 250 MW o f least cost installedpower generation capacity to the national grid. Project description [one-sentence summary of each component] Re$ PAD 11, TechnicalAnnex 4 The proposedPrivate Power Generation (Bujagali) Project i s a 250 MW runo f the river power plant with an adequate reservoir for daily storage, an intake powerhouse complex, and rock filled dam with a maximumheight o f about 30 meters, together with spillway and other associated works. The proposedproject will be constructed on the Nile River, at DumbbellIsland, approximately 8 kilometers north ofthe existingNalubaale and Kiirapower plants, inthe Republic o f Uganda. The proposed project i s structured as an IndependentPower Producer (IPP) which will sell electricity to UETCL under a 30-year Power Purchase Agreement (PPA) signed on December 13,2005. The powerhouse will be constructed to house 5x50 MW Kaplan turbines. The small reservoir will have an estimated surface area o f 388 hectares, extending back to the tailrace areas of the Nalubaale and Kiira. The proposed project will require238 hectares o f land take for the project facilities, o f which 80 hectares would be for new inundated areas adjacent to the Nile River. The land take includes 113 hectares required for temporary and ancillary facilities including temporary haul roads, coffer dams, storage and quarries. Evacuation o f electricity from the proposed projectwillrequirethe constructiono fabout 100kilometers o ftransmissionline, as well as the construction o f a substation. Which safeguard policies are triggered, if any? Re$ PAD IKG, TechnicalAnnex 15 Environmental Assessment (OPBP 4.0 l), Habitats (OPBP 4.04), Physical Cultural Natural Resources (OPBP 4.1l), Involuntary Resettlement(OPBP 4.12), Forests (OPBP 4.36), Safety o f Dams (OPBP 4.37), and Projects on International Waterways (OP/BP 7.50) Significant, non-standard conditions, if any, for: Boardpresentation: None Guarantee effectiveness: Re$ PAD 1113 Implementation: None I.STRATEGICCONTEXTANDRATIONALE A. COUNTRYAND SECTORISSUES RecentEconomic DevelopmentsinUganda 1. Country Context. With per capita income of about US$280in 2005, Uganda is one of the poorest countries in the world. Despite the progress in reducingthe national level of poverty, from 56% in 1992to 31% in 2006, the populationin the rural areas as well as the Northern and Eastern regions remains vulnerable - rural poverty accounts for 90% of the national level, and about 61% and 36% of the populationinthe Northand East, respectively, live belowthe poverty line. Uganda's demographic characteristics pose a challenge to future growth. The country has the third fastest naturalpopulationgrowthrate inthe world (3.5% in 2005); very high fertility (about 7 childrenper woman) and the world's highest dependency ratio (111 dependants per 100 working people and rising). Life expectancy is low - 49 years at birth. Without commensurate growth in infrastructure, employment opportunitiesand productivity, these characteristics of Uganda's demographics could result inareductioninsavings, investmentand growth. 2. Uganda has experienced robust macro-economic performance in recent years, with growth averaging 6.4% between 1990and 2005. Domestic inflationwas slightly above the 5% target for the third consecutive year due to pressuresfrom weather, power shortages and energy price shocks. The Uganda Shilling (USh) depreciated by 4% against the US dollar due to higher demand for foreign exchange to finance the import bill. Overall, due to good macroeconomic management, there is an increase in savings, exports, and foreign direct investment. Within the region, Uganda has been a leader inthe fight against HIV/AIDS, with prevalence droppingsignificantly duringthe past decade. The challenge for Ugandais nowto deepenthe reforms already underway and preventtheir reversal. 3. Although Uganda has made substantial progress towards achieving the Millennium Development Goals, more needs to be done to sustain progress and to improve the prospects for meetingall the goals. Special efforts will be neededto improvethe quality of education services to ensure that children complete primary education and to eliminate gender disparity at the post- primary levels of education. Greater access to quality healthservices is also essentialto significantly reduce childandmaternalmortalityrates. 4. Power Crisis Impacts on Economic Growth. Although economic growth and Uganda's external positionwere largely consistent with the Government's program for 2005/06, the ongoing electricity crisis has placed a significant strain on growth over the mediumterm. This crisis in the power sector consists o f substantialpower shortages that are attributableto delays in adding new generation capacity, a significant regionaldrought over the past few years, which has reduced the output of existing hydropowerplants, and annual demand growth for electricity o f about 8%. As a consequence, businesses and consumers have been forced to endure prolongedservice cuts, with some shiftingproductionto times when power is available, and many larger businessesrelying on high-costback-upgenerators. Manufacturing,high-valueagriculture(e.g., flowers) and processing industries (e.g., fish) are most affected by power cuts, and profits in these industries are being squeezed. Other macroeconomic consequences from the current power crisis were inflation that was slightly above projectionsthrough September 2006 due to higher energy costs and a widening o f the trade deficit due to higher oil prices and increases in diesel fuel import volumes for electricity purchased from thermal power plants. The present situation, with extensive load- shedding blackouts, is not sustainable and further delays in augmenting Uganda's electricity generation capacity could undermine the economy. The cost of unserved energy is estimated at US$38.9$/kWh. 5. Ugandan industrial growth has been constrained by spiraling energy and transportation costs, exacerbated by the current power shortages and both inadequate and poorly maintained infrastructure. By diversifying away from traditional exports and industries, such as the coffee sector, the Government is attempting to create a more stable and dynamic economic base. However, the infrastructure gap, particularly in energy and transportation, has placed extreme pressure on the cost o f doing business in Uganda, especially for the manufacturing and horticulturalsectors (see Box 1). 6. Uganda's Poverty Eradication Action Plan (PEAP). Uganda's development objectives are articulatedinthe 2004 PEAP, the third version of its poverty eradicationactionplan. The 2004 PEAP restates the country's ambitions of eradicating mass poverty and of becoming a middle income country in the next twenty years. It promotes a shift of policy focus from recovery to sustainable growth and structural transformation. The PEAP presents specific policies and measures to achieve its objectives, grouped under five pillars: (a) economic management; (b) enhancing competitiveness, productionand incomes; (c) security, conflict resolution, and disaster management; (d) governance; and (e) humanresources development. BankGroup/Donor Support for PEAP and Power Sector 7. Uganda Joint Assistance Strategy (UJAS). The UJAS was approvedby IDA'SBoard o f Executive Directors in January 2006 as the country assistance strategy, which was jointly prepared with seven other development partners. The UJAS lays out the strategy for supporting the implementation o f the third PEAP and achievement of the Millennium Development Goals. It promotes strong collaboration and harmonizationamong development partners and with the Government, as well as a stronger focus on results and outcomes.As part o f the UJAS harmonization agenda, an exercise to ensure effective division of labor among development partners has been launched. 8. Power Generation Investments. Investments in power generation facilities will increase the reliability and lower the cost o f electricity, thus contributing to the achievement o f PEAP Pillar 2. This pillar has as a specific objective to "strengthen infrastructurein support o f increased production o f goods and services." The UJAS aims to help ",.. create infrastructure that reduces the cost o f doing business, links isolatedareas o f the country to the broader economy, and promotes regional integration." This project will contribute directly to this pillar (see Box 1). 2 Box 1: Energy, Growth and Structural Transformation in Uganda The recently completed Country Economic Memorandumconcludes that Uganda's low level of electricity use could put a significant brake on structural transformation,and hence on future growth. Much of the Ugandan economy is rural and does not use electricity in production, mainly because it is unavailable in most rural areas. Since the mid-I990s, agriculture has been shedding labor, which has been finding employmentin off- farm rural enterprises (mainly trading, distributionand retail).Average labor productivity is higher outside of farming, and this movement of labor has led to improvementsin average output per worker. Food crop prices started to decline by more than the increase in agricultural productivity - with poverty amongst farmers increasing between 1999and 2002103.This is due in part to the lack of significant industrial demand for processing Ugandan agricultural output. Another reason is that most of the labor which moved out of agriculture still lives in farming households, growing their own food. For significant structural transformation to occur, Uganda needs to develop its agro-processing industry to create more jobs for the increasing labor supply moving out of agriculture. Given Uganda's population growth rate and current age structure, the workforce will more than double in the next 15 years. This makes it urgent to expand industry, tourism, and commercial services in order to create jobs for a growing labor force at higher average labor productivity, otherwise growth in average per capita income will slow down, reducing the prospects for poverty reduction. These sectors are currently the most energy intensive in Ugandaand will therefore rely on a reliable, affordable and expanding supply of power. Power Sector Context Overall GovernmentStrategy 9. The Government's power sector strategy has been to: (a) promote legal, regulatory and structural sector reforms, including leveraging private sector investment; (b) provide adequate, reliable and least cost power generation with the goal to meet urban and industrial demand and increase access; and (c) scale up ruralaccess to underpinbroad baseddevelopment. The World Bank Group and the donor community have supported the Government's power sector strategy and reformedpolicyframework, includingcatalyzingprivatesector managementandcapital. 10. Over the past sevenyears, the Governmenthas: 0 Promulgateda new ElectricityAct; 0 Created an independent Electricity Regulatory Authority (ERA), which has established a strongtrack recordinensuringthe financialviability ofthe sector (see Annex 1); 0 Unbundledthe state-owned Uganda Electricity Board into separate entities responsible for generation, transmission and distribution, and concessioned the generation and distribution facilities to the private sector (see Annex 1 for details on the Government's comprehensive power sector reformprogram); 0 Increased the number of urban and rural households with direct access to electricity, promoted grid and off-grid private sector-led rural electrification and established a Rural ElectrificationAgency (REA); 0 Pursuedleast cost power investmentsto provideadequateandreliableservice; and 0 Collaborated with the East Africa Community on regional power interconnection. This regionalapproachis expectedto benefit all countries involvedby diversifyingsupply sources andreducinginvestmentcosts. 11. In this context, the Government has supported the development of the proposed Private Power Generation (Bujagali) Project. The proposed project is structured as an Independent Power Producer (IPP) and will sell electricity to Uganda Electricity Transmission Company Limited (UETCL), under a 30-year Power Purchase Agreement (PPA), signed on December 13,2005. Main Sector Issues and Government Responses 12. In spite of the significant structural reforms implemented in the power sector, Uganda is confronted by a number of short and medium term challenges in this sector which are affecting growth. The main issues andthe Government's responses are describedbelow. Issue 1:Power Shortages 13. Uganda's main source of power is from the Nalubaale and Kiira 380 MW' dam complex, locatedat the mouth of Lake Victoria. Electricity output from the NalubaaleKiira dam complex has declined from around 200 M W in April 2005, dropping gradually to reach 170M W by January 2006, reducing further to 135 M W (equivalent to water discharges of 850m3/s)from February 2006 to August 20,2006. Since then, hydropower production has droppedto 120M W (equivalent to water discharges of 750m3/s). In contrast, current system demand is about 380MW at peak times and about 290 M W at base load, resulting in persistent and acute power shortages which are impacting growth. The reasons for these power shortages are fourfold. First, there has been a significant delay in power infrastructure development and, in particular, in completing the financing of the previous Bujagali project, which is the next least-cost generation increment. As part of the previous effort to develop the project, construction was scheduled to commence in early 2002 and the power station was to be commissionedby the end of 2005. Second, the low Lake Victoria water levels, causedboth by the recent regional drought as well as water over-abstraction for hydropower generation, have resulted in significantly reduced power generation output at the NalubaaleKiira dam complex. In this regard, the Government has decreased hydropower production in an effort to return to the principles embodied in the Agreed Curve2.A third contributor to current power shortages has been the high level of technical and non-technicallosses of the distribution system, which are now being addressed by UMEME, the private sector concessionaire. Fourth, annual demand growth over the past severalyears increasedby about 8%, placing additional pressure on the power system. 14. It is noteworthy that ifthe previous Bujagali project had been successfullyfinanced in2002, Uganda would have been able to avoid the current economic penalties. Moreover, the reductions in Lake Victoria water levels from over-abstraction for hydropower production may not have occurred. This is because the Bujagali project is downstreamof the current NalubaaleKiira dam complex, and will re-use the upstream water releases. When commissioned, the proposed project will produce power at a cost significantly lower than what Uganda is now paying for the supply from thermal power plantsrunning on importedfuel. I The currentcommissionedcapacityo fthe dam complex is 300 MW.Two additional 40 MW Kiiraunits are 'scheduledforCurve commissioning inApril 2007. The Agreed describesa water dischargeratingcurvewhich emulatesthe naturalrelationshipbetween Lake Victorialevelsandthe flow o ftheNile Riverthroughthe Nalubaaleand Kiiradam complex. It depicts the management ofthe Nalubaaleand Kiiradams inwhichthe volume of water releasedwould remainconsistent with what would have occurredunder naturalconditions, thereby ensuringno change in downstreamdischarges. Sincethe Agreed Curve functions as an operatingrule for water discharge, such water releases are a functionof the lake levelat any given period. 4 15. GovernmentActions Already Taken -Augmenting Power Supply. The Government has contractedtwo 50 M W thermal generation plants running on Automotive Diesel Oil --the only available short-term technical option given transportation and fuel logistics. The first 50 M W was commissioned in May 2005 and the second 50 M W was contracted in late 2006, and are being operated by the private sector. In addition, a proposed Power Sector Development Operation (US$306.5 million, of which US$6.5 million is from the SwedishInternational DevelopmentAgency (Sida) and US$300 million is from IDA), is scheduled for Board Presentationin April 2007. This Power Sector Development Operation will include: (a) the contracting of an additional 50 M W of thermal generation capacity to help meet existing electricity demand; (b) demand side management and energy efficiency measures; and (c) general budget support to assist the Government in absorbing a portion of the high costs of thermal power generation. The Operation will also help to finance a broad energy communications strategy. These three 50 M W thermal plants would operate until the proposed Private Power Generation (Bujagali) Project is commissioned in early 2011. Furthermore, the Government is negotiating an IPP for a 50 M W permanent thermal plant based on less cost`ly Heavy Fuel Oil (HFO). This permanent plant will replace 50 M W of existing thermal plant running on Automotive Diesel Oil (ADO). This permanent plant would provide thermal complementation to the Ugandan power system over the long term and is consistent with the least cost plan for the power sector. The Governmenthas also reporteda domestic oil resource discovery in the Lake Albert region of western Uganda, which would need to be proven as economically viable; this is not expected to have any impact on power generation before 2011. The Government concluded an agreement with Kenya to import up to 10MW on a non-firm capacity basis, i.e., dependinguponavailability. Some imports have alreadytaken place. 16. The Government is also actively pursuing co-generation opportunities, accelerating its renewable energy programand geothermalpotential, including the following: The Governmententered into power supply arrangements with the Kilembe Minesto provide 2.3 M W of power to the grid for 24 hoursper day andthe Kakira Sugar Company will supply 12M W to the grid in the near future for 18 hours per day. Beyond this, the Kakira Sugar Company will also self-generate 6 M W for its internal use, so that this capacity is not requiredfrom the national grid. Additional mini-hydro schemes are under active development with the support of the Energy for RuralTransformationProject(Credit 3588-UG). A Renewable Energy Policy Framework has been prepared for Cabinet approval. It aims to promote additional renewable energy development. By 2009, at least 3 mini-hydro transactionswith a total capacity of 26 M W are expectedto produce grid-basedelectricity. Indigenous geothermal investigations have been accelerated under the IDA supported Power IV Project (Credit 3545-UG). 17. Improving Power Transmission & Distribution Performance. A key element of the Government's power sector reform program has been to concessionthe power distribution facilities to the private sector as a means to underpinthe commercialviability and sustainability of the power sector. In March 2005, UMEME, the private concessionaire, took over the operations of the distribution system under a concession agreement that includes financial incentives to increase the number o f connections, reduce technical and non-technical losses and increase the collection rate (see Annex 1). At the time of UMEME's takeover, system technical and non technical losses were around 38% (or 43% including 5% transmission losses). The billing collection ratio was SO%, implying that prior to the UMEMEconcessiononly about 47% of the energy sent out to the national 5 grid was paid for. Since March 2005, UMEME has improved the collection rate from 80% to 92% (although the rate dropped to 82% in December 2006 since the June and November tariff increases), decreased technical and non-technical losses to about 34%, and connected about 36,000 new customers. During the first 22 months o f the concession, UMEME invested US$13.6 million for system improvements, and has committed to invest a total o f US$65 million during the first five years o f the concession. Due to years o f neglect o f maintenance, inadequate investment, poor management practices and antiquated billing and accounting systems, it will take time and capital to lower technical and non technical losses. This requires implementing a customer verification program, installing new customer management and accounting systems, as well as replacing and installingmeters, transformers and poles, which are under way. 18. The lack o f power available for sale, and the 94% cumulative increase in average electricity tariffs that took place in 2006, have affected UMEME's viability. A major challenge, therefore, has been to ensure that UMEME's performance under conditions o f stress is not further impeded by the impact o f reduced electricity supply and high tariffs. To this end, the Government and UMEME recently renegotiated portions,of the concession agreements to protect UMEME during the current power crisis from the impact o f power shortages and the reduced revenue stream, which are factors beyond UMEME's control but have a bearing on UMEME's ability to meet its concession obligations. The Government and UMEME are cognizant that due to the expensive thermal costs in the current generation mix, there is an urgent need to achieve accelerated efficiency improvements in the short to medium term. The restructured concession agreement includes commercial incentives for the concessionaire to further reduce losses and non-collection rates. Issue 2: Power Sector Finances 19. The impact o f the high cost o f thermal power on the Uganda power system is considerable, given the small size o f Uganda's installed generation capacity, the low percentage o f such installed capacity currently being used, and the high cost o f thermal capacity. Electricity end user tariffs before Value Added Tax (VAT) would have to increase from US$17.2$/kWh today to around US$26$/kWh if consumers were to bear the full cost o f electricity. This is mainly due to the change ingenerationmix, from a predominantly hydro-based system inmid-2005, to a hydrolthermal mix o f 55/45 today. The share o f thermal generation is expected to further increase when an additional 50 MW temporary thermal plant, to be financed under IDA'Sproposed Power Sector Development Operation, is commissioned later this year. Prior to the power crisis and consistent with the Government's reform program, the full cost o f electricity supply was being borne by customers. The Government recognizes, however, that during this crisis period, there are affordability thresholds which ifcrossed, could have serious long-term impacts on the economy. 20. Government Actions Already Taken. In response to the current power crisis, the Government has developed a financing plan (2007-11) to meet the high cost o f thermal power generation which includes: (a) deferment o f USh128 billion (US$67 million) o f debt service to the Government to 2011; the sector should be in a position to repay all o f the deferred debt service by end 2011 and will be expected to meet all o f its debt service obligations to the Government from 2011 onwards; (b) budgetary transfers o f USh92 billion (US$49 million) annually in 2007 and 2008, USh28 billion (US$15 million) in 2009, and USh66 billion (US$34 million) in 2010; and (c) IDA support towards thermal power costs through the investment project o f the proposed Power Sector Development Operation (US$206.5 million3). Electricity tariffs are expected to decline once the 3Thetotal amount ofthe proposedOperation is US$300 millionincludingUS$80 millionofgeneralbudget support and US$ 13.5 million of Technical Assistance, Energy Efficiency and Demand Side Management 6 proposedproject is commissioned inearly 2011andthe benefits of the loss reductionand efficiency improvements are realized. In real terms, under the base case scenario, the projected weighted averageelectricitytariff declines from the presentUS$17.2#/kWhto US$13.8#/kWhby 2011. Issue 3: Long termSector Expansionand Increased UrbadRuralAccess to Electricity 21. The long term expansion of the power sector requires: (a) the addition of least cost sustainablepower generation, transmission and distributioninvestments, (b) improvingthe currently low access to electricity,and (c) regionaltransmission integration. 22. Addition of Least Cost Sustainable Power Generation. In the long run, the Government recognizes the importance of planning and developingfuture power sector investments in a timely manner and on a least cost basis. Furthermore, since the recent drought period, which drastically reduced the availability of hydropower output from the NalubaaleKiira dam complex, the Government has also recognized the economic advantage of maintaining an appropriate level of thermalgeneration capacity to complementthe hydropower system. 23. Government Actions Already Taken. The Government is proceeding with the proposed project, which represents an important long term least cost and sustainable generation expansion. When commissioned in2011, the proposedproject would immediatelydisplace at least 738 GWh of diesel generation, thus demonstrating the economic penalty of the long delay in realizing its implementation.In addition, the Government is negotiatinga 50 MW permanentthermal plant on an IPP basisto operate on less costly HFO. This plant will complement Uganda's power generationmix on a longterm basis and in periods of low hydrology, in a more cost effective way than the existing AutomotiveDiesel Oilfiredthermalgenerationplants. 24. Low Electricity Access Levels. Uganda has one o f the lowest rates of per capita energy consumption in the world, with only 5% of the population having access to electricity. Service expansion in urban and rural areas has been hampered in the past by political, commercial and technicalissues. The lack of adequatepower generationcapacity, which has beenpartially addressed through the commissioningof high-cost thermal power generation, has also hindered progress on expandingurbanaccess to electricity. 25. GovernmentActions Already Taken. The Government is addressinglow electricityaccess through: (a) the Energy for Rural Transformation Program (Credit 3588-UG), which aims to establish the institutional and legal framework for rural electrification and a Rural Electrification Fund and to facilitate scale-up of rural access which would otherwise not be a commercial proposition.This program supports the development of small and medium-scale renewable energy options, including both grid-connected and off-grid mini and micro-hydropower, bagasse based cogeneration, and biomass gasification; (b) an acceleratedplanto reduce system losses and connect new customers; (c) support to UMEME through US$12million for rehabilitationinvestments under the Power IV Project (Credit 3545-UG); and (d) IDA and MIGA risk mitigationfor UMEME, the privatedistributionconcessionaire4. measures.Howeverthose additionalUS$93.5 millionare not takeninto account for the mitigationofthe US$348 million operational shortfall. 4A PartialRisk IDA guaranteemechanismwas approvedunderPrivatizationandUtility SectorReformProject (Credit 3411-UG) in December2004. MIGA also supportedUMEME in2004 (MIGA/R2004-0076) as well as the subsequentrestructuringo fthe UMEMEconcessionin2006 (MIGNR2006-0059). 7 26. Substantial improvements in urban and rural access rates are anticipatedin the medium to longterm. UMEME is obligedto invest US$65 million duringthe first five years of its concession, and the Energy for RuralTransformation(ERT) Programwill beginwith its secondand third phase inthe nearfuture andwill support the REAover the next 6 years. B.RATIONALE FORWORLD BANKGROUP INVOLVEMENT 27. Electricity is a critical element o f the Government's PEAP. Even though the Government has implemented a comprehensive power sector reform program, established a positivetrack record in electricity regulation and privatized distribution and generation facilities, electricity service quality, availability and reliability have been major impediments to sustained private investments and economic growth. The combined financial resources of the World Bank Group and other internationaldevelopment financial institutions(DFIs)' are crucial to mobilize a considerable level of private funds and commercial bank lending for the proposed project (total project costs of US$798.6 million), which is the next least cost generation option for the country. The successful implementationofthe proposedprojectwill also helpto underpinthe financial viability of the power sector and the progress made on implementinga comprehensive power sector reform program, and will facilitatebuildingprivatesector confidence inUganda(see Annex 1). 28. Fitwithin the World Bank Group Strategy. The proposedprojectfits well with the UJAS as well as with IFC's strategy for the power sector in Sub-Saharan Africa, whereby IFC is focusing its efforts onthe development, from an early stage, of Public PrivatePartnerships in countries with a clear commitment to sector reform; and with IFC's strategy for Uganda, which is centered on the following objectives (as outlined in the 2003 Strategic Initiative for Africa): (a) ,improving the investmentclimate, (b) enhancing support to small and medium-scaleindustries, and (c) proactively developing large privateinvestments. 29. MIGA has undertaken projects in the agribusiness and power sectors in Uganda and has been working closely with IDA to support Uganda's power sector reformand stability. This project is consistent with MIGA's strategic priority of supporting infrastructureprojects, as well as MIGA's objective of increasing its exposure in Africa. The proposed project will be one of the largest IPPs supportedby MIGA inUganda, as well as inAfrica, and should have a positive demonstrationeffect for other potentialforeigninvestments inthe moreregulatedsectorsof Ugandaandother countries in the region. 30. The proposed project also complements the various programs currently being implemented in the sector by the World Bank Group (Annex 2). The proposed project is expected to make a significant contribution to improving Uganda's investment climate; not only will it provide much needed reliable generation in a cost effective manner, includingfor medium-scale industries, but it will also be Uganda's largest private sector investment to date. Therefore, it is expected that the successful completion of the project will promote further private sector investment in the country and establish a standardthat can be replicatedby other countries and investors inthe region. c.HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES 31. A key objective of the UJAS is to reduce poverty through rapid economic growth, which depends upon increased foreign and domestic private investment. Access to infrastructure, specificallyreliable and affordable power, is criticalto attract investment and promote growth. The Other international DevelopmentFinanceInstitutionsinvolvedinthe proposedprojectinclude:EIB,ADB, FMO,DEG, KfW,ProparcoandAFD. 8 Government's strategy for the power sector is expectedto improve service delivery and reliability of supply through private ownership and management; and expand access to reliable and clean electricity for households, industries, and social infrastructure such as schools, clinics, hospitals, and water systems. The execution of these measures will contribute to poverty alleviation through income and employment generation, thereby improving the quality of life in Uganda, and will increase growth in economic activity. In addition to placing the power sector on a commercialbasis, the provision of least-cost power will foster economic activity and generate fiscal revenues, thereby increasing budgetary resources which the Government can direct to health, education and other activities benefiting the poor. Moreover, financing through private sector participation in the proposed project allows the Government to fund social and other sector expenditures for which private capital is not currently available. D.ADDITIONALITY OFWORLD BANKGROUP INVOLVEMENT 32. The World Bank Group involvement in the proposed project is expected to provide: (a) comfort to first-time investors inUganda's power sector (including sponsors, commerciallenders and DFIs); (b) access to long term financing, leading to a more affordable tariff for the proposed project; and (c) project structuring advice, based on international experience, which ensures the project's bankability. In addition, the World Bank Group has taken the lead among the DFIs in the environmental, social and economic due diligence relatedto the financing o fthe project. 33. The project is one of the largest private sector financings in the power sector in Sub-Saharan Africa. The funding market available to Bujagali Energy Limited(BEL, the private project company) includes commercial and development finance institutions. However, given the required level of debt financing (approximately US$627 million), the successful implementation of the project requires a coordinatedapproach andjoint commitment of the World Bank Group and other key DFIs. Similarly, the MIGA guarantee is a precondition for one of the two project sponsors' approval to invest in the proposed project. It ensures the participation of an experienced power developer, who will play a particularly critical role during the project construction phase, when risks are the highest. IFC's investment in the proposed project would be among IFC's largest single-obligor exposures in Sub- SaharanAfrica, once fully disbursed. 11.PROJECTDESCRIPTION 34. The proposed Private Power Generation (Bujagali) Project is a 250MW run of the river power plant with an adequate reservoir for daily storage, an intake powerhouse complex, and a rock filled dam with a maximum height of about 30 meters, together with spillway and other associated works. The proposedproject will be constructedon the Nile River, at Dumbbell Island, approximately 8 kilometers north of the existing Nalubaale and Kiira power plants, inthe Republic of Uganda. The proposed project is structured as an IPP which will sell electricity to UETCL under a 30-year PPA signed on December 13, 2005. The powerhouse will be constructed to house 5x50MW Kaplan turbines. The small reservoir will have an estimated surface area of 388 hectares, extending back to the tailrace areas of the Nalubaale and Kiira dam complex. The proposed project will require 238 hectares of land take for the project facilities, of which 80 hectares would be for new inundated areas adjacent to the Nile River. The land take includes 113 hectares required for temporary and ancillary facilities including temporary haul roads, coffer dams, storage and quarries. Evacuation of electricity from the proposed project will require the construction of about 100 kilometers of transmission line, as well as the construction of a substation at Kawanda, and the extension of the Mutundwe substation(the Interconnectionproject). 9 35. Background.A previous effort to develop a hydroelectric power project at Bujagali was undertaken by the AES Corporation (AES - a US power company). The World Bank and IFC's Boardo fDirectorsapprovedthe Bujagaliprojectbeingdevelopedby AES on December 18,2001. In the end, AES withdrew from the project which led to a termination of the agreements by the Government in September 2003, Subsequently, the Government initiated a transparent bidding process in adherence with the Government's procurement guidelines, to seek a new project sponsor to develop the Bujagaliproject. 36. The environment in which the current project is beingdeveloped has substantially changed from that in 2001. This includes: (a) a reformed power sector structure, in which an independent electricity rGgulator has been established, and generation and distribution has been unbundled and concessioned to the private sector; (b) increased demand for electricity in the face of declining generation output; (c) an improvedsector financial structure, which is now under stress because of the current power sector crisis that has requiredexpensive thermalpower generation and has led to significant tariff increases; and (d) improvedgovernance standards; the current sponsors have been selected following a transparent, international competitive bidding process. In turn, the sponsors selectedthe Equipment, Procurement, Construction(EPC) contractor on a competitivebiddingbasis and requiredthe contractors to signupto a Code of Conduct. A. BANKGROUPINSTRUMENTS 37. The proposed project, a major infrastructure investment in the East Africa Region, would benefitfrom an IDA partialrisk guarantee, IFC lendingand a MIGA guarantee.The Government has requested the provision of an IDA Partial Risk Guarantee of up to US$115million to support the commercial lenders involved in financing the proposed project. In addition, BEL has requestedan IFCA Loanof upto US$lOO millionand an IFC C Loanof upto US$30 million, while Sithe Global Power LLC, one of the two project sponsors, has appliedto MIGA for politicalrisk insurance for up to US$115 million through its wholly-owned subsidiary, World Power Holdings (Luxembourg) (WPH). The total World Bank Group exposure to the proposed Bujagaliproject would be of up to US$360 million. Inview of the significant amount of privatecapitalrequired, the perceived country and sector risks andUganda's limitedtrack-recordinattractingprivatecapitalfor large infrastructure investments, the proposed project would not be financeable for equity investors and commercial lenders without the direct support of the DFIs, MIGA, IFC and IDA. BEL and the commercialbank lender group have indicatedthat broadWorldBank Group participationis also criticalto mitigatethe risks associatedwith the provisionof long-termfinancing for a hydropower project in Sub-Saharan Africa. Given the significant capital required for the project, the limited availability of donor financing, and the benefits of mobilizing private investment, the proposed project has been developedas a Public PrivatePartnership. RiskSharingArrangements 38. The contractual structure of the transaction and the allocationof the commercial, technical andpoliticalrisk amongthe parties are consistentwith industrystandards for limitedrecourseproject financing. As it is customary in project finance transactions, risks are allocatedto the party best able to mitigate them. BEL ultimatelybears the technical, commercialand financingrisks of the project. BEL has signed a PPA with UETCL for the sale of electricity generated by the project, and an Implementation Agreement (IA) with the Government, which outlines the Government's project obligations, includingthe terms of the guarantee to back UETCL's payment obligations under the PPA. 10 39. The allocation of key risks among equity holders, lenders, the Government and the risks backedby the IDA PartialRisk Guarantee (PRG) andMIGA's guarantee are summarizedinTable 1 belowand inthe subsequentparagraphs, as well as inAnnexes 13 and 14. Phase RiskdObligations Sponsors Lenders GOU World Bank Group RiskMitigation Package Pre-Construction Pro-jectDesign Construction delays lementation o f Environmental 40. Pre-construction Risks. The key risk duringthe pre-constructionphase is BEL'Spotential inability to mobilize sufficient financing for the project and reach financial closure. The proposed project will be financed through equity and debt in approximately21:79 proportion.Equity will be contributedup front by the Government (throughits contributionofproject assets) andby the project sponsors, in advance of loan disbursements. The sponsors have adequate resources to finance the proposedproject, and have already posteda US$4.5 million bondwith the Government.Most ofthe project debt financingis beingprovidedby DFIs, with the remainingdebt comingfrom commercial banks, with an IDA PRG enhancement. All o f the lenders are planning to obtain management approval for their financingfor the projectduringAprilMay 2007, consistent with the planned date of financial closure of mid 2007. In parallel the Government is also consideringa bridge loan o f about US$75 million to BEL so that BEL can lock in the current EPC contract price prior to expiration of the bid validity by the end of April 2007 and start construction prior to financial closure, incase there is anunforeseendelay inachievingthis milestone inaccordancewith the above mentioned schedule. The bridge financingis expected to be repaidfrom the proceeds of the project permanent financing. The terms o f bridgefinancingwould be providedto the World Bank Group on finalization. 41, ConstructionRisks. The two key risksduringthe constructionphase(Le., cost overruns and constructiondelays) are discussedbelow: 0 Cost Overruns: The EPC contract will be a fixed price turnkey contract between BEL and Salini CostruttoriSPA (Italy) (with Alstom Power Hydraulique, France, beingone of its key subcontractors), which has adequate experience of undertakingsimilar projects.Changes in the EPC contract price are only allowed under very specific circumstances, such as for changes in law, approved change orders by BEL and for geologicallgeotechnicalconditions beingworse than those determined in the baseline reflectedin the EPC contract. Thus, there is limited likelihood of EPC cost increases once the EPC contract is finalized. Moreover, the PPA structure providesan incentiveto BEL to minimizeany cost increases, as BEL will only be allowed to recover 70% of such additional costs through the project tariff, while the 11 remaining 30% will be absorbed by BEL. Conversely, BEL is incentivizedto attain cost reductions, since 30% of such savings would be for BEL'Sbenefit, with the remainder 70% contributing to reduce the project's tariff, While BEL would be able to recover additional costs resultingfrom a variationinthe ground conditionsrelativeto those initially identified, other costs, such as BEL'Sdevelopmentcosts, are capped. Construction Delays: BEL is entering into a date certain turnkey EPC contract for the constructionof the hydropower plantthat will requirethe EPC contractor to meet BEL'S44- month constructionschedule and delays will result in the payment of penalties to BEL. The contractor obligation for delay penalties mitigates BEL'Srisk in case the commissioning of the power plant is delayed beyond 47 months (other than for reasons of force majeure and events o f a similar nature), when BEL would be requiredto start payingpenalties to UETCL. BEL would eventuallyface the risk of termination of the PPA ifthe delays were protracted and not resolved. 42. Operation Risks. BEL is requiredto provide a contracted capacity of 250 MW and achieve on average a target availability of 95% during its first year of operations, and 96% thereafter. Failure to achieve such targets is penalized in the PPA through reductions in the capacity payments. This risk is mitigated through the EPC and operations and maintenance (O&M) contracts, where the contractors are requiredto meet the relevant performancespecifications.The proposedproject is not complex from a technicalpoint of view. Thus, the risk of not meetingthe agreedplantavailability is consideredto be relativelylow. The evacuation of maximumelectricityoutput fromthe plant would require 100 km of transmission lines, the construction of a new substation at Kawanda, and the extension of the Mutundwe substation (the InterconnectionProject). Since the constructionperiod for the transmission lines and substations is significantlyshorter than that of the power plant,there is a minimal risk of a completion mismatch. To mitigate this risk, the completion o f 8 km of transmission line connectingthe projectto the NalubaaleKiiraswitchyardwill enablethe evacuation o f approximately 180 MW from the proposed project, until the Interconnection Project is commissioned.The hydrologyrisk is borne by the power purchaser (UETCL), whichhas the rightto terminate the agreements and purchase the hydropower plant in case of an extended period o f extremely low hydrology. ProposedIDA PartialRiskGuarantee 43. The proposedIDA PRGwill providea guarantee to commerciallenders against debt service payment defaults resulting from the Government's failure to meet its payment obligations as stipulatedunder the IA and the Government Guarantee. The proposedIDA PRG is non-accelerable; therefore, principal and interest on the IDA Guaranteed Facility between the commercial banks and BEL would be coveredby IDA only as they become due. 44. The commercial and performance risks described above, as well as natural force majeure risks directly affecting the project, will ultimately be borne by BEL. The obligations of the Government under the project's contractual agreements (principally the PPA and IA) to be covered under the IDA PRG are discussed below, and explained in further detail in the IDA Guarantee Agreements Term Sheets (Annex 13). These covered obligations will form the basis o f the IDA Guarantee Agreement between IDA and the Agent Bank, representing the IDA guaranteed commercial lenders. Under the IDA Guarantee Agreement, commercial lenders will be entitled to demandthe portionof any principaland/or interest debt payment whichhas fallen due underthe IDA guaranteed commercial loans and that has not been paid by BEL as a result of the failure of the Government to pay amounts due under either the IA or Government Guarantee. Government payments could be with respect to periodic capacity payments or terminationpayments, inthe event 12 that the projectwas terminated. Inthe case of a dispute betweenthe Government and BEL inrespect of such payments, the IDA PRG would be callable only if the Government is obligated to pay and has failed to do so as provided under the relevant contractual dispute resolutionprovisions. If the Government, however, takes legal action to prevent dispute resolution in contravention o f the applicable dispute resolution provisions, then the IDA guaranteed commercial lenders would be entitledto demandpaymentunderthe IDA GuaranteeAgreement. 45. If IDA were called upon to make payments under the IDA Guarantee Agreement, IDA would seek reimbursement from the Government of any and all claims and other expenses it suffers under the Indemnity Agreement. Under the Indemnity Agreement between IDA and Uganda, the Government will: (a) indemnify IDA for all claims paid under the IDA Guarantee and related expenses; (b) carry out any obligations(e.g., environmental) the Government may have accepted for IDA'Sbenefit; and (c) perform all o f its obligations under the transaction documents. IDA would reserve its rightsto demandimmediate reimbursement from the Government inthe event of an IDA payment under the IDA Guarantee. Consequently, there would be a clear financial incentivefor the Government to avoid defaultingunder the project and financingagreements so as to avoida call on the IDA PRG. Any such Government default would also have an impact on other lenders and could leadto the eventualterminationof the project and enforcement of the project security arrangements. As guarantor of the Government's performance, IDA'Sdirect risks relate to project risks borne by the Government and covered under the IDA Guarantee. However, ultimately, IDA would bear the risk of non-payment by the Government under the Indemnity Agreement, for which IDA is well- suited in its role as a long-termlenderto the Government. 46. IDA will enter into a Project Agreement with BEL. The Project Agreement will contain standard covenants, representations and warranties, includingthat BEL has acted and will continue to act in compliance with all applicable World Bank Group policies and procedures, includinganti- corruption, and social and environmental policies, and will provide IDA with necessary project information. PrincipalIDA-GuaranteedRisks 47. The IDA PRGwould cover the risk of debt service default for the coveredlendersarising fromthe followingcategories of events: 0 Politicalforce majeureevents; 0 Changes in law and events makingthe project contractual agreements unenforceableor void, or making the performance of BEL or its EPC contractor (and related parties, such as subcontractors) unlawful; 0 Government imposed restrictions on the ability of BEL to be paid or to receive foreign currency or transfer funds abroad; and 0 Failureby the Government to fulfil its payment obligationsrelatingto UETCL's purchase of power andterminationpayments due by UETCL. IFC Financing 48. The lenders' terms for the financing of the project will be documented as part of the project's Common Terms Agreement (see Annex 5). Terms specific to each of the lenders (such as loan amounts, maturity and interest rates) will be reflectedin each of the lenders' loan agreements. 13 IFC is supporting the project through an US$lOO millionA Loan and a US$30 million C Loan to BEL. 49. The key parameters of IFC financing are: A Loan(for IFC's account) Borrower: Bujagali EnergyLimited Amount and Currency: Up to US$lOO million (senior loan) Maturity: Up to 16 years Other Terms: To be determined C Loan(for IFC's account) Borrower: Bujagali Energy Limited Amount and Currency: Up to US$30million (subordinatedloan) Maturity: Up to 20 years Other Terms: To be determined MIGA Guarantee 50. MIGA proposes to offer World Power Holdings Luxembourg SarL (WPH or the Guarantee Holder, a Luxembourg incorporatedcompany and a wholly-owned subsidiary of Sithe Global Power LLC), a guarantee covering its equity investmentof upto US$127.8 million in BELvia SG Bujagali Holdings Ltd. (Mauritius), a wholly-owned subsidiary o f WPH incorporated in Mauritius. The coverage would be offered for a period of up to 20 years against the risk of Breach of Contract by UETCL and the Government o f certain obligations under the PPA, the IA and the Government Guarantee. In line with MIGA's standard policy, MIGA will guarantee 90% of WPH's equity (including a portion of the sponsor's return during the construction period on its initial paid-in equity, to be included in the tariff), which will translate into MIGA's gross exposure of up to US$115 million. MIGA's net exposure under this project would be up to US$57.5 million after treaty reinsurance.Annex 14 providesdetails on MIGA's Breach of Contract coverage. Table 2: MIGA UnderwritingStructure TotalGuaranteeIssued(90%) Less CooperativeUnderwritingProgram TotalMIGA (Gross) FacultativeReinsurance B.PROJECT DEVELOPMENT OBJECTIVEAND KEYINDICATORS 51. The project's main objective is to provide least-cost power generation capacity that will eliminate power shortages. The proposed project would represent an increase of 250 M W of least cost installedpower generationcapacity to the nationalgrid. The project's outcome indicatorsare: 0 BEL'Selectricity generated(GWh) from the proposed250 M W power station; 14 0 Levelizedcost of electricity($/kWh)from the Bujagalipower plant; and UnmetDemand(GWWmonth). 52. The project's intermediate milestones/outputs related to the commissioningof the power plantontime andwithin budget. Inparticular,the followingaspects wouldbe monitored: 0 Achievement of financial closure date; 0 Plantconstructionprogress; 0 Plantconstructioncosts; Trial runresults; and Commissioningtest results. C. PROJECTCOMPONENTS ProjectCost and FinancialPlan 53. The total financingrequiredfor the proposedPrivatePower Generation(Bujagali)Projectis estimated a US$798.6 million. This is based upon a fixed price EPC Contract between BEL and Salini Costruttori SpA (Italy), which represents approximately 65% of total project costs. Tables 3 and4 providethe projectcost andthe financingplan. Table 3: PrivatePower Generation (Bujagali) Project Costs by Component Governmentcontributedassets (1) InterestDuring Construction; (2) Debt ServiceReserveAccount 15 Table 4: PrivatePower Generation(Bujagali) ProjectFinancingPlan CommercialBanks(under IDA PRG) (*)The group ofEuropeanDFIs includesProparco,AFD, DEG, KfW, andFMO. The preciseamount ofdebt from each entity is beingfinalized. 54. The World Bank Group andother project lendershavetaken several steps to verify that costs for the proposed project are reflective of current market conditions. BEL has conducted the procurement of the EPC contractor under the EIB's procurementrules. In additionto the review of bid prices conducted by BEL'SOwner Engineer, the EPC contract price and conditions are being reviewed by the lenders with the assistance of their Independent Engineer before finalization. It should be noted that the next higher bid received by BEL for the EPC Contract was approximately 43% abovethat ofthe winningbidder. 55. Costs for the Proposed Private Power Generation (Bujagali) Project have increased substantiallycompared to the EPC contract of six years ago. BEL'Shard costs (i.e., the EPC costs) are 62% higher than those of the 2001 EPC priceof US$315 million, and currently stand at US$511 million, excluding spares (Le., US$2,044/kW in 2006 compared to US$1,260/kW in 2001). In additionto the impact of inflation,this cost increase is the result of the rapid increase in the price of raw materials driven by high worldwide demand, and a tight market for qualifiedEPC contractors. Second, equipment costs in Uganda are much higher than those for markets with a substantial indigenous manufacturingbase for hydropower equipment and other constructionmaterials (such as cement), a skilled and mobile labor force, and a more robust transportationnetwork. Third, since Uganda is a land-lockedcountry, land transport for imported equipment (likely through the port of Mombasa, Kenya) together with the recruitingof skilled labor for its installation, remainsignificant costs. Given the above circumstances, the relatively high cost per installed megawatt for the proposedprojectis consideredto reflectcurrent marketprices. 56. The InterconnectionProject, to be built as a separate project, will connect the generation facility to the nationalgrid. It includes: (a) a 75 km220kV transmission line, operating at 132kV, to convey the power generated at the power plant to a new substation located in Kawanda (on the outskirts of Kampala); (b) a 17 km 132 kV transmission line to connect the Kawanda substation to the existingMutundwe substation, located in the southwest section of Kampala; (c) a 5 km 132 kV transmission line from the Bujagali switchyard to the existing 132 kV transmission line, currently connecting Nalubaale with the Tororo substation (in eastern Uganda); and (d) a 5 km 132 kV transmission line extending north from the Nalubaale dam to interconnect with the Bujagali switchyard. It will also require the construction of a 132kV substation at Kawanda and the expansionofthe Mutundwesubstation. 16 57. The Government has requested financing for the Interconnection Project from ADB, also a lender to the proposed hydropower project. The Interconnection Project will be owned and operated by UETCL, although the procurement and construction process will be managed by BEL on behalf o f UETCL. The construction cost o f the Interconnection Project is estimated at approximately US$55 million. Actual project costs will be known once the competitive tender has been completed and the tendered EPC contract has been signed. D.LESSONS LEARNED REFLECTEDINTHEPROJECTDESIGN AND 58. The main lessons from the World Bank Group's energy sector operations and project finance transactions include the following: It is more efficient to initiate and implement a comprehensive power sector reform program in advance o f major new investments. This approach helps to establish a sound legal and regulatory framework and underpin the financial viability and sustainability o f the power sector and new investments; The financial viability o f the power sector is enhanced by commercializing power sector operations and through private participation in the ownership and management o f distribution facilities, whereby the private sector is provided with a suitable incentive and penalty structure for enhancing performance and achieving efficiency targets; 0 Because o f limited donor funding for large and complex infrastructure projects, World Bank Group support can help catalyze long term private sector financing for capital intensive projects by mitigating certain political risks for investments in developing countries where the power sector has notyet developed a consistently long and positive track record; 0 Investment decisions should be made based on their technical, financial, social, environmental and economic merits, thereby ensuring that projects are consistent with the macro-economic and sector development objectives; and 0 Inorder to ensure a project's long-term sustainability, it is important that there is an equitable allocation o f project's risks between the various parties (e.g., the Government, private sponsors, lenders, consumers and other stakeholders). 59. In addition to the above, there are a number o f specific lessons learned from the previous attempt to mobilize financing for the Bujagali Hydropower Project6.These are the importance of: 0 A strong project sponsor group and a robust Jinancing plan (the export credit agencies unexpectedly pulled out of the previous effort to develop the Bujagali project in January 2002, following approval o f the project by ajoint IFC/IDA Board meeting on December 18, 2001). An important share o f the proposed project is currently being financed by DFIs and commercial banks. Lender/sponsor/commercialbank negotiations are proceeding according to schedule. The World Bank Group is satisfied that the sponsors, Industrial Promotion Services (Kenya) (IPS(K)) and Sithe Global Power L L C (Sithe Global), have the technical and financial strength and the capability to successfully manage and implement the proposed project. As a demonstration o f the sponsors' commitment to the project, they have posted a A Project Completion Note was circulated to the Board of Directors inOctober 2005 on the earlier Uganda- Bujagali Hydropower Project (B-003-0 UG). 17 financing bond in favour of the Government for US$4.5 million, which will be replaced with an US$11.O million bond at the time o f financial closure. 0 The adoption of a transparent and competitive process for the selection of the project sponsors and EPC contractor and of sound governance practices (see Annex 8). The project sponsors and the EPC contractor were selected following international competitive bidding procedures, the latter being conducted according to EIB's procurement rules. In addition, BEL has implemented a "Code of Conduct" for its operations and has required its key contractors and subcontractors to adopt similar ones inrelation with their activities with BEL. Ensuring measures are taken to support the eflcient operations of the power sector's distribution business, including improved quality of supply and access, that help underpin reliable and adequate sector cash flows. UMEME has managed and operated the power distribution facilities since March 2005. In spite of the lack of power to sell and significant tariff increases, performance improvements have been realized in both collections and in system loss reduction, A financially viable distribution business will, over time, help to mitigate the perceivedrisksof future private investors inthe power sector. 2002 Inspection Panel Findings and Recommendations. The World Bank Group's due diligence on the proposed Private Power Generation (Bujagali) Project has incorporated the recommendations o f the Inspection Panel Report dated May 23, 2002 and of the Management's Response.and Action Plan dated June 17, 2002 (Report No. 24272 (INSPK2002-002/1). This includes undertaking a comprehensive Strategic/Sectoral Social and Environmental Assessment and Cumulative Impact study, ensuring adequate stakeholder consultations, adhering to the World Bank Group's operational procedures and policies with regard to the economic and risk analyses, as well as the examinationof alternative generation investments, such as geothermal activities. E.ALTERNATIVES CONSIDEREDAND REASONS REJECTION FOR 60. The conclusion of a number of power planning studies, most recently the study entitled, "Bujagali I1- Economic and Financial Evaluation Study" dated February 2007 and carried out by Power Planning Associates Ltd., in association with Coyne et Bellier (France) and ECON (Norway), is that the proposed project is the least-cost generation expansion option to meet Uganda's growing power generation requirements under various conditions o f demand and hydrology. A wide range of options were reviewed in order to assess Uganda's power generation expansion options: (a) small and medium hydropower projects; (b) large hydropower projects beyond the feasibility stage (i.e., Bujagali and Karuma); (c) thermal generation options (various conventional thermal generation technologies and plant sizes were screened); (d) geothermal generation; and (e) other renewable sources such as bagasse based cogeneration. The feasibility o f either importing firm electricity from the Kenya grid or locating a Uganda-specific thermal plant inKenya, in order to economize on fuel transportation costs, was examined. Neither option is feasible until the commissioning of the proposed project. Therefore, firm electricity imports are not considered a feasible option within this timeframe. 61. Alternatives to the proposed Bujagali hydropower facility were assessed in three ways: (a) development alternatives; (b) location alternatives; and (c) alternative configurations o f the Bujagali location(see Annex 15). 62. In addition, the Strategic/Sectoral, Social and Environmental Assessment (SSEA), dated February 2007, prepared by SNC Lavalin (Canada) and funded under the Nile Basin Initiative, was 18 undertaken to provide an overview analysis of the social and environmental issues surrounding possible regionalpower development options inthe Nile EquatorialLakesRegionof Africa basedon demand scenarios up to 2020, taking into account potentialclimate change and cumulative impacts from multiple investments. A regional stakeholder group consisting of representatives from academia, religious groups and non-governmental agencies was also established to provide input to all stages of the SSEA. The SSEA thus analyses and ranks identified power options based on a combination of estimated costs, social, environmental and risk considerations, so as to provide strategichectorallevelguidance to decisionmakingin the power sector at the regional and national levels.The findingsand recommendations o f this report support the implementationof the proposed PrivatePower Generation(Bujagali) Project. 111.IMPLEMENTATION A. PARTNERSHIP ARRANGEMENTS 63. The proposed project is a Public Private Partnership between the private project sponsors (IPS(K) and Sithe Global), the Government (including UETCL), multilateral and bilateral development agencies (the ADB, EIB, the World Bank Group, AFD, Proparco, FMO, KfW and DEG), and commercial lenders (Absa Capital, o f SouthAfrica, and Standard Chartered Bank, of the UK)as beneficiaries ofthe proposedIDA PRG. B.INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS 64. The proposed project will be developed by BEL, a special purpose company incorporated under the laws o f Ugandaby the project sponsors, which will be responsible for financing, building and operatingthe proposedprojecton a Build-Own-Operate-Transferbasis. BEL will sell electricity to UETCLunder a 30 year PPA. The projectsponsorsare: (a) IndustrialPromotionServices (Kenya) Ltd. (IPS(K))7, the Kenyasubsidiary of IPS, the industrialdevelopment arm of the Aga Khan Fund for Economic Development (AKFED); and (b) Sithe Global Power LLC (US) (Sithe Global), an international development company formed in 2004 to develop, construct, acquire and operate strategic assets aroundthe world, which is controlledby Blackstone Capital Partners, an affiliate of the Blackstone Group. Reservoir Capital Group, LLC, a privately held investment firm, and Sithe Global's managementare also Sithe Global's shareholders. 65. Since the 1970'sthe WorldBank Group has hadan extensive and long-standingrelationship with AKFED. The World Bank Group supported numerous AKFED related companies in the manufacturing, tourism, financialand power sectors. Also, IFC has helda seat inIPS(K)'s Boardo f Directors since 1984. IFC currently has 16 active projects with AKFED andor AKFED related companies, for a total committedexposure of approximatelyUS$154million. IFC has also invested inpower projects successfully implementedby IPS(K) in Sub-SaharanAfrica, such as Azito Energie (Cdte d'Ivoire) andKipevu(Kenya). Sithe Globalhas an experiencedmanagementteam, with a long track-recordindevelopingpower projects.Sithe Energies, where most o f Sithe Global's management team them held key long term positions, was one of the world's leading independent power producers, with a total generating capacity of approximately 5,000 MW, and was involved in the development ofthe SanRoque hydro plant inthe Philippines(340 MW). 66. The EPC contractor for the proposed project is Salini Costruttori SpA (Italy), with Alstom Power Hydraulique (France) as one its key subcontractors, which were selected following a IFC andDEG, bothlendersto the project,eachhavea participationinIPS(K) of approximately15%, andhold a seat in IPS(K)'s Board. 19 competitive tender under EIB's procurement rules. The O&M operator o f the plant will be an affiliate company o f Sithe Global. The proposed Interconnection Project required for evacuation o f electricity generated by the power plant will be owned and operated by UETCL. BEL will be responsible for managing the design, procurement and construction o f the Interconnection Project on behalf o f UETCL (see Annex 6). 67. Project Management. BEL is responsible for developing, constructing, operating and maintaining the Bujagali hydropower plant. BEL will have a core team responsible for overseeing the work o f the EPC contractor o f the proposed project and o f the InterconnectionProject. BEL has established its headquarters in Kampala, to be headed by a project manager. BEL will also have a presence at the project site for supervision o f the works by the EPC contractor. BEL'Sproject organization will include: (a) a finance department, charged with accounting, financial management and control, reporting, internal audit, disbursement and contract administration; and (b) an operations department, staffed with experienced personnel responsible for the technical aspects during the construction and operational phases. BEL will have dedicated resources for implementation o f the environmental action plan as well as resettlement related activities. BEL is recruiting staff to match the build-up o f project activities. In order to ensure that project construction and operation are carried out in line with contracts, the lenders have appointed an experienced engineering firm, Colenco Power Engineering (Switzerland), as the lenders' Independent Engineer responsible for independently monitoring construction and operation activities on the lenders behalf. Duringthe 44- month construction phase, the proposed project is expected to employ from 600 to 1,500 skilled and unskilled workers (of which around 10% are expected to be local workers) at the power plant and about 330 workers for the Interconnection Project. During the operational phase, BEL expects to employ about 30 staff. 68. A joint BEL-UETCL Coordinating Committee will be established prior to the project financial closing date. The Committee will have six members, with equal representation from BEL and UETCL; chairmanship o f the Committee will rotate between both parties. The Committee will be responsible for coordinating the interface between BEL and UETCL as well as their respective obligations under the PPA and the IA. 69. BEL will be responsible for managing the construction o f the Interconnection Project, on behalf o f UETCL. Construction o f the Interconnection Project is expected to commence in November 2007, and to be commissioned well inadvance o f the power plant. 70. Project Contractual Arrangements. The contractual structure o f the project i s consistent with industry practice for limited recourse project finance transactions. The project agreements allocate the commercial, technical and political risks amongst the parties, to those best able to manage them. Figure 1 provides an overview o f the main project agreements. Further details are described in Annex 6. 20 Figure 1:The Principal Project ContractualA g r ~ e ~ ~ ~ ~ ~ r s package for the proposed project provi clud~n~ prupc31-~yimortga~~:r;able real ass liore and off-shore accoittits (.vcihichtvili b as on any p ~ ~ ~ n~r ~ a~l ~made~byi the Coverrs t ~ n ~ ~ o t r l daistt roeeite at s~icltas the PPA. In,EPC and with the parties to such agreements, The ierrders wit1 also be granted a first ranking pledge over the shares of BEL, 74. Insurance Coverage. BEL, together with the EPC contractor and O&M operator (during construction and operations, respectively) are required to obtain and maintain adequate insurance coverage in terms and by insurance companies acceptable to the Government, lenders and IDA. The insurance program is being developed by Marsh, the project insurance broker, and will be reviewed by Willis (FINEX Financial Solutions), an insurance advisory firm, and IFC's insurance team. The insurance program will reflect standard market practices for limited recourse finance projects o f this nature. c.MONITORINGEVALUATIONOUTCOMES/RESULTS AND OF 75. IDA'Sand IFC's key outcome indicators to be monitored and used in the evaluation o f project impacts are presented inAnnex 3. D.SUSTAINABILITY 76. The sustainability o f the project (as well as that o f any other investment inthe power sector) will depend upon: (a) the financial health o f the power sector and its ability to generate sufficient revenues to fully cover costs, including capacity payment obligations to the proposed project; and (b) the Government's continued commitment to supporting the comprehensive power sector reform program which has been implemented over the past eight years. Moreover, the economic analysis establishes that the proposed project is the least-cost generation expansion option for Uganda and is affordable. The outlook for the project's economic and financial sustainability is also reinforced by: (a) the cautious forecasts o f demand growth for electricity; (b) tariff levels that are consistent with the electricity prices underlying the demand forecasts; and (c) inthe residential sector, the share o f expenditure on electricity, relative to projected total household expenditure, is expected to remain in the range o f 5% to 6%, which is considered affordable. The environmental and social assessment reflects the limitedenvironmental footprint o f the project. 77. The institutional, technical and financial assessments o f the power sector and its positive track record over the past five years, demonstrate that the Government has instituted a sound legal and regulatory framework. In this regard, ERA has implemented substantial tariff increases to cope with the increasing costs o f generation, and help maintain the financial viability o f the sector. The Government has contributed budgetary support to the sector to cover a portion o f the high cost o f thermal generation essential for reducing severe load shedding, which is adversely affecting a number o f key sectors o fthe economy. This clearly demonstrates the Government's ownership o fthe power sector reform program and the importance o f electricity for economic growth. In addition, since the concessioning o f power distribution facilities to a private operator, there have been improvements in the operational efficiency and performance o f the distribution function even under the current adverse conditions. E.CRITICALRISKSANDPOSSIBLECONTROVERSIALASPECTS 78. The potentialrisksand possible controversial aspects are discussed below. Risk Mitigation Failure ofthe proposedproject The project has been designedas a Public Private Partnership.The PPA and due to an inability to mobilize IA havealreadybeensigned by the parties.The sponsors have posteda bid financing. bond inthe amount ofUS$4.5 millionto confirm their financing commitment, to be replacedwith aUS$11million bond upon reaching financial closure. Basedon the due diligence performed the World Bank Group is satisfied with the sponsors' commitment to the project and BEL'S 22 abilityto successfully managethe technical, operationaland financing aspects ofthe project, as well as its implementation.The project is supportedby a group of multilaterals andbilateraldevelopmentfinance institutions (EIB, ADB, AFD, Proparco, KfW,DEG, FMO, IFC,IDA and two commercialbanks).These institutions are carryingout their due diligence andare expected to seek their respectiveBoard/CreditCommittee approvalsat aroundthe same time as the World Bank Group. Demandrisk has beencarefullyevaluatedby constructingdemand forecasts basedon a range of realistic outcomes for keyunderlying drivers, such as loss reduction, improvedcommercialdiscipline over billingsand collections, tariff changes, householdconnectionrates and GDP growth of the key electricity-usingcommercial and industrialsectors.The demand forecastsunderlyingthis appraisalindicate low positive growth of end-use requirementsandnegativegrowth o f generationrequirementsfor some years before2011, due to the existingsituationof power shortages, high tariffs andthe loss reductionprogram. While the probabilityofgeneration requirementsgrowing lower thanthat ofthe low forecast (1.2% per year from 2005/15) is remote, if itwere to occur, surplusenergycould be exportedsince there is a regionalshortageo f supply which is likely to persistfor years. When the proposedproject is commissioned, it would replaceexpensivethermalgeneration: its capacity would be quickly absorbed inthe power system andwill allow for a reductioninthe average electricitv tariff. A stable macroeconomic The proposedprojectwill provide adequate electricitysupply that will external environment (and removeshortage constraints, and would also replacehigh-costthermal liberalizedforeign exchange generationrunningon importedfuel. Hencethe project is expectedto place regime) is not maintained. Ugandaina betterpositionto handleany potentialchanges inthe external environmentto helpUgandamaintainsatisfactory macro-economic performanceby reducingthe foreign exchange burdenof oil importsfor electricityproduction, and eliminatingelectricityshortages as a deterrentto investment,Macro-performanceandprogresson power sector reformare underpinnedbythe World Bank and IMF macro-economicprograms,as well as the HeavilyIndebtedPoor Country Initiativeprogram.Accordingto a December 2006 IMFreport, solvingthe currentpower sector crisis is criticalfor Uganda's macro economicprogress.The project's viability has beentestedfor a low electricitydemandgrowth scenario that has, as one of its components, industrial and commercialGDP growthrates as low as 3.4%and4% peryear, comparedwith about 6.4% and 7% inthe base case. Government commitmentto Since 1999,the Governmenthas taken significant and irreversiblestepsto power sector reform is not implementa comprehensivepower sector reform program. The maintained,thereby Governmenthas also demonstratedits commitmentto supportthe jeopardizing the financial commercialviability ofthe sector, for instance,throughthe concessioning viability o fthe power sector. of its distributionassets to the private sector.Moreover, ERA has a strong track-recordof independence, as reflected inthe increases inthe retailtariff by about 94% in2006, thus helpingto maintainthe sector's financial viability. UMEME, the private UMEMEhas already investedUS$13.6million(well beyondits original distributionconcessionaire, contractualcommitment) andhas agreedto investup to US$65 million terminates its concession. duringthe first five years ofthe concession.IDA andMIGA are also providingUMEME coveragefor regulatoryand non-paymentrisks, and for breachofcontract, respectively.The current concessionstructurewas recently modifiedto protect UMEME from the impact o fpower shortages andthe reducedrevenue stream, which are factors beyondUMEME's control buthave a bearingon UMEME's ability to meet its concession obligations, therebyreducingthe likelihoodo fany termination ofthe I concession. 23 Hydrologyrisk: Adequacy of 1 Significant due diligence has beenundertakenon the hydrologyofLake water flows onthe Nile River; Victoria andthe Nile Riverby Coyne et Bellier, in coordination with LakeVictoriawater levels do Power PlanningAssociates. Evenunder the low hydrology scenario, not improve, or even decline which is basedon 106 years o f data, the proposedproject:(a) would further. generate approximately 132MW of firm power; and (b) has been establishedas the least cost powergenerationincrement.Inthe event of a sustainedperiodof extremely low hydrologypreventingthe proposed project from generatingpower supply, the Government has the optionto purchasethe plant. 1 The proposedprojectdoes not create an incrementaldraw on Lake Victoria: it reusesthe water released for the operationofthe NalubaaleKiiradam complex.Furthermore,the Governmentis taking a numberof measuresto diversifysupply in linewith leastcost planning I principles.These include procuring50 MW of permanentthermal generationcapacity, adoptingdemandside managementmeasures, as well as acceleratingmini-hydroandco-generationprospectsinthe short term, and geothermalprospectsinthe longterm. Hydropower plant and 1 The sponsors' equity and returnsare placedat riskfor construction InterconnectionProject delays, inadequateproject managementand plantoperational encounter constructiondelays performancebelowthe agreedtargets. and cost overruns; systemnot 1 The EPC contract has beenstructuredon a fixed-price turnkey, date- operatedand maintained in certainbasis and includes paymento f penaltiesinthe event of delays. linewith international 4BEL will be undertakingthe procurementand constructionmanagement standards for hydropower o fthe associatedInterconnectionProject(being financedby ADB), on plants. behalfofUETCL, andthis shouldmitigateagainstconstructiondelays. The constructionperiodfor the InterconnectionProject is substantially shorter thanthat ofthe dam andpowerhouse,thus minimizingthe risk that it would not be commissionedin advance ofthe proposedproject. 1 Inaddition, the construction of an 8kmtransmission link from the Bujagaliswitchyardto the Nalubaalesubstationwould enable the evacuationof 180 MW from the Bujagaliplant, inthe unlikelyevent o fa delay inthe commissioningofthe InterconnectionProject. Impacto fthe project on the The Governmenthastwo optionsto buildthe power capacity:as a public Government's contingent projector a publicprivatepartnership. Inthe former case, the Government liabilities. would take on direct liabilitiesfor all financing andall risks. Inthe latter case, the constructionfinancing andoperationrisk i s transferredto the private sector while the Governmentprovidescertain guarantees. A vast number of project finance transactionsindevelopingcountriesrequire similar Governmentguarantees relatingto Governmentand publicsector performance.These guarantees canonly be calledifthe Governmentdoes not fulfill its obligations. The EPC contract will be a fixedprice turnkey contract with Salini (includingfinancing costs). Costruttori SpA (Italy), with Alstom PowerHydraulique(France) as a key subcontractor,botho fwhichhave adequate experienceofundertaking similar projects. Changes inEPC contract pricesare only allowed under very specific circumstances, such as changes in law, change orders instructedby BEL, and for geological/geotechnicalconditions beingworse thanthe baselinereflectedinthe EPC contract. The PPA structure also providesan incentiveto BELto minimize any EPC cost increases.A reasonableestimateo f financing costs is incorporatedintoproject costs, andwill be firmed up at financial closure. 24 F.LOAN/CREDIT/GUARANTEE CONDITIONSAND COVENANTS PRGEffectiveness Conditions 0 Firmcommitment for sufficient financingto complete the constructionofthe project; Execution, delivery and effectiveness of all project and financing agreements, including but not limited to the lenders' Common Terms Agreement, the individual loan agreements and the security documents, the IDA IndemnityAgreement and the IDA ProjectAgreement, each inform andsubstancesatisfactory to IDA; 0 Submission of the Social and Environmental Assessment and the Social and Environmental Action Plan, satisfactory to IDA; Effectiveness o f all required insurances (to include IDA as an additional insured on third- party liability insurance); 0 Provisionof satisfactory legalopinions; 0 Payment in full of the Initiation and Processing Fees, and the first installment of the Guarantee Feeand Standby Fee; and Satisfactionof all conditions precedent to the first disbursement under the Common Terms Agreement andthe IDA Guaranteed FacilityAgreement (the agreement betweenIDA and the "IDA guaranteed" lenders) includingsatisfactory progress on the financing and construction arrangementsfor the InterconnectionProject. Other 0 Confirmationofthe Government's acceptanceo fthe KalagalaOffset. IV.APPRAISAL SUMMARY 79. The proposedproject is beingsupportedby ajoint team from IDA, IFC andMIGA. IDA and IFChavetaken major responsibilityfor all aspects of project appraisal. IFChas playeda leadrole on lender coordination, while IDA has taken a lead role on the due diligence with regard to the power sector reformprogramandthe power sector's financialsituationandprospects. A. ECONOMIC ANALYSIS 80. The project economic analysis covers a review of Uganda's power sector, including the impact of the current power shortages, electricity demand growth, the hydrology o f Lake Victoria, generationalternatives and an assessment of the least cost power investment program for Uganda.It also covers the project's economic rate of return, the end-user tariff path and the macro-economic impact of the project. Through a transparent and competitive process, Power PlanningAssociates Ltd. (UK), in association with Coyne et Bellier (France) and ECON (Norway), was selected to undertake the economic analysis funded under IFC's FundingMechanism for Technical Assistance and Advisory Services (FMTAAS). The findings and recommendations of Power Planning Associates' report entitled, "Bujagali I1 - Economic and Financial Evaluation Study", dated February 2007, are summarized below.The reportwas publicly disclosed on February 26, 2007 and i s available on the followingwebsite: www.worldbank.org/Bujagali. 25 81, The key elements o f the economic analysis include: (a) the impact o f the current power crisis conditions on the power sector and the need for emergency thermal power; (b) the demand forecast, which is mainly influenced by new customer connection programs, commercial and industrial GDP growth, loss reduction targets for the power system and the tightening o f commercial discipline over billings and collections; (c) the level of electricity tariffs; (d) hydrology o f Lake Victoria and its impact on hydropower generation; (e) the supply alternatives and their costs; (0 environmental and social costs o f Bujagali and its main alternative; and (g) the economic value o f electricity to consumers, the end-user tariff path and its affordability. Risks arising from varying degrees o f future uncertainty regarding these variables have also been evaluated. The main findings o f the economic analysis are that: e The proposed project is needed immediately, and its implementation presents minimal economic risk to its status as the least-cost option for the next major Ugandan grid system generation increment; e Any delay inthe proposedproject scheduled commissioningtime (2011) would be costly; e The 250 MW configuration is preferred over 200 MW, and it is not economic to commission the Karuma hydropower project before the proposed project; e Using a set o f 72 generation expansion plans, taking into consideration the uncertainty surrounding the main economic determinants, commissioning the proposed project in 2011 has a risk-adjusted net present value advantage o f US$184 million, at a 10% discount rate, relative to the alternative o f not implementing the project; and e The economic internal rate o f return (EIRR) o f the project is 22% inthe Base Case and falls within a range o f 11.3% to 26.4% taking into account a broad range o f contributing assumptions about demand, costs and hydrology. 82. These conclusions encompass an evaluation o f the relative merits o f alternative projects, three demand projections, three scenarios for fuel price projections, environmental and social impacts, two hydrological scenarios (based on a 106 year hydrological record) and, through measuring the impact of electricity tariff increases on demand, the affordability o f electricity in the vastly under-served Uganda market. 83. Economic Context and the Current Power Supply Crisis. Due to the inability to mobilize financing for the former Bujagali project in 2002, combined with the onset o f poor hydrological conditions, it has become necessary for the Government to enter into short term supply arrangements using expensive diesel generating units on an emergency basis, and to ration electricity supply by means o f massive load-shedding. About 43 MW o f mini-hydropower schemes and around 15 M W in co-generation (bagasse) are to be commissioned in the 2007/09 timeframe. While these alternative sources will make a modest contribution to total generation needs, reliance on diesel based power generation (about 150 MW) will continue to be needed untilthe proposed project is commissioned in early 2011. 84. A detailed economic assessment o f thermal generation requirements during the period 2006/10, highlightingthe very large and costly contribution o f thermal power, which carries around US$700 million in economic costs duringthis period. By comparison, the expected economic cost o f the proposed Private Power Generation (Bujagali) Project will be about US$520 million for a project that will have an expected productive life o f about 50 years and will generate at least 60% more annual energy than the thermal plants would produce in 2010. This indicates the economic penalty 26 that the long delay of the project implementation will have cost Uganda. It also highlights the important economic circumstance that if commissioned in 2011, the project would immediately displace at least 738 GWh o f diesel generation - a substantial portion o f the project's expected output o f 1,165 GWh and 1,991 GWh for the low and high hydrology scenarios, respectively. This displacement contributes to a rapid build-up o f economic capacity utilization which favors the project's economic rate o f return. 85. Demand for Power and Electricity Tariffs. The demand forecast model explicitly recognizes the potential impact on consumption resulting from both the near doubling o f tariffs implemented in 2006, which were required to accommodate the high cost o f thermal generation program (2006/10), and a reduction in technical losses and an improvement in collection o f billed sales expected from the private distribution concessionaire UMEME. The average annual base case growth rate o f generation requirements for 2005/20 is projected to be 5.5%. The high and low average annual demand growth rate projections are 7.7% and 2.2%, respectively. The low demand projection implies a dire picture of economic and sector performance, with declining annual electricity generation requirements for the next five years, resulting from low per capita GDP growth (0.8% per annum), very low new consumer connection rates and poor performance in the commercial and industrial sectors. The spread between the base case and the low demand forecast ranges from 15% in 2011 to 27% by 2015, and continues increasing thereafter. Annex 9 provides details on the economic assumptions and results. 86. Supply Options and Risk to the Investment Decision. The economic analysis confirms that the proposed project is the next major least-cost generation expansion option for Uganda. The major generation alternatives considered include: small and medium-sized hydropower projects, large hydropower projects studied beyond the feasibility stage (Le., Karuma), thermal options, bagasse based cogeneration and geothermal. The Government has reported a domestic oil resource to be developed and exploited with a small scale refinery. It will take several years to prove up the reserve, determine its daily productive capacity, define the costs o f developing and producing wells, and to construct a refinery (without a refinery, it is unlikely that crude oil can be used for power generation). Hence, this recent oil discovery is not expected to have an impact on power generation options over the medium term. An in-depth investigation o f Uganda's geo-thermal potential was conducted, the result o f which is a vastly diminished estimate o f future availability - one 40 MW facility. Apart from some committed small hydropower schemes that will make a modest contributionto supply between now and 2010, recourse to fossil fuel plants remains possible at lower investment cost per kW compared with much o f the hydropower, but with very high operating costs, resulting in fully-allocated costs that are far above those o f the proposed project or Karuma over the longterm. The least-cost o f the various fossil-fuel-based options is mostly medium speed diesel plant using heavy fuel oil, but reliance on this option above 5 0 M W is not feasible without major investments in Kenya to ease constraints o f fuel supply logistics, as well as transportation constraints. The least-cost analysis was conducted for three demand projections (low, base and high), two hydrological scenarios (low and high), three project cost estimates (low, base and high), and three fuel price projections (low, base and high). In addition, the least-cost status o f Bujagali was tested for 200 MW versus 250 MW project size, delayed commissioning and the Karuma hydropower project preceding it. The only cases where the proposed project is not part o f the least- cost expansion plan are those where low demand is combined with high hydrology; such scenarios have a combined probability o f occurrence o f only 6%. 27 87. Hydrology. Two substantial reviews o f the hydrology o f Lake Victoria' indicate that the whole 1900 to 2005 hydrological record should be included inthe analysis. Because there was a very distinct period o f unusually high hydrologic performance between 1960 and 1999, it i s sensible to perform the hydrologic risk analysis usingtwo distinct scenarios: one is reflecting the "wet" period (1960-1999) and one the "dry" periods, which consisted o f many more years surrounding the relatively "wet" period. The calculated probabilities of occurrence for the "dry" and "wet" periods are 79% and 21%, respectively (see Annex 10). The project remains viable in both scenarios. The risk o f climate change on the hydrology o f Lake Victoria was taken into consideration: the conclusion o f both the economic study and the Strategic/Sectoral, Social and Environmental Assessment (February 2007) under the Nile Basin Initiative, is that there will be no adverse effect on water release due to climate change duringthe life o f the proposed project. 88. Affordability of Electricity to Consumers. About 5% Ugandan households are currently supplied by the national power grid. These consumers generally have incomes inthe middle to upper end of the income distribution for Uganda. A review was undertaken to determine whether individual households will be able to purchase electricity within their budgets. Based on ERA'Sand other household surveys regarding total household spending relative to electricity supplied per residential connection, it was assessed that the average residential customer spent in electricity in 2005 about 5.7% o f household income, but this figure assumes (incorrectly) that there is only one household per connection. Based on information received from discussions with UMEME, the Ministry o f Energy and Mineral Development (MEMD) and ERA, it is common for more than one household to be supplied from a single UMEME connection. This can range from "compound houses" with three or four individual households sharing a single compound and a single UMEME connection, to apartment blocks where only the landlord is metered, but the tenant households all consume electricity and pay an allocated share o f the bill for the total supply to the building from the one connection. Based on available data, it is reasonable to infer that each connection supplies on average 1.8 households; on this basis, the annual proportion o f household income spent on electricity would be reduced to 3.2% before the major tariff increases o f 2006. The analysis also assessed whether electricity would be affordable in 2011, given the large 2006 tariff increases and the tariff trajectory utilized in the demand forecast. The base case demand forecast assumes a 2.3% real annual growth o f household disposable income between 2005/11. Under this scenario, electricity prices will have more than doubled in real terms over the same time period and the average household expenditure on electricity will have increased from about 3.2% to 5.2% o f household income, which is considered to be an affordable level o f expenditure. This demonstrates the proposed project's positive impact on the financial sustainability o fthe power sector (see Annex 9). 89. Environmental Considerations. Environmental and social costs have been incorporated in the economic analysis and are based on the review o f existing documentation and field research. This includes the environmental and social costs related to the dam, powerhouse and transmission line, which for the proposed project are approximately US$26 million. The social costs already paid-up in respect o f the previous Bujagali project preparation are considered sunk, for economic purposes, and not included in this analysis. For purposes o f least-cost system planning, environmental and social costs are capitalized as investment costs. Thus the results o f the least-cost analyses include these project-associated incrementalenvironmental and social costs. 90. The proposed project will avoid substantial amounts o f Carbon Dioxide (COz) emissions that would be generated by thermal plants. Over the project's 50-year commercial life, the proposed * The hydrological aspects were also reviewed, commentedupon and found to be satisfactoryby ProfessorJuan Valdes, an expert hydrologist from the University of Arizona, who was financed under the Bank Netherlands Water PartnershipProgram(BNWPP) to carry out this independentassessment. 28 project is estimated to avoid the emission of nearly 60 million tons of C02,Neither the benefits o f avoidedCOZ for the hydropower plantsnor the costs of C02 for the thermal plants are includedinthe least-cost calculations. The reasons for this approach are: (a) the importance o f understanding comparative costs before accounting for this externality; (b) including such cost would simply augment the net least-costadvantage of the proposedproject; and (c) similar benefits would accrue to bothBujagaliandKaruma, so that where the latter is a counterfactualto the former, the size of the net effect favoringBujagaliis quite reduced.The impact ofthe COZfactor, however, is demonstrated inthe EIRRanalysis. 91. Economic Internal Rate of Return (EIRR). The economic analysis is designedto find the EIRRto a series o f annual economic benefits and costs attributableto the project.The benefits are a combinationof displacement of more expensive thermalpower inthe early years of the project's life and "consumer willingness-to-pay"for incremental electricitysupply. The costs includeconstructing and operating the project and the incremental transmission and distribution works needed for deliveringthe project's energy to end-users, as well as managing environmentaland social impacts. The EIRR is calculated over 2007 to 2061 inclusive,with project benefitsand costs stabilizedat the levelreachedby the year Bujagali's output is fully absorbed, which varies dependingon the selected hydrology and demand forecast assumptions. The key risks to the EIRR are hydrology, fuel prices (which impact consumers' willingness to pay for alternatives to grid power), and the demand forecast, resultingin eighteen possible scenarios for the EIRR.Because the EIRR for each of the 18 scenarios is computedwith andwithout a "greenhouse gas" benefit, there are 36 such scenarios. The resultso fthe EIRRanalysis are that the EIRRwithout any greenhouse gas credit has zero probability of being less than 11-3%or more than 26.4%. The EIRR to the base case (low hydrology, base demand, base fuel) is 22%. The greenhouse gas credit adds less than one percentage point to the EIRR. 92. MacroeconomicImpact. The project,as a part of a mainly hydro-basedleast cost expansion plan for power generation in Uganda, is expected to have a positive macroeconomic impact. Comparedto a thermaloil-basedexpansionplan, the hydro-basedexpansionplanis expectedto save the country's balance of payments over US$700 million from 2011to 2020. The positive impact on the balance of payments is robust to sensitivity tests on the main assumptions. The hydro-based strategy would potentially save the country an estimated 3.6% of budget revenues and 6.0% of development expenditures over the same periodinavoided subsidiesto the power sector. Investment activity associated with the proposed project would not cause "excess investment demand" domesticallynor have a significantimpact onthe exchangerate.g B.FINANCIALANALYSISOF BUJAGALIENERGY LIMITED (BEL) 93. BEL is a privately owned and operated company established with the sole purpose of developing, constructing and operating the proposed Private Power Generation (Bujagali) Project, and managing the constructionof the associatedInterconnectionProject.Financingfor the project is beingmobilizedon a limitedrecoursebasis. 94. BEL's main financial objective is to earn a competitive rate of return for its shareholders. This will depend on BEL's ability to construct, complete and commission the project on time and within budget, and ensure the efficient operations and maintenance of the power plant. BEL's sole source of revenueswill be from the sale of electricity to UETCL under the 30-year PPA. Consistent with the nature of hydropowerprojects, the PPA has a capacity-basedtariff, with a penalty regime if 9This assessmentis basedon analysis preparedby independentconsultantJohnHolsenfor IDA,usingdata from Power PlanningAssociatesLtd. anda modelofthe Ugandaeconomy. 29 the requiredcapacity and availabilitytargets are not met. The electricitytariff from the hydropower plant is computed based on allowed project costs, operation and maintenance fees and debt and equity costs. UETCL, the power purchaser, is exposed to cost increases only for explicit pass- through costs. UETCL's payment obligations are guaranteed by the Government under the Government Guarantee, and this guarantee remains in force at least until the date on which the projectdebt has beenrepaid. 95. Under the PPA, BEL will be required to issue monthly bills for its capacity payments denominated in US Dollars. Payments by UETCL may be made in US Dollars or in Ugandan Shillings basedon the USh/US$ exchangerate onthe payment date. BEL'Sannualprojectrevenues" range between US$137million and US$187million during the life of the senior loans, and decline after 2023 when a substantial portion of the project debt would be repaid. Figure 2 and Table 5 below indicatethe estimatedhydropower electricity tariff in nominaland levelizedterms under both the low (basecase) andhighhydrology scenarios. Figure 2: ProjectTariff Structure 0.02 - 1 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 -cLowHydrology(687m3Is) High Hydrology (1,247m3Is) Table 5: BujagaliHydropower Project Electricity Tariffs Profile (Figures in US cents per kWh) IYear I 2011 I2012 I2013 I2014 I 2015 I2016 I2017 I2018 I2019 I 2020 112023 12027 1 (*)The levelizedtariffper kWh is the averageannualnominaltariffover the life ofthe PPA, discountedat the projectweighted average cost of capitalandexpressedas of 2006, assumingannual inflationO 2.5%. f 96. ProjectFinancialPerformance.A forecast for the project's financial performancehas been prepared, the results of which, along with the key assumptions, are presented in Annex 11. These financial projections demonstrate the project is financially sound, with a minimum Debt Service loPaymentsmade by UETCLto BELwill, inturn, be recoveredbyUETCLthrough its sale of electricityto UMEME. 30 Coverage Ratio (DSCR) of 1.5 over the term o f the loans. The project's financialrate of returnhas beenestimatedat 11.2%. 97. A number of sensitivities have been undertaken to test the project's ability to withstand downside scenarios, including: (a) a 30% increase in the EPC contract cost, such that 30% of such increase is not recoverable by BEL through the project capacity payments; (b) a 25% increase in operating and maintenance costs above those for the base case, which would not be recoverable throughthe project capacity payments; (c) capacity testing at the time of commissioningis 50 MW below the 250 MW requiredunder the PPA and BEL'Scapacity payments are reduced accordingly; and (d) the project's availability is 90% (i.e,, below the 96% target required under the PPA) and BEL'S capacity payments are reduced accordingly. As shown in Table 6, the sensitivity analysis indicates that the financialperformance of the project remains acceptable within a reasonablerange of outcomes. Table 6: Bujagali HydropowerProjectSensitivityAnalysis Scenario Minimum DSCR Year BaseCase 1.5 2018 30% Increase in Construction Costs 1.3 2018 25% IncreaseinO&M Costs 1.4 2018 50 MW CapacityShortfall 1.1 2022 ReducedAvailability to 90% duringproject life 1.4 2018 98. An additional sensitivity that has been analyzed is a potential project delay o f up to 6 months. Should that be the case, it is considered that the combination of project contingencies and the penalties, payable by the contractor to BEL, would be sufficient to cover BEL'Sfixed costs duringsuchdelay periodand any penaltiesthat BEL wouldowe to UETCL. c.FINANCIALANALYSISOFTHE UGANDAN POWER SECTOR 99. In June 1999, the Government approved a comprehensive power sector reform strategy focusingon improvingefficiency througha structurethat allowsfor a partnership betweenthe public and private sectors in the operation of the power system's assets and investment in the system's development. Annex 1 provides an overview of the implementation of structural reforms in the power sector. The consolidated performance o f the generation, transmission and distribution Ugandan power utilities is discussed here (Annex 12 provides more details on the financial performance ofthe sector). 100. Power Sector Performance (2004-06). The significant reduction in relatively inexpensive hydropower supply over the recent past and in the medium term, has forced the Government to implement an interim generation expansion plan (2005-10) to meet the country's power generation needs untilthe proposed project is commissioned in early 2011. As already described under Section I.A. above, this interim plan includes the installation of up to 150MW of thermal generation capacity (further details also in Annex 1). This heavy reliance on very expensive thermal power combined with a reduced amount of kWh energy to sell has significantly increased the sector's overall revenue requirements as well as the average costs per kWh. Total revenue requirements in 2004 were US$76 million, at which time the sector was financially viable. However, the corresponding requirement in 2006 is approximatelyUS$200million, equivalent to an increase of 164%over two years. Thus, electricitytariffs hadnot kept pace with risingcosts since 2005, andthe gap betweencosts andrevenueshas widened considerably. 31 101. Since the power crisis begun, the Government has shown its commitment to the power sector by providing substantial support to UETCL (the single buyer in the power system) and in spite of significant power cuts, the ERA has also substantially raised tariffs (by a cumulative 151% since April 2005), to meet the revenue requirements of the sector (together with budgetary and donor support). 102. The power sector's key operational and financial performance indicators for 2004-06 are summarized in Table 7 below. The consolidated financial performance of Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL), and Uganda Electricity Distribution Company Limited (UEDCL) for 2004-06 and projectionsfor the period2007-16 are providedinAnnex 12. Table 7: Key Consolidated Operational and Financial Performance Indicators A c t u a l A c t u a l E s t A c t u a l Peak d e m a n d ( M W ) 3 3 4 3 5 4 3 4 7 T o t a l units sent out ( G W h ) 1,892 1,887 1,610 o f w hich: H y d r o 9 9 % 9 0 % 7 2 % T h e r m a l 0 % 7 % 2 3 % G e o t h e r m a l 0 % 0 % 0 % Renewahles & other 1% 3 % 5 % Transmission losses 4.6% 4.8% 4.2% E x p o r t sales ( G W h ) 1 9 6 6 4 5 3 B u l k supply to U m e m e ( G W h ) 1,610 1,74 1 1,503 Distrihution losses 36.0% 38.2% 3 4 . 1 % Billed U g a n d a sales ( G W h ) 1,030 1,075 9 9 0 U g a n d a sales g r o w t h -0.5% 4.4% -7.9% Billed as % o f units sent out to U g a n d a 6 1 % 5 9 % 6 4 % U g a n d a sales collected as % o f sent out 5 0 % 5 1 % 5 4 % A v e . n u m b e r o f customers (`000) 2 5 4 2 7 8 2 9 5 A v e . n u m b e r o f employees 1 , 7 8 8 1,745 1,542 Customers per employee 1 4 2 1 5 9 1 9 1 T o t a l electricity revenue ( U S h billion) 1 6 7 1 7 5 2 2 2 U g a n d a electricity revenue ( U S h billion) 1 4 5 1 6 8 2 1 3 U g a n d a electricity revenue (US$ million) 8 0 9 4 1 1 6 U g a n d a V A T revenue to G o U (US% million) 1 4 1 6 2 1 Ave. U g a n d a electricity revenue ( U S h / k W h) 1 4 1 1 5 6 2 1 5 Ave. U g a n d a electricity revenue ( U S S l k W h ) 0.078 0.088 0.1 1 7 Ave. operating income ( U S h l k W h ) 2 3 -23 3 2 Ave. operating income ( U S S l k W h ) 0.013 -0.013 0.018 R e t u r n o n fixed assets 3.3% -3.1 % 4.0% D e b t service coverage 2.1 0.3 1.7 C u r r e n t ratio 2.1 1.6 2.3 Dehtlequity ratio 4 1% 4 3 % 4 0 % 103. Electricity Tariffs. After the takeover of the distributionbusiness by UMEME, tariffs were increasedeffective April 1, 2005 by an average of 27%. This increase took account of UMEME's revenue requirements and also the costs of the first 50 MW thermal plantthat was commissionedin May 2005. Tariffs were increasedsubsequently by an average o f 2%, 37.5% and 41% on October 1, 2005, June 1,2006, andNovember 1,2006 respectively. 104. Despite those significanttariff increases, the domestic lifeline tariff for the first 15 kWh per monthwas only increasedone time inthe last five years and less significantly thanthe averageretail tariff. The lifeline tariff was set at UShSOkWh (US$2.7$/kWh) in 2001 and represents 32 approximately 5.5% of total consumptionby end-use customers. InJune 2006, the lifeline tariff was increased by 24% to USh62/kWh(US$3.4$/kWh). 105. Retail electricity tariffs are now below costs of supply.Today's weighted average retail tariff excluding VAT is USh313kWh (US$17.2$/kWh and US$21$/kWh includingVAT). The estimated actual average for 2006 was USh215kWh (US$11.7$/kWh). Based on accrued revenue requirements, the required average tariff excluding VAT for 2006 was USh37l/kWh (US$20.2$/kWh). The estimated subsidy for 2006 is around UShl56/kWh (US$SS$/kWh), equivalent to US$85 million for the calendar year. In 2006, the Government provided UShll3 billion (US$62 million) indirect budget support towards thermal power costs of the power sector and in the Government's Fiscal Year 2006/07 the total amount of subsidies will reach US$84 million under base case assumptions. Inaddition to the Government's support, UETCL was directedby ERA to utilize the remaining balance of USh49 billion (US$27 million) in the Bulk Supply, Tariff stabilization fund that had been collected from electricity customers in prior years. This fund was fully utilized inthe first quarter of 2006. 106. Uncollected EnergyBills.Another important factor of Uganda's power sector is the amount o f losses and uncollected energy bills. Since its take over o f the distribution concession from the state owned UEDCL, the collection rate had already been improved by UMEME until May 2006 from 80% up to 92%, but since the large increases in tariffs in June and November 2006, the collection rate dropped again to 82% at the end of 2006. Equally the transmission and distribution losses remained at levels of about 455.0% (transmission losses of UETCL) and 34.1% (distribution losses of UMEME) since mid-2006. This means that at the end of 2006 approximately 49% of the energy sent out is not paid for. It will be crucial that loss numbers and collection rates improve again. UMEME is actively pursuing various measures to accelerate technical and non technical loss reduction and to improve collection rates. The distribution concession has recently been renegotiated between UMEME and the Government due to thehcurrent electricity crisis. The restructured concession agreement includes commercial incentives for the concessionaire to reduce losses and non-collection rates. 107. Sector Revenue Requirementsand Indicative FinancingPlan (2007-16). A summary o f the base case forecast of the power sector revenue requirements and an indicative financing plan for 2007-16 is provided Annex 12, as well as the annual sector revenue requirements and the financing plan for 2007-16. 108. Total revenue requirements of the power sector for 2007-11 and 2012-16 are estimated at US$1,495 million and US$1,899 million, respectively. Based on the tariff levels effective from November 2006, the power sector will raise revenues of US$1,147 million during 2007-11, and US$1,627 million during 2012-16, leaving a shortfall of US$348 million during 2007-111', and US$272 million during2012-16. 109. The shortfallduring2007-11will be met as follows: Deferment of USh128 billion (US$67 million) o f debt service by the Government to 2011; the sector should be ina positionto repay all of the deferred debt service by the end of 2011 and will be expected to meet all of its debt service obligations to the Government from 2011 onwards. I 1Please notethat inaddition to the shortfall in2007-2012 ofUS$348 million, the sector also has to service a remaining shortfall ofUSh 8 billion (approx. US$5 million) that was carried forward from the previous calendar year 2005. 33 USh92 billion (US$49 million) annually in 2007 and 2008, USh28 billion (US$15 million) in 2009, and USh66 billion (US$34 million) in 2010. On this basis, the projected direct Government budget support is estimated to reach USh278 billion (US$147 million), representing10%of sector revenue requirements from 2007 to 2011.No Governmentsupport will be needed beyond 2011 if the estimated shortfall between 2012 and 2016 can be mitigated through additional smalltariff increases as describedinthe following paragraph. IDA support (under the proposedPower Sector Development Operation) of US$206.5 million towards the capacity and energy charges of a 50 M W thermal plant. This financial assistance will comprise US$42.1 million towards capacity payments and US$164.4 million towards energy charges, including fuel.I2 110. Electricity Tariff Increases. According to the World Bank's forecast, internationalprices of crude oil are expectedto decline gradually over the coming years, to reacharound US$45 per barrel by 2011 (in 2006 prices). Based on this oil price forecast, and after taking account of Government and IDA support towards thermal power costs as described above, the financial analysis indicates that there will be no need for further revisions in electricity tariffs through to 2011. This means that tariffs will fall inreal terms over the course of the next five years from the present US$l7.2$/kWhto US$13.9$/kWh by 2016. However, if crude oil prices from today to 2011 would slightly increase to US$73 per barrel (in 2006 prices), the projections show that an additional amount of US$92 million would have to be raisedthrough additional tariff increases. 111. With regardto the period of 2012 to 2016, even inthe current Base Case, tariffs would have to rise by an average of 15% on January 1, 2012 and by the assumed Uganda inflation rate of 4.5% inboth2014 and2015 (or 26% cumulatively). 112. Figure 3 depicts the "glide path" of the average electricity tariff until 2016. The revenue requirements above the dark line show the amount of "tariff subsidy" being provided by the Governmentthrough direct budget support, debt service deferment and IDA supporttowards thermal costs. The projected revenue requirements and tariffs converge by the time the proposed project comes on line in 2011. Electricity tariffs would be fully cost reflective by then and subsidies would be removed, except for duty exemptionson generationfuel andtransmissioninvestments. ''Thetotal amount ofthe proposedOperation is US$ 300 million includingUS$ 80 millionofgeneralbudget support and US$ 13.5 millionofTechnicalAssistance,EnergyEfficiencyand DemandSide Management measures.Howeverthose additional US$93.5 millionare not taken into account for the mitigationo fthe US$348 millionoperationalshortfall. 34 35 114. Government Support to Power Utilities. Total Government support to the power sector over the period2005-2011 is estimated at US$734 million. The compositionofthis support is shown inTable 9 belowandinmoredetailinAnnex 12. Table 9: GovernmentSupport to Power Sector per Calendar Year 2005-2011 (in US$ million^)'^ 2005 ux)6 m 2008 2009 2010 2011 2oMll GwanmmtSubsidies 1) Ikfmeddebt service 0 6 17 17 17 17 0 73 2)msuppsrt 17 62 49 49 15 34 0 226 Totalbudgetsupport 17 67 66 66 32 50 0 299 3) DAsuPpnt CaFaCity charges 0 0 5 12 12 12 2 42 Fuel 0 0 35 62 55 13 0 164 Total IDAqpltfor opemtlonalcasts 0 0 39 74 66 25 2 207 4)DA&SIDAsuplnltforDsM&technical~~ 0 0 3 6 7 3 1 19 Total(3- support 17 67 108 145 105 78 3 524 Deferreddebt senicerepaidinyear 0 0 0 -9 -25 -21 -12 -67 RAP(ResettmActionPlan)tokfundedbyGOU 0 1 2 12 5 0 3 23 IqmItdutyd o n s : Genaationfwl 10 27 59 54 41 40 5 235 Trammissioninvemmtsrealtingtotrrmsnissioninvemm& 0 1 1 4 4 8 19 TotalSupporttoPowerUtilities n0 96 170 204 130 101 6 `134 115. Revenues Accruing to the Government. The revenues accruing to the Government over 2005-11 are estimated at US$439 million, and a further US$597 million during 2012-16. This compares to total Government support to the power sector of US$734 million until 2011, and US$85 million during 2012-16. Over the entire period, 2005-16, the Government stands to collect net revenues of US$217million. The power sector will be a drain on the Treasury untilthe proposed project is commissioned, but a net contributorthereafter. D.TECHNICAL 116. The proposedproject was reviewedby the lenders' Independent Engineer (Colenco Power Engineering, Switzerland), during project preparation to identify any issues that merited scrutiny during the implementationand operational phases. The review consisted of an overview of project documents and presentations by the EPC contractor, the sponsors and BEL'S Owner Engineer (MontgomeryWatson Harza, USA). The findings o f the lenders' Independent Engineer are that the proposedproject is technically well conceived and the sponsors and the EPC contractor are capable of completingthe works. The technology used is knownand proven, the overalldesign o f the works is consistent with prevailingindustrypractice, and there are no significanttechnical issues identified that would undermine the project's viability. The project design addresses geologic risks, which couldaffectthe constructionschedule andcost. Hydrologicrisksto the lenders are mitigatedthrough the structure of the PPA, under which this risk is borne by UETCL and, ultimately, by the Government. The importanttechnicalaspects ofthe proposedprojectare discussedbelow. 117. Geology. Geo-technical investigations at the project site have been comprehensive and provide adequate information to understand the geologic conditions prevailing at the site and the principal factors most influencingconstruction costs and risk. Over twenty-six boreholes (totaling 900 meters), seventy-eight test pits, ten seismic refraction profiles and laboratorytesting conclude that the site is appropriate for the construction of a dam. The risk of significant leakage from the 13Note that this table shows expenses per calendaryear starting in 2005. Government's fiscal year is from July 1-June 30. 36 reservoir is minimal. Reservoir slope stability is considered appropriate. Sources of suitable construction materials have been identified in sufficient quantities for construction of the proposed civil works. Seismicity criteria for the design of the proposed project have been established and considered appropriate. Values for Maximum Design Earthquake and Operating Basis Earthquake are included in the technical specifications of the EPC contract. These values will be used in the detailed design of the dam and other major structures. 118. Hydrology. The planning of the proposed Private Power Generation (Bujagali) Project and the assessment of the energy output have been based on the flow released from Lake Victoria through the NalubaaleIKiira dam complex in accordance with the Agreed Curve (Annex 10). The Agreed Curve is the relationship between the release of water from Lake Victoria (at the NalubaaleKiira dam complex) and the water level of Lake Victoria. The Agreed Curve replicatesthe "rating curve" that used to be imposed by the situation of the Lake Victoria outlet before constructionof the Nalubaale dam inthe 1950s. Since then, the Agreed Curve has been used as the operating reference for discharges from the Nalubaale dam (and Kiira, once it was commissioned). The Agreed Curve, therefore, constitutes a "moving reference": in dry periods, the net inflow is steadily lower than the long term average and the opposite is true for wet periods. The proposed project is designedto be viable with water flows in accordance with the Agreed Curve release rule, since the NalubaaleKiira dam complexregulatesthe flow of water from Lake Victoria. 119. The hydrology of the Victoria Nile is complex due to the nature of the meteorological influences, the rainfall-runoff process, the scale of the evaporation losses, and the interaction between rainfall and evaporation within the watershed. The available reservoir inflow record comprises 106 years of data. The record includes several significant hydrological cycles with the seasonal and ten year cycles being most apparent. Given the lengthof the hydrological record at this site, hydrological risk for energy generationis consideredto be definablefrom the available data set. 120. The long-term flow of the White Nile upstream from the Kiira dam has been extensively studied by Acres International (Canada) in 1990, the Institute of Hydrology (United Kingdom) in 1993, Electricite de France (France) in 1998, and Knight Piesold (United Kingdom) in 1999. More recently, the Power Planning Associates (United Kingdom) report dated February 2007, prepared in association with Coyne et Bellier (France) and ECON (Norway), has reviewed the hydrology of the White Nile. Except for the studies carried out by Acres International, all other studies present the lake level rise inthe early 1960's as a consequence of the natural hydrologic regime of the lake, and the unusualaspect might only bethe occurrenceof several wet years insequence. 121. Basedon the historical recordof the hydrological system, there are possibilities of long-term hydrological cyclesthat will cause significant changes inthe available flow over ten-year cycles.The Lake Victoria levels, andthus the flow inthe Nile River, will also continue to fluctuate seasonally as experienced in the past. Future high flow sequences are also possible along with the prospects of long low flow periods. 122. An analysis of Lake Victoria water levels during the 2003/05 period has concludedthat the main origin of the drop in lake level during this timeframe is an exceptionally dry period, during which the mean net inflow was only 46% of the long term average net inflow, and only 60% of the mean net inflow of the low hydrology scenario (Annex 10). The consequence of this low inflow, combined with the over-releaseof water for power generation, exacerbated the reduction inthe Lake Victoria water levels. Since the end of 2005, the Government has steadily decreased hydropower generation in an effort to return to the Agreed Curve operating regime. Water flows for power productionare being scheduled is such a way that the returnto the Agreed Curve is achieved as soon 37 as reasonably possible. This operation mode is being followed at a significant cost, associated with the running ofavailablethermal generation. 123. Were the Bujagali dam currently in operation, the consequence of this exceptionally dry period, in terms of over-abstraction for power generation, could have been eliminated: the Bujagali site i s located downstream of the existing Nalubaale and Kiira dam complex, and the same water release could have been used a second time at Bujagali and would have generated 1.2 times the power already generated by the turbines of NalubaaleKiira (the ratio is 1.2 due to the higher head available at Bujagali). Hence, with the joint operation of the existing hydropower and the proposed project, the generation of the same energy output currently generated by Nalubaale and Kiira would only require 45% ofthe current water release from Lake Victoria. 124. Planning and operation of hydro-based power systems is normally based on hydrological reliability of about 95% to 98%, dependingon the nature ofthe economy served and the nature of the power system. In the case of Uganda, a 95% hydrological reliability is likely appropriate as Uganda is evolving to a higher standardof service. The 5% risk of experiencingsome un-servedenergy will be mitigated by any system reserve capacity that is available: under the low hydrology scenario, the system reserve capability would be reducedbefore affecting the delivery of energy to customers. 125. Hydrological Risks. Hydrological risk in relation to the proposed project consists of possible variations in the long term flow of the Nile River. Based on available information, hydrologic risksdue to long-term flow conditions appear to be well defined. The river is susceptible to some hydrological cycles, but these are included within the available record lengthof 106 years. The proposed project design has adopted a conservative approach for defining the firm energy capability of the proposedproject basedonthe full hydrological record. Changes in Seasonal Water Flows in any Given Year: Seasonal variability at the project site is impacted by the size of the storage available in Lake Victoria. The lake regulates the seasonal inflow to permit a more uniform outflow than is normally available for power generation; and Flood Risks During Construction and in the Operational Phase: Flood risks are also consistent with industry design practice. The large lake storage mitigates these risks and provides a very long forecast of future high flows. Flood risks are believedto be well defined and acceptable for the project. 126. Under the PPA, given the nature of hydrologic risks (Le., long-term variations and seasonal variations), the risk is borne by UETCL and, ultimately, the Government, since project capacity paymentsare basedon the project available capacity. 127. Dam Safety. Dam safety concerns are an integral part of the World Bank Group's review of any hydropower development. Dam safety analyses are normally conducted as part o f feasibility studies and later as part of detailed design. For large dams, a Panel of Experts is required to advise on the dam's design, construction, and operation. Periodic monitoring of dam operation, including safety, is normally conducted by independent specialists. This work is conducted separately from a project's social and environmental studies, and any recommendations are reflected in the project's socialand environmentalassessment. 128. The existing Nalubaale dam and powerhouse were constructed in the 1950's. Unexpected and significant deterioration subsequently occurred due to the effect of the alkali-silica reaction between the aggregates and the cement in the concrete. The Government engaged consultants to 38 review the safety of the dam structure (Le., a post-constructionaudit) and to devise a plan and strategy for remedialworks to correct deficiencies.These remedialworks were concluded under the oversightof an internationalexpert panel. 129. At the time of the appraisal o f the former Bujagali project, the lenders' Independent Engineer (Harza Engineering, USA) reviewed the reports of the panel of experts for the remedial works ofNalubaale and concluded in its April 2001 reportthat the structures do not pose an unusual risk to the Bujagali project. The Dam Safety Panel at the time advised on the need to continue regular monitoring and dam safety reviews of Nalubaale in a manner consistent with good international practice. The Dam Safety Panel appointed by the previous sponsor conducted an independentreview of Nalubaale remedialworks and concludedthat the remedialand strengthening works for the Nalubaale dam were satisfactory, since they increasedthe factor of safety to comply with current standards. The current lenders' Independent Engineer (Colenco Power Engineering, Switzerland) has endorsed the above recommendations of Harza Engineering in regards to Nalubaale. 130. As part of the studies and analysis done for the implementationo f the remedial works of Nalubaale, Gibb (United Kingdom) presented an Emergency Preparedness Plan (November 2000). The Inspection Panel Report of May 23, 2002 found Management in compliance with OP 4.37. Monitoringofthe Nalubaale structures is being addressedunder the Power IV Project (Credit 3565- UG). According to the latest Annual Inspection Report, prepared by Lahmeyer International (Germany), there is no present risk in the conditionand stability of the maindam, though it pointed to structuralproblems of the powerhouse and intake structures which are beingaddressedby Eskom Uganda(the current private concessionaire of the Nalubaale and Kiira dam complex).Currently, the intakeof UnitNo. 8 is undergoingrepairs. 131. The designof the proposedBujagalidam has beenreviewedby the technicaladvisors of the Government, the current Owner's Engineer (Montgomery Watson Harza) and Colenco Power Engineering.The preliminarydam design, includingthe selection of the project site, seismic design requirements, the generalarrangement of the site, the locationof the mainstructures, andthe scheme for diversion of the river during construction, is considered appropriate for the site and its construction feasible without undue difficulties. This review has also included the evaluation of flood risks and their incorporationin the design of Bujagaliand is considered to be consistent with industrydesignpractice. 132. Dam Safety Panel. The World Bank's OperationalPolicy 4.37 requires a DamSafety Panel to be appointedto review and advise BEL on matters relativeto dam designand safety as part of the implementationofany dam greater than 15m inheight. A DamSafety Panel, with terms o freference and staffing acceptable to the World Bank Group, has been established. The safety issues posed by the Nalubaale dam and its impact on the proposed project, as well as an extensive review of all technicalmatters, will be undertaken by the panel. This panel will also provide advice throughfinal design, construction, initial filling, and start-up of the dam, including any design or operational precautions to ensure that the project, consistent with OP 4.01, EnvironmentalAssessment and OP 4.04, NaturalHabitats andOP 4.37. 133, Construction Schedule. The construction program establishes a guaranteed final unit performanceacceptancedate for the fifth 50 MW unit, 44 months from the date of issuance by BEL of the noticeto proceedto the EPCcontractor. 134. The constructionof the Bujagali dam is on the critical path. The EPC contractor has built several dams and has experience in construction and transportation conditions in East Africa. Also, 39 Sithe Global is a well known name in the power generation industry and its management has proven capable o f developing large independent power projects worldwide. To complement its capabilities and experience, BEL has retained Montgomery Watson Harza (US) to act as the Owner's Engineer. Montgomery Watson Harza has significant global experience in the development o f hydropower projects as well as inAfrica. 135. The construction schedule will be monitored by BELandthe lenders in order to identify any situations that might result in deviation from the scheduled completion date for the project. The EPC contract imposes penalties for late completion o f the project and the contractor has accepted the milestone completion dates and the project schedule, together with associated penalties. Also, timely construction o f the associated InterconnectionProject does not present any significant issues. These facilities are part o f a separate EPC scope o f work, to be financed by ADB, and their completion schedule is not expected to represent a significant risk to the project. E.FIDUCIARY 136. The World Bank Group has reviewed the selection process for the sponsor and the procurement process for the EPC contractor and established that the process was in accordance with World Bank Group guidelines. The overall financial management o f the proposed project would be undertaken by a private entity according to commercial practices acceptable to the lenders. BEL has put inplace an acceptable governance framework for its operations and for the EPC contractors (see Annex 8). 137. The IDA PRG is providing a guarantee to the commercial lenders. As such, there are no fiduciary issues as there will be no procurement or procurement-related disbursements under the proposed project. Should the IDA PRG be called, IDA would disburse to the beneficiary and the Government would then be obligated to repay IDA in accordance with the terms o f the Indemnity Agreement between the Government o f Uganda and IDA. F.SOCIAL 138. The social and environment assessments carried out in 1999/2000 as part o f the previous effort to develop the project, and later reconfirmed in the social and environment assessment disclosed in December 2006 for the proposed project, identify five key social issues: (1) resettlement and income/asset displacement; (2) physical cultural resources and cultural issues; (3) community development and vulnerable groups; (4) employment; and (5) safety and health. During the time between when the previous sponsor abandoned the project in 2003 and the arrival o f the new sponsors, continuity o f consultations with project affected populations (PAPS) and villagers surrounding the hydropower site and the associated InterconnectionProject was maintained by staff from UETCL, through its Bujagali Implementation Unit (BIU).A core group o f qualified specialists from the BIU, many o f whom had been with the project since the first social surveys were conducted in 1998/99, not only periodically informed villagers about the project's status, but also managed to strengthen relationships with affected groups through community development activities. The continuous consultations by the BIU have proven to be critical for strengthening villagers' trust, especially duringthe transition period with BEL, the current project sponsor. The BIU staff has also completed surveys o f households affected by UETCL's associated InterconnectionPr~ject'~.Under the new proposed project, the sponsors have re-established a more systematic documentation and 14The associated Interconnection Project directly affects approximately 1,900 households.Ofthese, 120 families will be physically resettled.The average land area lost per affected family alongtransmission lines and substations is 0.1 hectares. 40 consultation process, consistent with IFC's Performance Standard 1. The project sponsors have engaged a witness Non-GovernmentalOrganization ("NGO"), InterAid Africa, to monitor the stakeholder engagement activities of the social and environmentalconsultants. InterAid was also involvedinthe previous effort to developthe Bujagaliprojectas the witness NGO. 139. Land Acquisition and Involuntary Resettlement (Operational Policy (OP)/Bank Procedures (BP) 4.12; IFC's PerformanceStandards (PS) 5; MIGA InvoluntaryResettlement Policy). The previous project sponsor carried out physical resettlement and payment of compensation associated with the hydropower facility in 2001. These activities directly affected 1,288 households(or 5,158 people). Ofthese, 85 householdswere physicallydisplaced (634 people) -34householdsoptedtoliveintheNaminyaresettlementsite, while51chosetore-establishtheir physicalhouseholds on their own using cash compensation. The remaining 1,203 families received cash compensation for lost land and crops. All households were to receive assistance in livelihood restoration. Physical resettlement and compensation were completed prior to the departure of the previous sponsor. In June, 2006 BEL completed a draft Assessment of Past Resettlement Activities andAction Plan (APRAP), which containedfindings from a reviewofthe quality of the resettlement and the current status of the families resettled as part of the previous effort to develop the project. Based on the findings of this report, BEL committedto completingthe requiredprovisions of the original resettlement and community development program. These commitments were included in the new Social and EnvironmentalAction Plan (SEAP) ofDecember2006 for the proposedproject. 140. The majorityof economic and physicallydisplacedhouseholds took the cash optionthat had to be offered under the Uganda LandAcquisition Act (1965) and the Land Act, Section 78 (1998). As has beenthe World Bank Group's experience with cash compensation generally, this option did not lead consistently to restored livelihoods.Althoughvillagerswere advised about usingthe money for relocation and livelihoodrestoration, some expenditures appear to be made for luxury goods and entertainment. To assist in income restoration, BEL has committed to several income generating programs, initially providing support for intensification of the agricultural economy, but also expanding into linkages programs for the project and fisheries development once the reservoir has beenfilled. BEL has also committedto improvesuchpublic services as village-managedwater wells andhealthcenters. 141. Tourism operators and workers will adjust to changes from the hydropower project by moving their businesses. Rafting companies will move their operations further down the river, including locating some of their facilities around the offset site at Kalagala Falls. Other tourism operators, such as small arts and crafts shops, restaurants, four wheeler rentals, and locally owned enterpriseswill also beable to movetheir businessesnearer to KalagalaFalls. 142. Cultural Heritage (OPD3P4.11; PS 8; MIGA Physical Cultural Resources Policy) and Cultural Issues.The previous project sponsor prepared a Cultural Property Management Plan that documented the surveys and studies of cultural issues. These included family graves and ancestral shrines (amasabo) and ceremonies associated with the spiritual importance of Bujagali Falls and beliefs (e.g., movement of spirits to alternative locations). BEL will complete all of these commitments, includinga non-denominationalservice in remembrance of those buried in unmarked graves that will be inundated.BEL is havingon-goingconsultations with local traditionalauthorities and has committedto measuresto ensure that these issues are properly addressedprior to and during construction. BEL will also institute a Code of Practice on cultural issues, along with training for workers and contractors duringthe constructionand operation phases. Archaeologicalsurveys were also completed inNamizi, Kikubamutwe,andMalindi villages; the Bulobaquarry site; the Kaybirwa landing site on the Nile River; Dumbbell Island; and areas surrounding Bujagali Falls. No 41 concentrations of cultural or archaeological resources requiring pre-constructionconservation were found.BEL will ensurethat the EPC contractor develops and implements a chance finds procedure. 143. Community Development and Vulnerable Groups (PS 1). The Community Development Action Plan (CDAP) focuses on "supporting communities' needs based on culturally appropriate means of consultations." This document contains provisionsto address the measures requiredunder the APRAP and to address impacts on the eight project affected communities, but also goes beyond these requirements to provideother benefits.Accordingto the APRAP, US$497,000, will be needed to finance the programs neededto complete resettlement and income restoration.BEL is committed to providingUS$2.4 million on community development over a five-year periodfollowing the start of construction. These commitments cover health care facilities; employment opportunities; water supply and sanitation; fisheries; education; small-scale tourism; training and financial services. Whenever needed, village-based NGOs will be used to ensure that community works will be sustainable. For example, village water committees are beingformed, and villagers will be trainedin operating and maintainingwater pumps. To be sustainable, the operation and maintenance costs are sharedby the villagers anddistrict(local) governments. Similar committees will be set up for health, agriculture, etc. There is a separate program for women, includinga facility for maternaland child care. Many of the village committees are chaired by women. A persistent concern raised in the consultations was lack of access to basic services and resources, including electricity. BEL is committed to a feasibility study on the commercial viability of providing the communities with electricityinorder to facilitatethe processvis-a-visUMEME. 144. Employment(PS 2). Since the appraisalconducted as part of the previouseffort to develop the project, communities have expressed the hope that the project will provide jobs. Economic displacement caused by the project is being addressed through the community development programs. Community expectations about employment at the constructionsite are high.As a general rule, BEL and the EPC contractor will give priority to hiring local people for dam, road, and other construction.Realistically,the constructionwill not be ableto providejobs to all who may seekthem from the project affected communities. The employment figure is estimated to be between 600 and 1,500. BEL has estimated that 10% of these jobs will be unskilledand available for local villagers (i.e., between 60 and 150). These will not be enough to provide all project affected people with employment. BEL is identifying additional employment opportunities in addition to the income restorationprograms of the CDAP. BEL is developing a tree plantingprogram for boththe borders of the reservoirand the river banks betweenthe hydropower projectand the KalagalaFalls, and this may be a major source of additionalemployment. 145. BEL is a special purpose corporationset up for this project. BEL is committedto ensuring that the EPC contractor has a human resource policy and a grievance mechanismas indicatedinthe SEA. 146. Safety and Health Concerns (PS 4). The SEAP for the proposed project includes mitigatingmeasuresfor reducingnegative safety and healthconsequences fromthe project.First,the EPC contractor may encourage workers to seek housingin near-by Jinja, which can accommodate families andthus avoida majorrisk factor for HIV/AIDS amongthe local communities. Second, the Ugandan AIDS/HIV NGO TASO will assist the project in developing an education and health campaign to inform the local communities and workers about communicable diseases. Third, a constructiontraffic management plan will be developed, especially along the western side of the river where construction traffic will be the heaviest. Fourth, a Dam Safety Panel will assess the design and constructionquality o f the dam and its operations. Finally, an Emergency Preparedness andResponsePlanwill bedevelopedand implementedfor the project. 42 147. Consultation and Project-Affected Community Support. Public meetings, focus group discussions, surveys and participatory appraisals were conducted in six phases: initial consultations; public consultation and disclosure; report consultations; action plan consultations; consultation planning; and ongoing project consultations. InterAid Africa serves as the independent monitor for the consultations and participates in the project's grievance process. There is a high level o f project awareness, including from disclosure o f project documents. Facilitating village outreach are sub- county consultation committees. Consultation records show that women were represented in most o f the meetings. IFC has determined that the project sponsors did conduct free, prior, and informed consultations. IFC has also verified, through its own investigations, broad support for the project in the project-affected communities. G,ENVIRONMENT(ENVIRONMENTAL CATEGORY: A) 148. EnvironmentalAssessment (OP 4.01). The Private Power Generation (Bujagali) Project is a Category A project in accordance with the World Bank's OP 4.01 (Environmental Assessment), IFC's Sustainability Policy, and MIGA's environmental assessment policy. BEL conducted full SEASfor its proposed hydropower project and for the associated InterconnectionProject (on behalf o f UETCL). 149. ImpactAssessmentProcess.Because the InterconnectionProject is not part o fthe proposed project but an associated facility, BEL'Sconsultant, R.J. Burnside International Limited, prepared two separate SEA Reports, one for each project. Several significant project documents, in particular the Public Consultation and Disclosure Plans, the APRAPs - for the hydropower project and a substation near Kampala, the Resettlement and Community Development Action Plan (RCDAP) - for the InterconnectionProject, and the CDAP - for the Hydropower Project, are appendices within these documents. The findings from the APRAP were incorporated into the new SEAPs, which were completed in December 2006. The documentation was designed to fulfill regulatory and procedural requirements o f IFC/IDA/MIGA, the Government o f Uganda, ADB, EIB, and DEG. 150. Disclosure. The proposed project SEA has been disclosed, together with that o f the Interconnection Project, in InfoShop and in-country on December 21, 2006. Also, a Strategic/Sectoral Social and Environmental Assessment has recently been completed under the Nile Basin Initiative and has been disclosed on February 23,2007, inthe InfoShop and in-country. IFC commissioned the "Bujagali I1- Economic and Financial Evaluation Study" (Power Planning 151. ComplementaryStudies. Inaddition, IFC/IDA conducted separate, complementary studies. Associates Ltd, UK, February 2007) to provide an extensive economic due diligence study o f the proposed project. During the course o f the study, three workshops with agencies and other stakeholders were held in Kampala. This study was publicly released on February 26, 2007. The analysis includes a detailed assessment o f the probability o f occurrence o f different hydrological scenarios related to Lake Victoria based on 106 years o f hydrological records. The study provides detailed analyses o f various power generation alternatives including mini-hydro power, geothermal and bagasse. Taking into account the assessment o f the alternative generation options and the project's own economics, the study confirms that the proposed project is the least cost option for meeting demand for electricity. A second study, Strategic/Sectoral, Social and Environmental Assessment (SSEA) o f Power Development Options inthe Nile EquatorialLakes Region (Nile Basin Initiative, February 2007) was also recently undertaken to provide guidance on the power generation options available in the region, based on an assessment o f the electricity demand, project costs, and environmental and social issues surrounding such projects, among other factors. Consultation with Ugandan and other riparian stakeholders was a key component o f the SSEA. 43 152. Analysis of Hydropower Alternatives. Alternatives to the Bujagali hydropower facility were extensively assessed as part of the previous effort to develop the project. The earlier project was based on studies by Rust Kennedy and Donkin (1997), Electricit6 de France (1998), Energy Strategy Management Assistance Strategy for a Rural Electrification Strategy Study (1999) and the Assessment o f Generation Alternatives (Acres International, 1999, as finalized in May 2000), all o f which concluded that large-scale hydropower was the most viable alternative for electricity generation. These conclusions have been reconfirmed by the complementary studies conducted as part o f the ongoing effort to develop project, such as the Power Planning Associates economic study and the SSEA study. Power Planning Associates' economic study for the project evaluated the previous alternatives analyses (see Annex 9) and concluded that "Bujagali and Karuma therefore appear to be the only major hydro power candidates that can be developed in the coming years to contribute to meeting the power demand in the country by mobilizing the renewable energy o f the Nile." Power Planning Associates investigated the Bujagali and Karuma projects in more detail, usingupdated information, and concluded that Bujagali is the least cost project. 153. Transmission System Alternatives. As part of the previous effort to develop the project, the former sponsor and its consultants conducted an extensive study o f four options to evacuate electricity from Bujagali. As part o f BEL'Splanning, new interconnection analyses were completed to ensure that project development was proceeding with the optimal interconnection option (Siemens PTI, 2006). The new study confirmed the overall conclusions from the earlier project's study, although the planned alignment o f the proposed transmission system (as part o f the Interconnection Project) has been slightly modified from the earlier design and is the preferred option from a social standpoint. 154. Cumulative Impacts. As part o f the previous effort to develop the project, studies conducted for the project sponsor and additional studies commissioned by IFC addressed cumulative impacts. The assessment o f cumulative effects was undertaken again for this new project. The Bujagali project SEA and the SSEA, recently completed by the Nile Basin Initiative (see above) include cumulative impact assessments o f Bujagali in Uganda. Socioeconomic impacts were found to be generally local in extent. The studies also concluded that no major negative environmental cumulative impacts would occur if the proposed project is not developed in conjunction with additional hydropower projects on the upper reach o f the N i l e (Le., at Kalagala Falls). Therefore, the long term protection o f the Kalagala Falls and the preclusion o f development o f hydropower potential at Kalagala is a necessary offset for World Bank Group participation in the proposed project. 155. Natural Habitats (OP 4.04; PS 6; MIGA Natural Habitats Policy) and the Kalagala Offset Agreement. The loss o f Bujagali Falls and portions o f the Jinja Wildlife Sanctuary resulting from reservoir inundation would be an irreversible impact to significant natural habitat. In circumstances such as these, OP 4.04 allows for an "offset," i.e., protection o f an area that is ecologically similar to the area lost as a result o f a project. Kalagala Falls, the site o f a potential future hydropower project on the upper Nile River, was determined to be the appropriate offset candidate. On the basis o f cumulative effects assessment conducted as part o f the previous effort to develop the project and the offset provision in OP 4.04, IFC/IDA and the Government o f Uganda on April 25, 2001 reached an agreement known as the "Proposed Bujagali Hydropower Project: World Bank Group's Requirement o f an Offset at Kalagala Falls." The Government also provided an additional commitment, to be included as part o f IDA'SIndemnity Agreement together with a letter by the Government (dated June 4, 2002), confirming its intention to preserve Kalagala and identify sustainable investment programs to facilitate tourism, with appropriate mitigation measures. The Government had fulfilled all o f its commitments required under the agreement as o f the time that the 44 project developmentcame to a halt in2003. The Governmenthas agreed with the World Bank Group to reiterate its previous commitment, as per the terms of its letter datedJune 4, 2002. 156. Forests (OP 4.36), Forestry Offset and other Transmission Line mitigative measures (PS 6). The InterconnectionProject will pass through three central forest reserves in Mabira, Kifu and Namyoya, with natural, but not critical, habitat. The land take inthe Kifu and Namyoya central forest reserves will be minor, 3.7 and 6.7 hectares, respectively. Land take in the Mabira will be more substantial, with 70.4 hectares to be affected, of which 59.2 hectares is forested. To comply with OP 4.36 the SEA proposes a number of measures to be taken by UETCL in order to minimize the impact of the InterconnectionProject, along with paymentsto the National ForestryAuthority to be used for enrichment planting to offset the loss of forest. BEL will monitor progress on these measures and will collaborate, as necessary, to ensure their implementation. The Interconnection Project's transmission line will also pass through the Lubiji Swamp, near Kampala, in order to avoid a greater impact on humanhabitation. The tower construction is designedto minimize impact on the hydrology of the wetland, which does not contain any critical habitat. A total of 0.7 hectares will be needed. 157. Natural Habitats (OP 4.04; MIGA Natural Habitats Policy), Nile River Islands and Jinja Animal Sanctuary (PS 6). The permanent land take for the proposed hydropower plant will be 125 hectares, of which 80 hectares will be inundated. The land take and the inundation will not impact critical natural habitat. The land take will affect 28.6 hectares of land within the Jinja Wildlife Sanctuary, including 15.8 hectares of land on the islands in the river that have relatively intact native vegetation (out of a total of 26.8 hectares of total island land). This impact on the islands will be off-set by the planting o f a 100 meter strip around the edge of the reservoir with native and medicinal trees. The impact on the Jinja Wildlife Sanctuary and the loss of Bujagali Falls will also be offset by the enhanced protection of the Kalagala Falls and Nile Bank Central Forest Reserves. BEL will have a role in the development of this offset as an ecotourism site, in collaboration with the National Forestry Authority. 158. Safety of Dams (OP 4.37; PS 4; MIGA Dam Safety Policy). The hydropower facility meets the policy criteria for a large dam; a Dam Safety Panel has been established in accordance with the IFCADA safeguardrequirementson dam safety. The terms of reference and staffing of the three panel members were reviewed and approved by the World Bank Group. This panel will provide advice on the adequacy of spillway discharge capacity; adequacy of back-up power systems for the spillway and main power station; effects of blasting at Bujagali on the existing Nalubaale and Kiira dam structures; and the final design, construction, initial filling, and start up phases of the project. 159. Projects on International Waters (OP 7.50; PS 1; MIGA Projects on International Waterways Policy). The Nile River is an international waterway, and pollution and other project- related effects from Bujagali could potentially affect downstream riparians. As noted above, the project is not expected to cause this to occur. Moreover, the proposed project is not expected to affect upstreamriparians that border Lake Victoria, as any effects on the lake are determined solely by the operation of Nalubaale and Kiira. The World Bank Group has considered the international aspects of the project and has assessedthat the project will not cause appreciable harm to the other Riparian States, and will not be appreciably harmedby the other Riparian States' possible water use. In May 2006, the Ugandan Government requested that Egypt provide a reaffirmation of its no- objection (already delivered for the previous effort to develop the project) for the proposed project. Upon that request a written no-objection was issued by the Governmentof Egypt on May 15,2006 to the Government.Notifications regardingthe intendeddevelopment of the project were issued by the Ugandan Governmentto other Nile riparian states in September 2006, followed by an addendum in 45 March 2007 reflectingthe available public information on the project and providing a March 30, 2007 closingdate for responses.N o additionalresponses were received as of the closingdate. 160. Effects of Climate Change on the Long-Term Viability of the Proposed Project. The SSEA undertook a thoroughanalysis of the possible climate change impacts on power development options inthe Nile EquatorialLakes Region, includingBujagali.The SSEA climate change analysis examined potential values for temperature and precipitation change, and then runoff, to provide corresponding estimates of changes in net water yield in Eastern Africa. It used the best available general circulationmodels to assess the potentialchanges in temperature and precipitation in 2050 and 2100 relative to 2000. Outputs from various climate models were examined to determine the degree to which models agree or disagree on the direction and magnitude of change in temperature and precipitation in the region. A total of 16 general circulation models were examined to select those that best simulate East African climate. Bujagali is included in the north and west central regionof the study area - for the Nile, Ruziziand Kagera Rivers.The results of the climate change analysis were that temperature is expected to increase with greenhouse gas emission increases, and an increase in precipitation is the expected result from an increase in temperature, which will also increase evaporation and evapotranspiration losses. Net runoff will increase with increase in greenhouse gas emission levels. Increasedemissionlevels will result in increasedseasonalvariability in runoff, with wet seasons providing most of the increased runoff and dry periods being less affected. Overall, for the northern and central-west regions of the study area, including Bujagali, there is a high probability of increases in runoff, and thus power generation potential, compared to historic data. Staff believes that the SSEA incorporated the best currently available climate change science anddata in its analysis. 161. Mitigation Plans. SEAPs have been prepared for both the proposed project and the InterconnectionProject that identify the responsibilities, schedules and budgets of the social and environmental management measures to be implemented. BEL has ultimate responsibility for the proposed project, and will support UETCL by playing a management role in the design, procurement, and construction phases of the Interconnection Project. The proposed project and InterconnectionProject will be constructedunder separate turnkey EPC contracts. In order to deal with unforeseen or unexpected changes during implementation,a change management process has been devised to ensure continued attention to social and environmental issues. The SEAPs are umbrellaplans, comprised of several component plans that will be integrated and implemented by BEL and the EPC contractor. Components of the SEAPs to be implemented by BEL include the Public Consultation and Disclosure Plan, Assessment of Past Resettlement Activities and Action Plan, Community Development Action Plan, Labor Force Management Plan, Emergency Response and Preparedness Plan, and Environmental Mitigation and Monitoring Plan. Components o f the SEAPs to be prepared by each EPC contractor includethe Traffic/Access Management Plan, Waste Management Plan, Pollutant Spill Contingency Plan, Labor Force Management Plan, Hazardous Materials Management Program, Health and Safety Management Plan, and Environmental Mitigationand MonitoringPlan. 162. Monitoring. During construction, BEL will have the ultimate responsibility to ensure environmental monitoring and reporting procedures are being undertaken. The project's EPC contractors will also designate appropriately experienced and qualified Site EnvironmentalOfficers. These Site Environmental Officers will have overall responsibility for the activities o f the contractor's environmentaldepartments. BEL and the World Bank Group will agree on a suitable arrangement for independent review of monitoring information through construction and initial operations. BEL'S Environmental Manager will develop environmental reports suitable for submission to the National EnvironmentalManagement Agency (as a requirement of the Ugandan 46 Environmental Impact Assessment Regulations) and to other stakeholders, as appropriate, and will make these reports available in its local offices as well as on its website (www.bujagali-energy.com). H.SAFEGUARDPOLICIES Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [XI [I NaturalHabitats (OPBP 4.04) [XI [I Pest Management(OP 4.09) [I [XI Physical Cultural Resources (OPBP 4.11) [XI [I Involuntary Resettlement(OPBP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [I [XI Forests(OPBP 4.36) [XI [I Safety of Dams (OPBP 4.37) 1x1 [I Projects inDisputed Areas (OPBP 7.60) [I [XI Projects on International Waterways (OPBP 7.50) [XI [I 163. IFC has determined that the risks involved in this project should be addressed through adherence to Performance Standards 1,2, 3,4, 5, 6 and 8. For the purposes o f Performance Standard 7: Indigenous People, neither the Buganda, on the western bank of the Nile, nor the Basoga, on the eastern bank, are considered indigenous people. MIGA Policies on Environmental Assessment and Disclosure have also been addressed. Risks and issues associated with this project are addressed through MIGA's (issue specific interim safeguard) Policies on Involuntary Resettlement, Physical Cultural Resources, Natural Habitats, Dam Safety, and Projects on InternationalWaterways. I. EXCEPTIONS READINESS POLICY AND 164. N o exceptions to Bank policies, IFC Performance Standards, or MIGA policies are sought. 165. The EPC contract is expected to be signed in April 2007. Financial closure is currently scheduled for mid-2007. All other multilateral, bilateral and commercial banks financing the project are processing their respective approvals to meet this schedule. 47 UgandaPrivatePower Generation(Bujagali) Annex 1 Annex 1:Countryand Sector Background A. COUNTRYBACKGROUND 1. Uganda, with a per capita income in 2005 of about US$280, is one of the poorest countries in the world. Life expectancy is low (49 years at birth) while population growth, at 3.5% in 2005, is amongof the highest inthe world. 2. The Governmenthas demonstrateda firm commitmentto poverty reduction, as spelled out in its PEAP. The most current version aims at key strategic results in areas of increased GDP growth, reduced poverty and inequality, and improved human development. IDA'Sassistance to Uganda is aligned with the strategic direction given in the PEAP, and the UJAS, approved by IDA and other development partners in January 2006, provides the basis for their support of the PEAP's implementation. 3. IDA'S and other Development Partners' contributions have brought the country closer to reaching the Millennium Development Goals of reduced HnT/AIDS prevalence, poverty reduction, and increased enrollment rates for primary schooling. 4. The Uganda country program was the first to utilize the Poverty Reduction Support Credits, which provide external finance to the budget to support the implementation of the reform agenda derived from the PEAP. Uganda was also the first to benefit from debt relief under the Heavily Indebted Poor Country Initiative, which resulted in cancellation of 100% of Uganda's IDA debt on July 1,2006. 5. Uganda has experienced robust macro-economic performance in recent years, averaging 6.4% growth between 1990 and 2005. Strong macro-economic policies, a credible program to eradicate poverty and good financial discipline have led to falling poverty levels. Domestic inflation has been slightly above the 5% target for the third consecutiveyear due to inflationary pressures from weather, power shortages and energy price shocks. The Uganda Shilling (USh) depreciated by 4% against the US$ due to higher demandfor foreign exchange to finance the import bill. Overall, due to good macroeconomic management, savings, exports, and foreign direct investment are increasing. The challenge for Ugandais now to deepen the reforms alreadyunderway andpreventtheir reversal. B. SECTORBACKGROUND 6. This section includes: (a) the key characteristicsof the power sector; (b) a description of the Government's comprehensive power sector reform program; and (c) a description of ongoing and planned IDA-supported power sector operations (see Annex 12 on the power sector financial situation). Key Characteristicsthe Power Sector Hydrology, Supply and Demand 7. Uganda's main source of power is from the Nalubaale and Kiira 380 MW' dam complex, located at the mouth of Lake Victoria. Over the past several years, Lake Victoria water levels have droppedby 1.5 meters, and in October 2006 reachedlevels close to the historic low of March 1923. ' Thecurrent commissionedcapacityofthe damcomplex is 300 MW. Two additional40 MW units are scheduledfor commissioninginApril 2007. 48 Uganda PrivatePower Generation (Bujagali) Annex 1 However, by March2007, the lake levels have recoveredby about 0.7 meters. The low water levels have resulted in a decline in electricity output from the NalubaaleKiira dam complex from around 200 M W in April 2005, dropping gradually to reach 170M W by January 2006, reducing further to 135 M W (equivalent to water discharges of 850m3/s)from February 2006 to August 20, 2006. Since then, the production has dropped to 120MW (equivalent to water discharges of 750m3/s). In contrast, current system demand is about 380 M W at peak times and about 290 M W at base load, resulting inpersistent and acute power shortages which are impacting growth. 8. The reasons for these power shortages are fourfold. First, there has been a significant delay in power infrastructure development, in particular, in completing the financing of the previous Bujagali project, which is the next least-cost generation increment. As part of the previous effort to develop the project, construction was scheduled to commence in early 2002 and the power station was to be commissionedby the end of 2005. Second, the low Lake Victoria water levels, caused both by the recent regional drought as well as water over-abstraction for hydropower generation, have resulted in significantly reduced power generation output at the NalubaaleKiira dam complex. In this regard, the Government has decreased hydropower production in an effort to return to the principles embodied in the Agreed Curve. A third contributor to current power shortages has been the high level of technical and non-technicallosses of the distribution system, which are now being addressed by UMEME, the private sector concessionaire. Fourth, annual demand growth over the past severalyears increasedby about 8%, placing additional pressure on the power system. 9. Lake Victoria is a shared transboundary resourceof Kenya, Tanzania, and Uganda. Rwanda and Burundi are a part of the upper watershed that drains into Lake Victoria through the Kagera River. The lake is part of the Nile River Basin system shared by ten countries: Burundi, Democratic Republic of Congo, Egypt, Ethiopia, Eritrea, Kenya, Rwanda, Sudan, Tanzania, and Uganda. In addition to its environmentalvalue, including biodiversity and the hydrological cycle, Lake Victoria supports a large fishing industry for export and local consumption, hydropower production, drinking and irrigation water, lake transport, and tourism. Because of low water levels, these benefits have been threatened by environmental degradation manifested in reduced fish stocks, the drying out of fishbreedingareqs andthe loss of livelihood to many fishing communities; a decline of biodiversity; increasedsedimentationand nutrient loads resulting ineutrophication; the drying out of wetlands and loss of littoral habitat; increasedlake transportation costs, since ports and piers are left hanging on dry land, and water shortages for shoreline towns and farmers. Hence, the consequences of load shedding and depletion of Lake Victoria have been widespread, with macro, sectoral and environmental impacts affecting not only Uganda but the other Riparian States. Efforts to regulate and manage the activities threatening the lake are clearly insufficient at present, and widespread poverty in the basin exacerbates environmentalstress. Even in its current perilous state, the lake is a valuable asset supporting the livelihoods of approximately three million people directly; and indirectly the entire population ofthe basinestimatedrecently at 30 million. 10. On July 26, 2006, the daily water outflow regime of the NalubaaleKiira dam complex was modified so as to optimize hydropower generation. Higher volumes of water are now discharged during the day and lower volumes at night, such that the total volume of water releasedduring the 24 hour period is the same as ifthe release was at a constant pace (as was the case up to July 25,2006). Hydropower output during the day and night is now at 145 M W and 79 MW respectively, rather than 120 M W continuous. The operating regime of the 2x50 M W short-term thermal plants is now also optimized during peakhours and during the day. 11. The power supply situation has slightly improved since the optimization o f available generation capacity started in late July. However, the overall load shedding for the calendar year 2006 remainedhigh, with 364 GWh of load shed in2006. Infact, load sheddingin2006 increased by 49 UgandaPrivatePower Generation(Bujagali) Annex 1 over 370% compared to 2005 (98 GWh of load shed). Those numbers show the dramatic consequences of the overall capacity constraints in the system that the Government has now started to address. 12. The generationmix has changed from a predominantly hydro based system until mid-2005 to a hydrohhermal mix of 55/45 today and the share of thermal generation is expected to increase further when the additional 50 M W temporary thermal plant, to be financed under IDA'Sproposed Power Sector Development Operation, is commissionedlater this year. 13. In spite of a very low electrification rate, the cost of load shedding to the economy is significant. The lack of reliable and available power supply and/or the needto runexpensive back up generation has impacted on industrial production (many firms have limited back-up generation capacity). The cost of unserved energy has been estimated at US$38,9$/kWh. Furthermore, the shortfall in generationhas a knock-on effect on the rest of the power sector, since lower volumes in supply leadto lower retail electricity sales and revenues, which is affecting the viability of UMEME, the private distribution concessionaire. Government'sInterim GenerationPlan (to Bujagali commissioningin early 2011) 14. The Government's interim generation expansion plan until the commissioning of the proposedproject inearly 2011is summarized inthe table below. Dependable Fuel Commissioning Retirement 1 Capacity (MW) Thermal Aggreko Ishort-term(situated at Lugogo) 50 ADO May 2005 Mar 2008' Aggreko I1short-term(situated at Kiira) 50 ADO Oct 2006 Dec 2008 IDA financed plant (situated at Mutundwe) 50 ADO Aug 2007 Feb2011 Permanent(Heavy FuelOil (HFO)) 50 HFO Apr 2008 BOT Mini-hydros BugoyeIWaki 19 Jan 2009 Buseruka 9 Jan 2009 Kikagati 10 July 2008 Ishasha 5.5 Jan2009 Cogeneration KakiraSugar - 12 July2007 sugar c o p (SCOUL) 3 Jan 2009 15. Bids for the 50 M W short-termplant (to be operated on ADO) to be partly financed by IDA under this proposedPower Sector Development Operation are under evaluation. The Government is currently evaluatingthe procurementof a permanent 50 M W HFO plant on an IPP basis.Inaddition to procuring thermal capacity, the Government has reached final stage negotiations on a number of mini-hydro and co-generationschemes involving nearly 60 M W ofcapacity. Peak and Base Load & Power Demandfor Electricity 16. The charts below indicatethe peak and base loadand base case energy demandconsideringa number of thermal generation and demand side management and energy efficiency options. These graphs depict the generationexpansionplan detailedabove and also incorporatean estimatedsavings potential of about 50 M W through energy efficiency and demand side management initiatives. 50 Arrnex f Figure 1.1: Load d ~ e r n a 2006- 2014 ~ d l7. I'he operational P e is also sal p e r ~ o r I ~ include:c e ~ ~ ~ ~ e * ioil rate \vent up from 80% 011take r to 91% by hifay 2006. 1: o f 37.5% in Jutie 2006, the collc 11 rate dropped tu 85% October 2006, and to 82% in Nu 1XKinNo\ember2 * * 18. "tl?e ~o~er1~metitand U~~~~~~have agreed that as long as Ihc power crisis persists and until C7f31'Cf+'sbufk supply ~ as ~ a b ~ l ~ 7 ethe bulk~supply tariff does~not increase by (a) 10% or ~ [Le., ~j ~ ~ iiiore oi`lhe retai! tariff uithin a tMe1i.e month period or (b) by 20% or 11 retail 1tirff nithin a thirty-six montl~speriod), actual losses minus 1% and the actuaf no I1 rate (of the iast quarter p r ~ c eany itariff change) will be app~~ed ~ ~ ~ ~ in 1 ~ tariff ~ ~~ ~ ~~ r ~mThercnissa ~ ~ ~ ~ i . ~ ~' downside ion for ~~~~~, the benefits accruing from tower fosscs will be shred but and lSETCL (see 121. 51 Uganda PrivatePower Generation (Bujagali) Annex 1 19. Box 2 summarizes the main characteristics and key factors affecting Uganda's power system: Box 2: Uganda's Power System Characteristics D Uganda's total energy consumption is around 5 million tons of oil equivalent, of which 90% is biomass- wood, charcoaland agricultural residues. Per capita energy consumption is about 0.2 tons of oil equivalent, which is one ofthe lowest inthe world. D Uganda has one main hydropower complex, located on the Nile River: Nalubaale (180 MW), completed in the early 195Os,and Kiira(200 MW), adam and powerhousefacility located0.8 km downstream. D To address the current power shortages, the Government has procured two 50 M W short-term thermal power plants, and is planning to procure an additional 50 M W thermal power plant under the proposed Power Sector Development Operation (FY07). An IPP of 50 M W running on HFO is also being procured. Thermal power generationrepresented 23% oftotal generationoutput in2006. D The power sector generated 1,887 GWh in 2005, which decreasedto 1,610 GWh in2006, due to the power crisis. Domestic electricity sales revenueswere US$116 million in2006. D Uganda has the 231dhighest retail petroleum prices in the world - about the fifth highest in Africa. The average proportion of Ugandan transport costs attributed to fuel charges is estimated at about 50% (comparedto an average of 30% for Africa). D There were about 300,100 consumers connectedto the national grid at the end of 2006. Efforts to expand rural access in areas far from the grid, as well as extending existing connections outside of UMEME's concessionarea, are being pursuedunder the Energy for Rural Transformation Project. Key FactorsAffecting the Power System D A significant delay in power infrastructure development and, in particular, in completing the financing of the previous Bujagali project, which is the next least-cost generation increment. As part of the previous effort to develop the project, construction was scheduledto commence in early 2002 and the power station was to be commissionedby the end of 2005; D The low Lake Victoria water levels, caused both by the recent regional drought as well as water over- abstraction for hydropower generation, have resulted in significantly reduced power generation output at the NalubaaleKiira dam complex (currently only 120M W ofthe 300 MW installed capacitycan be used); D The high level oftechnical lossesofthe distribution system; D Annual demand growth which has increasedby about 8%; and -D Low access rate to electricity of approximately 5%. Government's ComprehensivePower Sector ReformProgram 20. In June 1999, the Government approved a comprehensive power sector reform strategy that focused on improving efficiency through private participation in the sector. In November 1999, the Parliament passed a new Electricity Act, which provided the legal and administrative framework for reform and removed the legal monopoly o f the Uganda Electricity Board (UEB). In April 2000, the Government created the ERA as an independent regulator. On March 31, 2001, the Government unbundledUEBinto three separate corporate entities, one each for generation (the UgandaElectricity Generation Company Ltd. - UEGCL), transmission (the Uganda Electricity Transmission Company Ltd. - UETCL) and distributiodsupply (the Uganda Electricity Distribution Company Ltd. - UEDCL). Subsequent to the unbundlingo f UEB, the private sector was granted separate concessions for the management o f UEGCL's and UEDCL's assets and UEB was dissolved inearly 2006. 52 2L. ~ ~ of Power G n e ~~ e Assets (April 2003). In April 2003,~ r ~~ ~ ~ ~ ~ ~ o ~ ~ ~ ~ b ~ i dofi aEskom En~er~rises r y (Pty) Ltd, the ~ t n ~ e utility of Soticti~Africa) - ~ ~ ~ ~ ~ d GCL"sassets, which consisted ofthe ~ a l ~ b a andeKiira a ~ since been lintited to itorill8 the activities of ple and its a ~ ~ ~ i ~ nCQSES ~arer recovered cfir ~ s which in turn, recovers its cost ~ ~ ~ r ~ ~ UEfCL for tfic sale of power. Eskom ~ ~ a ~chargesato~UETCL cover depreciat~~~ ~ d s of capital, the ~ o 1 ~ ~ e ~ s i o rreturn,~a' s~ i ~ i uoperationarid ~~iain'ien~I~Ce and r e ~ ~ ~ l nfees,r y i a i ~ a ~ costs, ~ o bidding process and te company esrabfish ~lobclcqLtd. of Ber~tiu d a 56% and 44% ownr ~ l o b c l eis~a ~ ~ ~ o l l ~ - so ~~ ~n ~e~d~ofdGa~r y~ bLtd.,l (UK) which, in turn, is a ~ ~ r o ~ l y - o ~ ~ ~ ~ e d i ~ ~ q rporntion oftfie UK, U~~~~ is the first ~ i n b ~ n d l ~ d ssiotted to the priicitc secror. Fr ME.uma, has s ttetwork, UE[>CX,"s fiitrcr ri pcuplr and its adr are rocovered ~ h r aolcase payment cliarged 'io ~~~~~~, ~ ~ ~ ~ ~ which rccovers t ~ ~thcr ~ ~ ~ ~ h ~~~~~ electricity retail tariff. The fitigttre bchw illustrates the current indusfrj strticrurr. Figure 1.2: Current ~ t rof Uganda's Power Sector ~ ~ ~ t ~ ~ rt t t _.- -- .. ~ Electricity Regulatory Authority rgy atid MineraId es figamla's power sector. : (a) provide pol ment and e ~ p l ~ iof' ~ ~ j ~ n ~ niitieraf resources; (b) acquire, t ~ c ~ n ~datalin ordcr to c a era1 resource potentialof in order to attract ~ n ~ ? e ~in~the~deen~ ~ e ~ o p~I ~o~ n ~~,ands u~ o~ ni l ~of~energyiand~mineral I r ~ ~ ~ ~ o resources: and (d) inspect, regtitate, monitor and evaluate activitiesof private c ~ i ~ ~ ain~the ienergy ~ e s E inNovember 2006. 53 Uganda PrivatePower Generation(Bujagali) Annex 1 and mineral sectors so that the resources are developed, exploited and used on a rational and sustainable basis. 24. With the approval o f the Electricity Act (1999), the legal and administrative framework for the electricity sector was created to regulate the generation, transmission, distribution, sale, export and import o f electricity inUganda. Some of the key elements o fthe Electricity Act are: Establishment o f the ERA as an independent body, specifying its structure, appointment o f its members, functions, power and administrative duties; Creation o f an application and implementation procedure for new projects, which is to be conducted in an open and public manner, and which allows for both unsolicited proposals to be presentedto the ERA and for the ERA to invite applications for aparticular license; Access to the transmission system to all licensees on a non-discriminatory basis, upon payment o f the relevant fees and charges as approved by the ERA; Universal access to the distribution network to all existing and potential users, upon payment o f the relevant fees and charges as approved by the ERA, subject to technical constraints; Creation o f dispute mechanisms; and 0 Commitment by the Government to promote and support rural electrification programs, including through the creation o f a rural electrification fund, which has been established and is managed by the MEMD. The Electricity RegulatoryAuthority (ERA) 25. The ERA commenced its functions in April 2000. The ERA is composed o f five members (including a Chief Executive Officer) appointed by the MEMD, with the approval o f the Cabinet. ERA members are appointed for 5-year terms and can hold a maximum o f two terms. ERA has a total o f twenty five permanent staff, including fifteen professionals. 26. The ERA key functions and responsibilities include the following: 0 Issue licenses for generation, transmission, distribution and sale o f electricity; licenses shall remain in force for a maximum period o f 40 years and cannot be transferred without the written consent o f the ERA; 0 Ensure compliance with the licenses issued and the Electricity Act and, in doing so, protect the interest o f consumers in respect o f electricity tariffs, and quality, efficiency, continuity and reliability o f electricity supply; 0 Establish the sector tariff structure, approve electricity tariffs, and investigate tariff charges. The methodology for tariff calculation (which should be determined so that it covers all reasonable costs and provides a reasonable rate o f return) must be approved by ERA and stated inthe license; 0 Develop and enforce performance standards for the electricity sector; 0 Provide the procedure for investment programs by the transmission and distribution 54 Uganda Private Power Generation (Bujagali) Annex 1 companies; Appoint the systemoperator, which must be also a transmission licensee (currently UETCL); and 0 Designate a bulk supplier, responsible for the transmission and sale of electricity in bulk to distributionand sales companies (currently UETCL), under the terms specifiedinthe license issuedby the ERA. 27. Although the Electricity Act allows direct funding for ERA from the Government and Parliament, ERA has not receivedany direct government financingnor does it rely on borrowings.Its primary funding (around 70% of its revenues) is throughannual license fees, followedby permit fees and funds from developmentpartners, suchas IDA andNordic DevelopmentAgency. 28. The ERA has played an important role in the oversight o f the power utilities operating in Uganda. It has regulated electricity tariffs effectively since 2001. Since early 2005, the power crisis brought about by dry hydrologicalconditionsinthe regionhas created significant challenges for the Government, the ERA and the power utilities.The ERA has implementedsubstantialtariff increases in recent months; 37.5% in June 2006 and 41% in November 2006, in order to ensure the financial viability of the power sector. The power utilitiesnow operate at arm's length.UMEMEhas achieved satisfactory operational improvements, although some o f the efficiency gains have been reversed to some extent followingthe large increases intariffs. TheRural ElectriJicationAgency 29. The Rural Electricity Agency was established in 2003 by the MEMD as a semi-autonomous agency. The Rural Electrification Agency is mandated to facilitate the Government's goal of achievinga rural electrificationrate of at least 10%by the year 2012 from 1%at the beginningof this decade. The Rural ElectrificationAgency derives its revenues from a 5% levy applied on UETCL's bulk energy purchase costs. A Rural Electrification Fund was created to support the Rural ElectrificationAgency's activities.The RuralElectrificationFundwas designedto partially subsidize initial capital costs and debt financing and providefinancialincentives for private companiesto bring electricityto unservedareas. 30. The Government's strategy in rural electrification is being supported by IDA through the implementation (in partnership with Global Environment Fund) of the Energy for Rural Transformation Program (Credit 3588-UG). One o f the projects currently benefiting from this program's efforts is the West Nile Rural Electrification Company, a small off-grid project, which currently supplies electricity during 18 to 24 hours per day to around 1,500 rural clients in the West N i l e area. The company is constructing a 3.5 MW mini-hydro plant and is currently operating a 1.5MW diesel power plant, benefitingfrom a US$7.5 million subsidy under the IDA financed Credit 3588-UG. Ongoingand PlannedIDA-supportedPower Sector Operations. 3 1. IDA has been involvedinthe power sector inUgandafor over 20 years throughdevelopment of several projects, beginningin 1980 with emergency repairs to the Owen Falls Dam- now called Nalubaale dam (financedby the UnitedKingdom), which, along with the OwenFallsExtension(now calledKiira) is a complex onthe Nile River constructedand extendedover a periodof about 50 years. Other projectsincludethe Power I1Project in 1985 for the rehabilitationthe Owen Falls (Nalubaale) Dam, Power 111in 1991 for the constructiono f the Owen Falls Extension(Kiira), a Supplemental 55 Uganda Private Power Generation(Bujagali) Annex 1 Credit to Power I11in 2000; the Power IV Project in 2001, which has financed Unit 4 and Unit 5 (each of 40 MW) at the Kiira powerhouse, and the Energy for RuralTransformationProjectin 2001, whichaims to expandruralaccess to electricity. 32. Ongoingpower projects financed by IDA are described below (see Annex 2 for a complete list of donor supportedprojects inthe Ugandapower sector). Power I V Project (Credit 3565-UG): US$62 million IDA credit to commission additional capacity (80 MW) at Kiira; geothermal investigations (shallow drilling), and US$12 million for urgentdistributioninvestments, petroleumreformand capacity building. Energy for Rural Transformation Project (Credit 3588-UG): US$46.5 million IDA credit which aims to establish the institutionaland legal framework for rural electrificationand a RuralElectrificationFund, to facilitate scale-up of ruralaccess which would otherwisenot be a commercialproposition. The project supports the development of small and medium-scale renewable energy options, including both grid-connected and off-grid mini and micro- hydropower, bagassebasedcogenerationplants, andbiomassgasification. Privatization and Utility Sector Reform Project (Credit 3411-UG): This projectwas amended to include a PRG guarantee mechanism to provide risk mitigation support to UMEME, Uganda's private distributionconcessionaire. IDA is providing limited risk coverage (up to US$5.5 million) to backstop a Liquidity Facility that could be drawn upon in the event of non-paymentby the Government of its electricity bills and because of failure of the ERA to approve tariff adjustments according to the pre-agreed tariff methodology set forth in UMEME's distributionand supply license. MIGA is as well involvedinthat project through a Guaranteethat covers a substantialpart of the concessionaire's investments. 33. Along with the proposed project, IDA is also preparing the Power Sector Development Operation (FY07), which provides budget support to Government and also supports the financingof one 50 MW temporary thermal plant, as described earlier. In additionto these two projects, IDA is also supporting a regional power interconnectionwith the East Africa Community, which would benefit all countries involved by diversifying supply, reducing investment costs, and increasing electricity supply. 34. Table 1.2belowdescribes the World Bank Group's role inthe UgandanPower Sector andthe development ofthe proposedproject. Table 1.2: World BankGroup Role inthe UgandanPower Sector Role and Expected Contribution Description& Indicators Indicator Timing Support for infrastructure The World Bank Group is supporting the financing of the Bujagali At commitmentand development and project, which will provide much needed cost effective generation during supervision. mobilization o fprivate capacity to Uganda. Such capacity addition is not only critical for the sector investments long-term sustainability of the sector and, ultimately, to the country's economic growth and macroeconomic stability, but also, the successful implementation o f the proposed project will underpin Uganda's reforms of the power sector. In this respect, a successful outcome is expectedto act as a catalyst for private investmentsinthe power sector inparticular,andinthe countryingeneral. IDA and MIGA are supporting UMEME, respectively, through: (a) a Ongoing PRG mechanism covering Government non-payment and regulatory 56 Uganda Private Power Generation (Bujagali) Annex 1 risk under Credit 3411-UG; and (b) political risk insurance MIGA/R2004-0076andMIGA/R2004-0059. Support to Government's IDA has supported the Government's power sector reform effort Ongoing Power Sector Reform through financingof technicalassistance and advisory support. Uganda i s (a) the first country in Sub-Saharan Africa to have unbundled its electricity sector and to have the generation and distribution sectors managed by the private sector, and (b) has established a regulatorwith a strong track-record. The development of the proposed Bujagali projectis key to sustainable sector reform. Development of the IFC has taken a leading role among the lender group in (a) initiating DuringAppraisal, Bujagaliproject and funding the project's economic analysis (funded through IFC's until commitment. FMTAAS), (b) the selection of lenders' advisors, and (c) coordinating environmental and social issues. The World Bank Group is also collaboratingon aproactivecommunicationstrategy with respectto the project, inconsultationwith the Government, sponsors and lenders. Structuring of the project The World Bank Group is sharing its knowledge and experience in DuringAppraisal, financing Uganda's power sector with the sponsors and other lenders, ensuring until commitment. that the project is financeable and establishes a standard that can be replicatedinother infrastructureinvestmentsin Sub-SaharanAfrica. Mobilizing long term IFC, alongwith the other DFIs lendingto the project, is providing fixed At commitmentand financing to better match rate A and C Loans with a 16-year and 20-year door-to-doormaturity, disbursement. the project's needs and respectively, among the longest provided by IFC in Sub-Saharan minimize impact on Africa, thereby ensuring the project sustainability. The proposed IDA project's tariffs PRGhas allowedBELto mobilizefunds from commerciallenderswith a 16-yearmaturity, thereby matchingthe maturity o fother DFIs. Attracting experienced MIGA's political risk insurance,providedfor the benefitof Sithe At commitmentand developersas equity Global (one of the project sponsors), ensures the participationof an disbursement. investors in Uganda's experiencedpower developer. Sithe Global's investment, together with power sector that of IPS(K), is one ofthe largestequity investmentscommittedby the private sector inan privatepower projectin Sub-SaharanAfrica. Implementationof The proposed project is required to comply with the World Bank At appraisal and environmentand social Group's andMIGA's SafeguardPolicies/IFC PerformanceStandards. duringsupervision. policiesacceptableto the World Bank Group. 57 3 A n s I Y Y I W L b 4 2 a$ Uganda PrivatePower Generation (Bujagali) Annex 3 Annex 3: ResultsFrameworkand Monitoring IDA ResultsFramework: capacity that will eliminate power shortages. Levelized cost per kWh. time and within budget. Trial runresults; and Commissioning test results. IFC ResultsFrameworkand Arrangementsfor ResultsMonitoring(DOTS): Key Impacts ImpactIndicators Financial Projectcompletionontime andbudget Q1 2011 FinancialEconomic Annual ROIC > WACC o f 8.9% andEconomicROIC From2012 > 10% ~ Economic Annual GWh generatedby project, benchmarkbeing From2011 Yes 1,165 GWh Economic Elimination of loadsheddingafter project 2011-2013 Yes commissioning(before next expectedgeneration capacity addition) Social Implementationofthe CommunityDevelopment 2007-11 No, tracked inESRR Action Plansfor the proposedproject Environmental Implementationof EnvironmentalManagementPlan 2007-11 1 No, tracked in ESRR for the dam andPower house 1 I Environmental 1 Implementationof Kalagalaoffset agreement Life ofProject 1 No,tracked in ESRR Privatesector Additionally IPPscommissionedinthe power sector in Life of Project Not applicable development: Uganda demonstration effect 59 rr) 5C 4 -1 zl -1 n w m 5a 2 5a2 -1 11 -1 a W m 2 a N $ Z I2 2 i z I c( 0 Uganda PrivatePower Generation(Bujagali) Annex 4 Annex 4: Detailed Project Description GENERAL PROJECT DESCRIPTION 1. The proposed Private Power Generation (Bujagali) project site is located at Dumbbell Island, approximately 8 km downstream of Jinja and 8 km north of the in the existing Nalubaale and Kiira dams, which are located at the outlet of Lake Victoria. At Dumbbell Island, the river will be dammedby an approximately 30 meter high rock filled dam and associatedspillway works. The dam will impound a small reservoir that extends 8 km upstream, to the Nalubaale dam. The reservoir will have a surface area of approximately 388 hectares (ha) at Full Supply Level, which is considered to be at elevation 1,111.5 meters (m) above mean sea level. The reservoir will provide live storage o f 12.8 million m3o f water. The total volume o f water at the Full Supply Level will be 54.0 million m3. 2. A powerhousewill be constructedat the dam housing 5 x 50 M W vertical-mounted Kaplan turbine generation units that together will provide a maximum generating capacity of 250 M W of electricity. A high voltage substation, to be known as the Bujagali Substation, will be located on the west bank of the Victoria Nile, adjacent to the dam and power house. This substation will be designed and constructed to allow operation at 220 kV, but will initially be operated at 132 kV. In the future, switching operation to 220 kV would require installation of new step-up transformers, 220 kV bus and associated circuit breakers and protective equipment and, possibly, minor on-site relocations of some of the power lines. BEL will build and operate this facility as part of the project. All power from the project destined for the national grid will flow through this substation. 3. Two hundred and thirty eight hectares o f land has been obtained for the project. Eighty hectares will be newly inundated land, with the balance of the acquired land needed for the facilities listed above as well as for temporary facilities needed during construction. These temporary facilities include haul roads, coffer dams, laydown and storage areas, and quarries. 4. The evacuation of maximum electricity output from the plant would require 100 km of transmission lines, the construction of a new substation at Kawanda, and the extension of the Mutundwe substation (the Interconnection Project). It will be built as a separate project from the proposed generation facility and will be financed by ADB. The transmission line includes: (a) a 75 km 220kV transmission line, operating at 132kV, to convey the power generatedat the power plant to a new substation located inKawanda (on the outskirts of Kampala), (b) a 17 km 132 kV transmission line to connect the Kawandasubstationto the existing Mutundwe substation, located inthe southwest section of Kampala, (c) a 5 km 132 kV transmission line from the Bujagali switchyard to the existing 132 kV transmission line, currently connecting Nalubaale with the Tororo substation (in eastern Uganda), and (d) a 5 km 132 kV transmission line extending north from the Nalubaale dam to interconnectwith the Bujagali switchyard. 5. Table 4.1 provides a summary of the characteristics of the proposedhydropower facility: 61 Integra{intake and Power Station Trash Screen Size 2 -9 rn wide x 17m high 62 Uganda PrivatePower Generation (Bujagali) Annex 4 Power Station: location Surface type in left channel around Dumbbell Island Total Installed Capacity 250 MW Numberof Turbines and Type 5, Vertical Axis Kaplan Maximum Discharge 2 - each 9 m wide x 6 m high approx. 1375 m3ls approx. DraftTube Gate Size Tailwater Level at Station Output (250 MW) 1089.5 m approx. Turbines: Reservoir level 1111-5m Output at 22.0 m gross head 50 MW Discharge at 22.0 m gross head 275 m3/s Generators: Maximum Output 62 MVA (Power factor 0.85 lagging to 0.95 leading) Oil immersed Transformer Type Spillways: Maximum Discharge -Total for all Spillways 4500m3/s Gated Spillway: Maximum Discharge Flap Gate 300mYs Radial Gates 3000m3ls Sill IevellClear WidthlHeight Radial Gates 1081.5m AMSL/l9m/10.5m Number of GatesiType Flap Gate. 1 Flap, 2 Radial Size of gates Flap gate: 12m wide x 8m high approx. Radial gate: 9.5m wide x 10.5m high approx. Siphon spillway: Maximum Discharae I,200m3/s Crest LevellClear Waterway Length 1111.5m AMSLl80m Dam: Twe Clay core rock fill dam Height (estimated maximum) 30m Crest LeveVLength 1114.5 AMSLl560m approx. Extreme Drawdown Level 1106.5m AMSL Bujagali Substation Voltage 132 kV (initial phase) Outdoor Open Terminal, Double Busbar, Single Circuit Braker HYDROPOWER LOCATION LAYOUT FACILITY AND 6. The advantages o f constructing a dam at the site, where Dumbbell Island splits the river into two channels, include: (a) the steep banks that limit flooding to a small area and provide for good abutments for the dam itself; and (b) the presence o f Dumbbell Island facilitates the construction of cofferdams duringriver diversion, and thus enables a shorter construction period. 7. The permanent facilities include an intake structure, a power station, housing 5x50 MW turbine generator units, services bay and control building; main gated spillway west o f Dumbbell Islandand a siphonspillway to the east of DumbbellIsland; rockfill embankment, with a maximum height o f 30 meters; and abutments. The power plant includes a high voltage electrical substation. Other on-site facilities are: workshop, stores, emergency power generation; water treatment plant; and access roads. 8. The layout comprises an embankment across the eastern channel at the downstream end o f Dumbbell Island, with the powerhouse and spillway located in the western channel. 63 Uganda PrivatePower Generation(Bujagali) Annex 4 The river will be diverted through the eastern channel to allow construction of the concrete structures, and then re-diverted through the spillway to allow the main embankment to be completed. The total construction time will be inthe order of 44 months. Power House 9. The power station is designed to house the complete generation plant and all five units, and to carry out all operational and maintenance related activities. There will also be provision for access for the maintenance and repair of the hydroelectric plant, and all essential services and components that may require frequent attention. The services and unloading bay will provide sufficient space to permit the future laydown, disassembly and working space for the overhaul and refurbishment of one turbine and one generator at the same time and will allow for normal access and unloading space for the routine maintenance of the remaining units inservice. The power house will be arranged on levels creating sufficient floor area to accommodate all necessary power house and auxiliary services, including cooling water systems, hydraulic pumping sets, oil purification systems, small power, lighting and ventilation equipment, drainage and dewatering equipment, compressedair systems and control and ancillary electrical equipment. 10. The generator transformers will each be located in a dedicated bay, suitably separated by blast walls and confined to prevent the spread of fire. Each transformer will be mounted within a concrete enclosurecapableof containing the entire contents ofthe oil ineach unit. 11. The standby diesel generating set will be housed in a separate building. All drains for the standby diesel generator house and for the areas around the daily and main diesel storage tanks will be valved and routed through suitably sized oil separation tanks. A control building will be provided as an integral part of the power house structure. Power Station Intake Structure 12. The power intakes will be capable of operating over the full range o f Head Pond levels and turbine discharges without hydraulic instability or vortex formation. Adequate submergence will be maintained to prevent air being drawn into the water flow or floating trash being drawn against the screens from the water surface. The power intakes will be designed to operate entirely separately so that any one unit may be shutdown and dewatered while the other units remain in operation. An access bridge will be provided across the intake structure. A grouting and drainage gallery will be located at the upstream toe of the intake structure to enable secondary remedial grouting without taking the structure out of service. Floating trash, water hyacinth and other forms of buoyant matter will be removed from the reservoir and preventedfrom reachingthe power intake structure. Spillways 13. The capacity of the spillway system will be at least 4,500 m3/secat freeboard conditions. The maximum permitted water level in the reservoir under any flood condition will be 1,112 m. The spillway will be dimensioned such that the reservoir water level can be drawn down and held at 1,106.5 m with a continuous discharge of 1,500 m3/s from the Nalubaale/Kiira stations. To achieve this, a proportion of the flow may be discharged through no more than two turbines, although this will be subject to the operational requirements specified by the manufacturer of the turbines. 64 UgandaPrivatePower Generation(Bujagali) Annex 4 Dam Embankment 14. The dam across the Nile River has been designed with a crest elevation of 1,114.5 meters above mean sea level (AMSL), assuming a Maximum Flood Level of 1,112.0 m and a full sup ly level of 1,111.5 m. The latter elevation will allow for a maximum discharge of 4,500 m /s. The height of the dam will be approximately 30 m. Access to the crest of the dam P will be provided from the west bank. A turning area will be provided on the east bank and the passage of vehicular or pedestrian traffic beyond the turning area will be prevented by an immovable barrier and security fencing. Suitable vehicle guardrails will also be provided on the dam crest and access roads. Instrument houses, gallery access points, electrical installations and all similar operational facilities will be fully secured against unauthorized access. Tailrace and DownstreamRiver Bed 15. The tailrace canalization will be excavated down to 1,070.5 meters above mean sea level at the outlet of the draft tubes. Further downstream, the rock will be excavated on a slope to 1,084.0 meters above mean sea level, approximately 70 m downstream of the draft tubes, and continue at this level as far as the location of the (temporary) cofferdam. Abutments 16. Abutments for the dam are required on the left and right banks. Both abutments will be based on the same design as the dam. Substation 17. A 132 kV outdoor substationwill provide the means by which the power station relays its power to the Ugandan national grid. The substation will be located on the left (west) bank, adjacent to the powerhouse and immediately upstream ofthe main access road. The substation will be designed for operation at 220 kV, but will be equipped and operated initially at 132 kV. Future operation at 220 kV would require installation of suitable transformers, circuit breakers, and protective equipment. The layout and location of substations and substation buildings and environs will be selected to minimize their visual impact and to provide the most suitable orientation for the outgoing transmission lines. Access Roads 18. A site access road will be constructedfrom the Jinja to Kayunga state highway to the area of the power station and to the west abutment of the dam. All roads will be constructedwithin the boundaries of the land already acquired for the project. Where possible, existing roads that have been constructed on the west bank, at the site, will be utilized, with upgrades to take place as necessary. During construction, the road will be surfaced with a natural gravel wearing-course suitable for the requirements of the construction traffic. On completion of construction activities the road base will be refurbished and a black top wearing-coursewill be added. A corridor of land with a minimum width of 30 m runs from the Jinja to Ivuanmba road to the east bank o f the project area. This corridor may be used by the EPC contractor for access to the site during construction. 65 UgandaPrivatePower Generation(Bujagali) Annex 4 ImpoundmentArea 19. The full supply level of the reservoir impounded by the Bujagali embankment will be 1,111.5 meters AMSL, the level of the Nalubaale dam tail water. This arrangement will command a gross head of 22 m and a corresponding installed capacity of 250 MW. With this arrangement, Dumbbell Island, the rapids in the vicinity of the island, the rapids at Bujagali Falls, and most of the small islands upstreamto the NalubaaleKiira dams will be inundated. The higher elevations of a number of the larger islands upstream of Dumbbell Island (namely those at Bujagali Falls) will be preserved within the reservoir. The pre-inundation area of the islands to be inundated total 48.34 ha. Of the 48.34 ha, 13.06 ha will not be flooded and will form smaller islands than exist at present. The area of inundation will largely be confined within the banks of the present N i l e channel, and will amount to 388 ha, excluding islands. This represents an increase of 80 ha over the current 308 ha river surface area between the proposedBujagali dam and the Nalubaale/Kiira dams. In addition to 35.28 ha of islands that will be inundated, 44.72 ha along the riverbank will be inundated. The impoundment will have a relatively small live storage volume of 12.8 million m3.Gross storage volume will be 54.0 million m3.The retention time of water in the impoundment will be limited to 0.5 to 0.7 days, largely depending on the operating arrangements for the conjunctive use of Nalubaale/Kiira dam complex and the Bujagalipower stations. Engineering,Procurementand Transportation 20. Although much of the materials for the civil engineering components of the hydropower facility will be produced on site, the mechanical and electrical components will be imported to Uganda from locations around the world. Equipment and materials, that will be procured from outside East Africa will be shipped to the port of Mombasa inKenya. For equipment and materials other than `abnormal loads' (50-250 tons) and a small amount of materials unsuitable for rail transport, transportation from Mombasato Uganda will be by rail to a bonded warehouse in Jinja, a distance of approximately 900 km. There will also be a bonded warehouse within the fenced boundary at the Bujagali project site, which will accept goods delivered by road from outside Uganda. Distribution from Jinja to the Bujagali hydropower facility site will be solely by road. ReservoirFilling 21. The reservoir will be filled in such a way that no more than 2.5% of the discharge downstream o f the Nalubaale and Kiira dams is retained in the Bujagali reservoir resulting in a 97.5% residual flow. Although the reservoir could intheory be filled in approximately one day, the ongoing checks of dam and riverbank stability will meanthat the reservoir is filled slowly, and in a staged manner. In practice, the discharge downstream of Bujagali at any one time i s likely to be considerably more than the 97.5% residual flow described above. The short term changes in flow are expected to be within the normal daily variability in flows as a result of the operations at Nalubaale and Kiira. 66 Uganda Private Power Generation (Bujagali) Annex 5 Annex 5: ProjectCosts andFinancingPlan Table 5.1: Project Costs contributed assets IDC`" and financing fees Contingenciesand DSRA`" (1) InterestDuring Construction; (2) Debt ServiceReserveAccount 1, The total project costs have been estimated at approximately US$798.6 million; certain project costs, such as the financing costs, remain under discussion. 2. The project costs breakdown is as follows: 0 The bulk o f the project cost is made o f the construction cost (65.0%), which includes the cost o f civil works, supply o f electromechanical equipment and spares. 0 Government contributed assets (2.5%) represents the contribution o f the Government to the project in the form o f land, acquired during the previous effort to develop the project, and intellectualproperty. e Development costs amount to 3.4% o f total project cost and corresponds principally to sponsors' corporate costs in developing the project, consultants and advisors. 0 Interest During Construction and Financing fees amount to 11.8% o f the project costs, and correspond to the interest costs incurred by the company during the construction period, which are capitalized, together with standard lenders' fees. 0 The project contingencies and the Debt Service Reserve Account (DSRA) amount to 10.3% o f project costs. Project contingencies have been estimated in order to address potential cost overruns andor project delays. The DSRA has been dimensioned to cover six months o f debt service. e The Initial working capital and other costs represent 7.0% o fthe total project costs. The initial work capital has been estimated at approximately two months o f revenues. Other costs include principally engineering, operation and construction management costs and the cost o f preparingthe project environmentaland social assessment documentation. 3. The Government's equity participation in the project will not attract an equity return and, therefore, will not affect the project tariff, until the project debt has been fully repaid. At that point, the Government's equity contribution will earn a returncomparable to that o f the private sponsors. 67 Uganda Private Power Generation (Bujagali) Annex 5 Figure 5.1: Financingof the Project Table 5.2: ProjectFinancingPlan - - Private Power GeneratiodBujagali) ProjectFinancingPlan US%000 YOof Total Equity ProjectSponsors 151.570 19.0 Government 20:ooo 2.5 171,570 21.5 Debt IFC EIB CommercialBanks (under IDA PRG) ADB ' EuropeanDFIs(*) Total Debt I 1 c P Total Debt and Equity 798,580 100.0 4. All senior loans are expected to have a 16 year door-to-door maturity. Subordinated loans (Le,, IFC's US$30 million C Loan and, potentially, up to US$20 million from European DFIs) are expectedto provide a door-to-door maturity o f up 20 years. 5. BEL is in advanced discussion with two commercial banks (Absa Capital, of South Africa, and Standard Chartered Bank, UK) in relation to the provision of up to US$115 million commercial senior debt tranche that will be guaranteedby IDA'SPRG. It is envisaged that the commercialtranche will have the same maturity than the senior loans being provided by the DFIs. 68 Annex 6 1 . "The 250 MU' Bl power plant will be developed, financed, buit by Bujngali EE Fed (BEL), a special purpose contpany in ilpanda. The project ~ ~ ~ ~ p l e i ~ i A ig~r~ea~r~i ~(IA)?and Power Purchase A ~ r e ~ i ~PPA)nwcrc ~ o e i ~ n f ~ e ~ signcd by BEL and the (;overnrnent/UETCi,, respectively, on Decernber 13,2005. 2. The IA sets out the terms on which the ~ o ~ ~ e r r grants to~BEL the concessionto design, ~ m e ~ t .Ftnance, ~ o n ~ town.~ operate *arid ~ 8 i ~the project. 'I'he PPA sets out the terrris as to how: r ~ ~ ~ ~ a j ~ ~ ect will bc coiiductc arid (b) the p r o j c ~~~o n ~ r a c t e ~ and said, Undcr the A, BEL agrees to sell all ut"its production exeiusively to UETCL and UETCL agrees to purchase the project's c o ~ eapacitj~ ~ . ~ a ~ ~ 3, wifl also be responsible far rn rtlalely io0 kiiomet o f I32 kV trai~si~iss~or~ a subs~a~~oii [be, located at Kacvanda, the expansion of tlic ~ u t u ~ ~ ~ ~ c s u b s ~ a t ~and~associated works (also referred to 8s the ~ ~ ~ ~ e r c o r ~Project),i ~on nb ~ ~of~ a ~ f ~ ~ , ~ e c t ~ UEYT'CL. to s ~ r ~ ~ ~thel e~ ~c an ~ ~ aof~ efectricity from the Bujagiali ~ ~ y d r oesoplant, 'The t i o ~ i p ~ ~ ~ n t e r e o i ~ Projectr ~isoan associated but scparate project from thc ~ e n e r a t i ~facilit) . The ~ ~ ~ ~ i ~ ~ ~ ~ ~ e rProject will~bc~~ nca nt c~byd~ADB,~alsoa lender to the Bujagaliproject. c ~ n ~ ~ 5. The ~ ~ ~ ~ ~ rstruc~urcof lffte p r o ~ o ~ ~ d is corisistent with i n d ~ practice~for ~ c t u a project ~ s ~ litnitcd recourse project: .finance t r ~ ~ ~ ~ a c tCoo n s . ~ anicungsf the parties best able to ~ ~ i ~ them,eF a g I - .. . 1 GOO IPS(K) controlled SG Bupgali (equity in kindl SPV MIGA __ HOlU