Blackstone backs $872m Ugandan dam

Financing is nearing completion for Blackstone’s first Ugandan deal, a hydroelectric project on the Victoria Nile.

The Blackstone Group portfolio company Sithe Global Power is the lead equity investor in an $872 million (€605 million) Ugandan infrastructure deal that, two years following the government’s award of the contract, is near completion.

The Bujagali project, expected to come online in 2011, entails the building of a dam on the Victoria Nile at Bujagali Falls, and creation of a 250 megawatt hydropower plant.

Blackstone confirmed that Sithe, which is headquartered in New York, has committed $110 million to the project, while the Ugandan government will provide $20 million and an additional $60 million will come from Industrial Promotion Services, the investment arm of the Aga Kahn, an Islamic spiritual leader, that is focussed on infrastructure in Africa and Asia.

Debt financing worth $682 million is being provided by multilateral institutions including the European Investment Bank, the African Development Bank and the World Bank. The World Bank’s support consists of $130 million in loans from the International Finance Corporation, a partial risk guarantee of up to $115 million from the International Development Association for the project’s commercial lenders, and an investment guarantee of up to $115 million from the Multilateral Investment Guarantee Agency.

Bujagali Falls

Though an official stone laying ceremony was conducted in late August, at which time all the associated lenders met and signed various agreements, the project’s financing is now reaching its close, said Sean Klimczak, a Blackstone associate involved in the deal. “The government of Uganda, given the dire need for power, had advanced funds to begin construction of the project,” he said.

Blackstone holds a 78.8 percent stake in Sithe; when the private equity firm invested in the global power company in 2005, the Bujagali dam was already in the company’s project pipeline.

“We believed their portfolio of projects was attractive and this was a part of the broader portfolio,” Klimczak said.

In addition to the opportunity to partner with a unique set of institutions, Klimczak said the Bujagali project is appealing because it will enable Blackstone to obtain “private equity-like returns, while also meeting a significant need in Africa”.
The project will double the country’s power supply, and provide electricity at roughly 6.5 cents per kilowatt hour as opposed to the rate currently paid by Ugandans for diesel-generated power, which is roughly 31 cents per kilowatt hour, Klimczak said.
And, he added: “We’re replacing carbon-emitting diesel power generation with a green renewable energy source.”

The Bujagali dam project has a long, controversial history spanning roughly a decade. The first attempt to build the dam, led by Virginia-based power development company AES Corporation, was halted “due to a host of issues, a significant one being environmental resistance”, Klimczak said.

Allegations of bribery as well as cost concerns and socioeconomic objections also plagued the AES deal, from which the World Bank withdrew funding after an internal investigation found the project violated five bank policies.
After that project effectively died, Klimczak said, “The Ugandan government, needing power, restarted the project anew, free from legacy issues.”
In terms of ensuring that the current project is not beleaguered by allegations of corruption, Klimczak said Blackstone is “as diligent as we would ever be with any of our portfolio companies. Further, we have partnered with the World Bank and many other multilateral agencies and have worked to ensure our policies are consistent with their guidance.”

More in-depth information about the Bujagali dam deal, its history and related controversy, as well as Uganda’s allure for private investors, will be featured in the February issue of Private Equity International.