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Risk Mitigation Instruments for Renewable Energy in Developing Countries: A Case Study on Hydropower in Africa

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Published: July, 2015

There is growing evidence that risk mitigation instruments provided by public financial institutions can help to reduce financing costs and mobilize private capital in financing infrastructure. However, these instruments still remain underutilized, especially for climate-related investment. Our analysis has shown the effectiveness of these tools in supporting low-carbon projects in high-risk environments but has also identified challenges to scaling-up their use. To better understand how these instruments work individually and in combination, we have analysed in detail the financial structure of a large scale low-carbon project in a high-risk environment. The project chosen, the 250MW Bujagali Hydropower Project in Uganda, was able to raise close to $300 million in commercial loans and private equity, an unprecedented amount of private finance in a low-income country, and mobilized a higher level of private investment than in any other comparable hydro-project in the region.

The construction of the Bujagali Hydropower project has been attended with controversy: The first attempt to build the project failed after difficulties related to the project’s alleged social, economic and environmental impacts, and allegations of bribery led stakeholders to pull out (see Annex 2 for more details). The second successful attempt to build the project has also attracted criticism on its expected environmental impacts, on resettling of affected populations, and about the estimated cost of the power for the country. The criticisms led to internal investigations and scrutiny within the Development Finance Institutions (DFIs) that concluded with recommendations on a set of changes and improvements that the project company has since implemented. The Ugandan government wanted and continues to want private investment in the energy sector to increase energy access and bring economic development. In 2007, before the plant was commissioned, only nine percent of the 38 million Ugandans had access to grid-supplied electricity.

This case study does not discuss the environmental and social aspects of the project. Instead, we examine Bujagali Hydropower from the project finance perspective because it is one of very few examples of large project finance structures to use simultaneously different risk mitigation instruments provided by the World Bank Group: a partial risk guarantee (PRG) from the International Development Association (IDA) and the Multilateral Investment Guarantee Agency’s (MIGA) political risk insurance (PRI). It therefore offers an opportunity to analyze how these particular instruments interact and how effective they are in driving private investment and reducing the cost of renewable power in developing countries with high investment risks and very little private investment. In addition, we examine how they might be applied to drive private investment in other renewable energy projects in developing countries.