LEADING-EDGE TRANSACTIONS: What are Leading-Edge Transactions for Possible Replication?

Name:Umeme Ltd. (IDA)
Entered On:08/28/2007 at 12:31 PM
Updated On:06/04/2009 at 02:48 PM
Year of Financial Closure:2005
Host Country:Uganda
Project Majority Ownership:private
Innovative Aspects:The innovative aspect of the Umeme Ltd. Transaction is that an existing risk mitigation instrument - a World Bank Partial Risk Guarantee (PRG) - was used to specifically mitigate regulatory risk in an electric power distribution company concession.

The attached CEPA/PPIAF Report "Mechanisms to Mitigate Regulatory Risk in Private Infrastructure Investment" published in 2005 describes the transaction as following:

"A PRG of US$5.5 million was issued in support to the concessioning of the Uganda Electricity Distribution Company’s (UEDCL) assets to Umeme Limited, a private consortium involving Globeleq Ltd and Eskom Enterprises, which is mandated
to manage UEDCL’s business for a period of 20 years. The PRG was issued for the benefit of Umeme Ltd to mitigate certain perceived regulatory and government agencies electricity payment risks.

Under the PRG structure, Umeme will have recourse to a Liquidity Facility in the form of a Standby Letter of Credit issued by Citibank Uganda Limited and backed by the World Bank PRG. The PRG specifically provides protection in relation to the following issues.
o Regulatory Framework events, including: Non compliance by the Regulator of the pre-agreed tariff framework relating to the distribution tariff; full pass through of the bulk electricity supply from UEDCL; timely adjustments of tariffs (45 days after tariff submission)
o Government Payment Arrears – non-payment of GOU Agencies, Electricity Bills (60 days)
o Termination Payments – Buy out amount for un-depreciated investments resulting from Early Termination of the Concession due to Breach of Concession Agreements by GOU and its entities.

Under the contract, Umeme enjoys the benefit of an 18 month ‘trial period’ for the 20 year concession. Umeme are allowed to recoup half of their initial investment obligation of $5m, if they decide to exit after the trial period. Despite this let-out clause, Umeme are working to cooperate with Government and the regulator to make the concession successful. Umeme has reputedly sought to reach agreement on tariff increases even where the Government and the regulator are at odds with each other. Likewise the regulator appreciates that the information Umeme were given at the time of bidding is limited and the need can arise to re-evaluate project parameters contained within the seven year contract with the regulator. Constant dialogue is maintained between the regulator and the operator which reduces the risk of the problems arising. The fact that these parameters are fixed for seven years does constrain regulatory discretion, but from Umeme’s point of view the most important factor is that tariff formulae are honoured however they are implemented in practice. It is the fact that tariff increases are ultimately protected by the PRG that sustains the investment."

Source: CEPA. PPIAF Mechanisms to Mitigate Regulatory Risk in Private Infrastructure Investments. Washington, D.C.: PPIAF. 2005.

Source(s):
Web Site:http://ifcln1.ifc.org/IFCExt/spiwebsite1.nsf/f451ebbe34a9a8ca85256a550073ff10/0bd2d64e083e97f4852575930058c92a?OpenDocument
Documents: CEPA - PPIAF Mechanisms to Mitigate Regualtory Risk in Private Infrastructure Investments (2005).pdf
Uganda - Umeme Ltd Financial Structure - CEPA,PPIAF (2005).jpg