By Bakampa Brian Baryaguma
[Dip. Law (First Class)–LDC; Cert. Oil & Gas–Mak; LLB
(Hons)–Mak]
bakampasenior@gmail.com;
www.huntedthinker.blogspot.ug
August 2022
1.
Introduction
A project is a, ‘(plan for a) scheme or undertaking’.[1]
For example, a plan to build a new dam. A project can be either public or
private. A public project is one that is funded using public resources, while a
private project is funded using private resources. Public projects refer to the
wide range of facilities, public services, utilities and installations that are
essential for the effective functioning of an economy and society such as roads,
bridges, railways, airports, public transport, telecommunications, sewerage,
healthcare, education facilities, electricity and water supply, etc.[2]
On the other hand, examples of private projects include factories, shopping
malls, leisure parks, etc. – as long as they are owned by individuals and
private associations like companies, partnerships and other firms. Whereas both
public and private projects may be undertaken to benefit the general public,
proceeds obtained from a public project are used for public purposes, while
profits from a private project are enjoyed by the specific owners.
Public projects can be financed in many ways. The commonest ones
are direct government revenue, public-private partnerships, loans and donations.
In emerging economies like Uganda, the latter two (loans and donations) are
usually obtained from external sources notably friendly governments and
international financial institutions in which they are members. Jonathan Maizel
and Alexander Borisoff characterize these as export credit agencies and multilateral development banks which
they recognize and analyze as official funding sources.[3] These
institutions are important sources of the financial resources that are helping
Uganda address its revenue shortfall and to meet development needs. It should
be noted that the World Bank is Uganda’s largest financier, providing the
highest volume of loans and is the country’s biggest donor.[4] For
instance, between January 2018 and June 2021 alone, the Bank advanced a total
of United States Dollars one billion, four hundred million only (US$1.4
billion) to the country.[5]
2.
What is ECA Financing?
The Karuma Hydro Power Project (hereinafter ‘Karuma HPP’) is
financed by a contribution from the Government of Uganda and a loan
contribution from the Government of the People’s Republic of China, through its
Export and Import Bank (hereinafter ‘CEXIM bank’). The CEXIM bank is an export
credit agency (ECA) of the Government of China.[6] It is the third
largest ECA in the world.[7]
To understand what export credit agencies (ECAs) are, one must
first know what is meant by export credit. According to the Glossary of
Statistical Terms, ‘Export credits are government financial support, direct
financing, guarantees, insurance or interest rate support provided to foreign
buyers to assist in the financing of the purchase of goods from national
exporters.’[8] These are loans extended to finance a specific
purchase of goods or services from within the creditor country.[9]
Since export credits are government financial support designed to promote
exportation, it follows that, ‘An ECA is an arm or agency of a national
government, created for the purpose of promoting or facilitating exports from
that nation to other countries, and by so doing, contributing to national
employment and overall national economic wellbeing in the ECA’s home country.’[10]
As government arms or agencies, ‘ECAs are generally funded by the national
treasury of their home nation …’.[11] In addition to promoting or
facilitating exports, an ECA can also, ‘… promote or facilitate national
investment overseas and/or the exchange of commodities between its home country
and other nations.’[12]
ECAs, ‘… are—at the most intrinsic level—government-backed
suppliers of financing and other credit support.’[13] Being
government-backed, ‘… these types of institutions find their roots in politics,
rather than commerce …’,[14] which,
… means that they possess a variety of tools that are not
available to commercial entities alone. Among the most important of these tools
are the ability to offer financial terms that are more generous than their
commercial counterparts, as well as the ability to provide both ‘hard’ and
‘soft’ political protections for the projects in which they invest. These
agencies have of late also been recognized for their ability to provide a
stable flow of fresh capital during both good and bad times, making them
attractive market participants in all types of credit environments.[15]
The relevance of ECAs in public project finance cannot be
overemphasized as they,
… are an essential source of capital for the financing of
cross-border trade, including for the financing of major infrastructure
projects worldwide. Historically, the role of these institutions in
capital-intensive project financings has been to facilitate sponsors’ access to
capital in regions where commercial and political risks were deemed to be the
greatest and where commercial credit providers were either unwilling or unable
to make loans without some element of political or country risk mitigation.[16]
3.
About the Karuma Hydro Power Project
In March 2015, the Parliament of Uganda approved a request by
Government of Uganda to borrow foreign funds for the construction of Karuma HPP.[17] On 12 August 2013, the President of
Uganda, H.E. Yoweri Kaguta Museveni Tibuhaburwa launched construction works for
the project.[18] It commenced on 16 December 2013 and was originally
scheduled to be completed in December 2019, but the completion date was
extended to June 2022.[19]
Karuma dam is a 600 megawatts electricity generation facility located
on River Nile in Kiryandongo District in mid-northern Uganda, 110 km downstream
of Lake Kyoga and 270 km from Kampala, the Capital City of Uganda.[20]
It is a run-of-the-river power plant which, upon completion, will be the
biggest power generation facility in Uganda and the largest dam in East Africa.[21]
Karuma HPP is implemented by Uganda Electricity Generation Company
Limited (UEGCL) on behalf of the Government of Uganda; the engineering,
procurement and construction (EPC) contractor is Sinohydro Corporation Limited;
the owner’s engineer is AFRY Switzerland Ltd; is budgeted to cost United States
Dollars one billion and seven hundred million only (U.S.D. 1.7 Billion Dollars)
of which the Government of Uganda is contributing 15% and the Export and Import
(EXIM) Bank of China providing 85% in form of a loan; meaning that the People’s
Republic of China is effectively the funding agency.[22] The loan
amount will be repaid over a period of 25 years, at an average interest rate of
3%. [23]
The overall physical progress of works is estimated at 98.80% completion
against the time spent of 87.8%.[24] The
project is divided into six major components namely a dam section, power intake
unit, powerhouse, transformer cavern, surge chamber, pressure shafts, cable
shaft and two tail-race tunnels for returning water circulating through the
turbines back to the river.[25] There is a network of underground road
tunnels measuring 26 kilometers.[26]
The electricity generated by Karuma HPP will be
fed into the national grid through three transmission lines, namely 400 kV
Karuma – Kawanda line, 400 kV Karuma – Olwiyo line and 132 kV Karuma – Lira
line, construction of which are on-going by Uganda Electricity Transmission
Company (UETCL).[27] The project also involves the construction of
three new sub-stations at Karuma, Kawanda and Olwiyo by UETCL.[28]
Karuma HPP employs some 5,000 Ugandans and 1,000
Chinese expatriates from the Sino Hydro Power Company undertaking the works.[29]
4.
Benefits of ECA Financing
ECAs present sponsors and project contractors
with the following benefits.
4.1.
Affordable and Cost Friendly Funds
ECAs offer more affordable and cost friendly funding to financing
applicants than do commercial lenders, especially for projects being developed
in more challenging markets[30] i.e. countries that are conflict
ridden or easily prone to violence. Their loans are more competitive because
they are payable over a long period of time and at fairly little interest.
Consider, for instance, the CEXIM bank loan for Karuma HPP that will be repaid
over a period of 25 years, at an average interest rate of 3%.[31]
4.2.
Promoting Best Practices
ECAs promote best practices by highly scrutinizing financing
applications, subjecting applicants to increased documentary and sourcing
requirements, and ensuring stricter covenant packages when negotiating the
terms of their credit.[32] Wang Jihong and Wu Peng write that, ‘The
process of application for overseas investment loans of the Export-Import Bank
of China is relatively complex, with higher compliance requirements, and in
which a legal due diligence report is required.’[33] The learned writers
say that CEXIM bank’s conditions of application for overseas investment loans
include:
(1)
The borrower shall have
viable operational management and financial conditions, good credit standing,
and the ability to repay the loan principal and the interest accrued thereon;
(2)
Relevant projects shall have
good expected economic returns;
(3)
The country where the
project is located shall have a good investment environment, and a stable
economic and political situation;
(4)
If the borrower is an
overseas Chinese-funded enterprise, the overseas investment project concerned
shall feature relatively low overall risks, stable investment returns, and full
guarantee for the repayment of the loan principal and the interest accrued
thereon;
(5)
If the borrower is an
overseas Chinese-funded enterprise not controlled by a domestic enterprise
(except for newly established SPV or project companies), the use of and
guarantee for the loan shall comply with relevant requirements of China’s
foreign exchange management regulations;
(6)
A repayment guarantee
recognized by the Export-Import Bank of China shall be provided (normal guarantee
measures for overseas investment loans will be described in our next article);
(7)
Overseas investment
insurance shall be purchased as deemed necessary by Export-Import Bank of
China; and
(8)
Other conditions as deemed
necessary by Export-Import Bank of China.[34]
Failure to comply with some of these requirements caused delays in
finalizing the formal loan agreement for Karuma HPP, apparently because Uganda
had problems supplying the necessary documentation and in establishing an
escrow account.[35] Sticking to the same guidelines has so far
caused the denial of financing for the Standard Gauge Railway in Uganda and
Kenya because,
… the China Exim Bank is ensuring that this project is a
worthwhile investment and is setting requirements that are similar to the
normal conditionalities that most traditional lenders would typically apply.
Proper compensation of project-affected persons is an essential requirement of
all project financing. A ‘bankable feasibility study’ is a normal expectation
in project development. The fact that the China Exim Bank has declined loan
applications by Uganda and Kenya is proof that they are exercising appropriate
oversight and not just funding any ill-considered loan request.[36]
Project sponsors and contractors can benchmark these best
practices of ECAs and incorporate them in their firms or companies to improve
their own systems and procedures.
5.
Objectives of ECA Financing
ECAs are created for different reasons and to achieve different objectives
or purposes. Majority of ECAs are meant for enabling trade and investment. This
is known as the ‘pure’ ECA purpose.[37] Others are ‘dual’ because
they, ‘… have a dual existential purpose—to serve the home economy through the
promotion and facilitation of trade and investment … while at the same time
also having a developmental mission more akin to that of a multilateral
[development bank][38] (even if such developmental mission is
ultimately tied to fostering a trade environment that is intended to support
the domestic economy).’[39] A dual purpose ECA has the objective of contributing
to the sound development of the home country and the international economy and
society, with its credit products either being tied to exports (to support home
country industry) or imports (to obtain commitments of strategically important
materials to the home country), or be altogether untied (to support overseas
business environments to facilitate home country trade).[40]
1.
Securing Raw Materials
Some ECAs are created for securing raw materials, by especially resource-constrained
countries.[41] China is known to be a resource-constrained country,
so much so that it is in fact said that its, ‘… default setting is resource
scarcity.’[42] One of the resource constraints China faces is enough
food due to growing urbanization that requires many different diets.[43]
It is for this reason that the country has committed itself to
engaging in food production in Uganda. For instance, since 1962, the Chinese
helped Uganda set up Kibimba (now Tilda) and Doho Rice Schemes.[44]
Then, in 2015, a Chinese investor started cultivating part of Lwera wetland
located along the Kampala-Masaka highway in Kalungu district to establish a
commercial rice farm.[45] The rice grown in these food growing
projects has to be processed and packed for shipment back to China, where it is
used in the Chinese food industry. This requires enough and consistent
electricity to run the factories, machinery and other equipment used therein. Karuma
HPP will generate the electricity required to enable China obtain the resources
it needs for its about 1,450,993,132 strong population as of Wednesday, 10th
August, 2022, based on Worldometer elaboration of the latest United Nations
data.[46]
2.
Promotion of Domestic Producers
Countries also establish ECAs focusing singularly on the promotion
of domestic producers.[47] This is done by providing preferred lines
of credit to state-owned enterprises and foreign governments wishing to
purchase the ECA’s home country made goods. This way, the ECA supports the
overseas expansion of home country firms in line with the country’s
international aspirations. For example, China has a “Go Global” strategy, whose
long-run goal is to increase the productivity and competitiveness of its
enterprises vis-à-vis their global competitors.[48] This amounts to
subsidized risk investment – courtesy of the ECA’s home country tax payer.
A case in point here concerns first, CEXIM bank which is financing
Sinohydro Corporation Limited (hereinafter ‘Sinohydro’) as the engineering,
procurement and construction contractor of Karuma HPP. Sinohydro is a Chinese
state-owned hydropower engineering and construction company.[49]
Another case in point here is Swiss Export Risk Insurance (SERV), a Swiss
state-owned organization that insures political and del credere (belief or trust) risks involved in exporting goods and
services.[50] SERV helps Swiss companies obtain low-interest loans
or higher credit limits in order to conserve cash when exporting goods and
services and its (SERV) insurance and guarantees protect Swiss exporters from
default and facilitate export financing.[51] Swiss companies like
AFRY Switzerland Limited[52] (which is the Owners Engineer in Karuma
HPP), enjoy patronage from Swiss ECAs like SERV.
China’s CEXIM bank and Switzerland’s Swiss Export Risk Insurance
are state-owned ECAs whose primary mission is promoting their domestic
producers of goods and services, now having a footprint in Uganda through the Karuma
HPP.
3.
Harmonizing Global Trade with National Economic Wellbeing
Other countries may view national objectives in a broader light
and instead focus on encouraging an environment of global trade that is
conducive to the over-arching goal of promoting national economic well-being.[53]
They therefore establish ECAs that are designed to harmonize global trade with
their national economic wellbeing. Jonathan Maizel and Alexander Borisoff give
a good and direct example of this i.e. the Japan Bank for International
Cooperation
(JBIC), which has the purpose of contributing to the sound
development of Japan and the international economy and society and its credit
products may either be tied to exports (to support Japanese industry) or
imports (to obtain commitments of strategically important materials to Japan),
or be altogether untied (to support overseas business environments to facilitate
Japanese trade).[54] Article 1 of JBIC’s constitutive document, the Japan Finance Corporation Act, No. 57 of
2007, states that,
The Japan Finance Corporation . . . has the purpose of
contributing to the sound development of Japan and the international economy
and society and to the improvement of the quality of national life, by taking
responsibility for (i) the financial function to provide for procurement
assistance to the general public . . . and (ii) the financial function to
promote the overseas development and securement of resources which are
important for Japan.[55]
This cannot be said of the CEXIM bank of China that is financing
the Karuma HPP, because I have traversed the bank’s English website (http://english.eximbank.gov.cn) and not seen such undertaking
anywhere. CEXIM bank’s mandate is unapologetically inward looking; and any
ventures abroad are purely for profit making, motivated by the “go global” strategy
and aspirations of the government of the People’s Republic of China.
Perhaps harmonization of global trade with national economic
wellbeing can be inferred from the bank’s mission of reducing and eradicating poverty
in its partner counties of Yunyang County in Chongqing Municipality and Minxian
County in Gansu Province of China. The bank, ‘… aimed to address the root
causes of poverty and bring about urgently needed development to energize
economic development …’,[56] by arranging funds for specific
projects and increasing inputs to make sure that rural poor people do not have
to worry about food and clothing and that they have access to compulsory education,
basic medical services, safe housing, safe drinking water, industry and skills training.[57]
Therefore, one can argue that by sponsoring Karuma HPP, CEXIM bank is indirectly
addressing one of the root causes of poverty in Uganda by availing abundant and
affordable electricity that is crucial for production and efficiency, thereby helping
people increase confidence in their own ability to lift themselves out of
poverty as it did in its two partner counties back home in China.[58]
Then China benefits by these now financially empowered people buying and
consuming more Chinese-made products.
4.
Promotion of Exports
Some ECAs focus primarily on the promotion of exports with each of
their primary credit products being strictly tied to the home country content
of the goods or services being acquired.[59] CEXIM bank, for
instance, under its trade finance business mandate, has a product called export order financing which is,
… a short-term trade finance service where CEXIM, after the seller
(exporter) receives valid orders from the buyer (importer) by remittance or
collection documents, provides the seller (exporter) with working capital for
purchase of raw materials, production, storage and transportation of goods,
etc. before shipment, and gets repayment from sales revenue and other sources
of funding of the seller (exporter).[60]
Export order financing enables Chinese domestic exporters to
alleviate financial strain by obtaining capital for purchases in advance.[61]
This facility enables Chinese firms and companies like Sinohydro Corporation
Limited to get lucrative business opportunities like the Karuma HPP, usually
after outbidding competitors from other developed countries.
5.
Funding Beneficial to Host Country Projects and Sectors
Some ECAs provide funding with a focus that is more related to the
potential benefit of the applicable investment to the home country (as measured
by research and development potential, market share maintenance or growth and
the number of primary / lead contractor designations for projects).[62]
Electricity facilitates production as it is necessary for powering and running
machinery and premises. Therefore financing a dam project like Karuma HPP makes
economic sense because the electricity it generates will grow other Chinese
businesses and enterprises in the host country, in this case Uganda – a country
that is arguably still amongst the countries in the world with least access to
electricity.[63]
The reverse is true however, where the project sought to be funded
is not beneficial to the ECA’s home country in terms of boosting its business
or other interests. That project will not be financed. Uganda experienced this with
the standard gauge railway, the construction of which the Chinese government
refused to fund, saying that it is not economically viable, fearing that Uganda
will not be able to pay back the loan.[64] The proposed financing model
of the standard gauge railway is similar to the Karuma HPP of 85-15 financing split:
85% contributed by China through CEXIM bank and 15% contributed by Uganda
government.[65]
6.
Alternative Sources of Funding
Export credit agency financing is not the only way through which a
mega construction project like Karuma HPP could be funded. There are other
viable alternatives through multilateral development banks, Islamic financing
and other ‘official’ funding sources.
6.1.
Multilateral Development Banks
These are global and regional financial institutions. According to
Jonathan Maizel and Alexander Borisoff,
Multilateral development banks are bodies or agencies created by
international agreement among multiple nations whose purpose is to promote
development among all or certain member states. These development goals focus
primarily on the economic and social benefits to be achieved through the
investment, as well as corollary matters such as protection of the environment
and sustainability. Unlike ECAs, multilaterals are generally funded or financed
by contributions from member states party to the multilateral agreement or other
arrangement creating such multilateral.[66]
Further, the authors state that,
The World Bank Group is the principal globally active
multilateral, providing private sector financing through the International
Finance Corporation (IFC) and political risk insurance through the Multilateral
Investment Guarantee Agency (MIGA). Other multilaterals function on a more
regional basis. Examples of regional multilaterals include the European Investment
Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the
African Development Bank (AfDB), the Inter-American Development Bank (IADB) and
the Asian Development Bank (ADB). Common among each of these multilaterals is a
desire to leverage their capital with that of the private sector, through
co-financings or otherwise, while at the same time taking care not to displace
or ‘crowd out’ private capital which might be available for a given use or
project in the absence of multilateral participation.[67]
Multilateral financing terms to countries are normally, ‘…
determined on the basis of several factors, including the borrowing country’s
risk of debt distress, the level of GNP per capita, creditworthiness, as well
as project-specific parameters where loans go to financing development
projects.’[68]
Multilaterals or similar regional or national development finance
institutions are instrumental in financing a project, ‘Where political risks
are significant, or where export content may be insufficient for ECA
financing—for example, where a project entails a substantial civil works
component …’.[69] Karuma HPP would have qualified for multilateral
financing because it entails substantial civil works component in form of constructing
the dam and its associated infrastructure like the transmission lines and
access roads. Needless to say, there are no significant political risks
associated with the project since Uganda is a peaceful and stable country. Much
as multilateral development banks are more open to financing investments in politically
risky countries, it does not mean that they do not like investing in less risky
ones like Uganda.
Moreover, multilateral development banks offer private sector
investors a variety of guarantee products against commercial risks. The World
Bank, for instance, has partial risk guarantees covering private sector lenders
against loss resulting from default by a sovereign under one or more key
project documents between the sovereign and a private sector project, such as a
concession agreement, a power purchase agreement, or any sovereign guarantee of
the same.[70] One significant condition to a partial risk guarantee
is that an indemnity agreement between the project’s host country and the Bank
will be required, pursuant to which the host country sovereign agrees to
indemnify the Bank against payments made under the partial risk guarantee.[71]
Multilateral development banks are also advantageous because they
promote best practices by highly scrutinizing financing applications,
subjecting applicants to increased documentary and sourcing requirements, and
ensuring stricter covenant packages when negotiating the terms of their credit.[72]
The World Bank, for instance, has an elaborate procedure (technically known as
a project cycle in the World Bank Group) for approving loan applications
covering six stages i.e. identification, preparation, appraisal,
negotiation/approval, implementation and completion/validation and evaluation.[73]
The project cycle is the framework used by the World Bank to design, prepare,
implement and supervise projects.[74] The World Bank even has an
Investigation Panel which,
… was created in September 1993 by the Board of Executive
Directors of the World Bank to serve as an independent mechanism to ensure
accountability in Bank operations with respect to its policies and procedures.
The Inspection Panel is an instrument for groups of two or more private
citizens who believe that they or their interests have been or could be harmed
by Bank-financed activities to present their concerns through a Request for
Inspection. In short, the Panel provides a link between the Bank and the people
who are likely to be affected by the projects it finances.
Members of the Panel are selected “on the basis of their
ability to deal thoroughly and fairly with the request brought to them, their
integrity and their independence from the Bank’s Management, and their exposure
to developmental issues and to living conditions in developing countries.”[75] The three-member Panel is empowered, subject to Board approval,
to investigate problems that are alleged to have arisen as a result of the Bank
having ignored its own operating policies and procedures.[76]
One of the best practices through which the World Bank safeguards
the interests of people who are affected by its financed projects is the Policy
on Involuntary Resettlement, now set out in Operational Policy 4.12 of December
2001. The policy,
… is triggered in situations
involving involuntary taking of land and involuntary restrictions of access to
legally designated parks and protected areas. The policy aims to avoid
involuntary resettlement to the extent feasible, or to minimize and mitigate
its adverse social and economic impacts.
It promotes participation of displaced people in
resettlement planning and implementation, and its key economic objective is to
assist displaced persons in their efforts to improve or at least restore their
incomes and standards of living after displacement.
The policy prescribes compensation and other
resettlement measures to achieve its objectives and requires that borrowers
prepare adequate resettlement planning instruments prior to Bank appraisal of
proposed projects.[77]
Having appreciated that, ‘Involuntary resettlement
may cause severe long-term hardship, impoverishment, and environmental damage
unless appropriate measures are carefully planned and carried out,’[78]
the World Bank Group devised the involuntary resettlement policy with the
overall objectives being the following:
(a)
Involuntary resettlement should be avoided where feasible, or
minimized, exploring all viable alternative project designs.
(b)
Where it is not feasible to avoid resettlement, resettlement
activities should be conceived and executed as sustainable development
programs, providing sufficient investment resources to enable the persons
displaced by the project to share in project benefits. Displaced
persons should be meaningfully consulted and should have opportunities to
participate in planning and implementing resettlement programs.
(c)
Displaced persons should be assisted in their efforts to improve
their livelihoods and standards of living or at least to restore them, in real
terms, to pre-displacement levels or to levels prevailing prior to the
beginning of project implementation, whichever is higher.[79]
The policy highlights the important relationship
between property rights, human settlement and the need to maintain people’s
source of livelihood.[80] The Government of Uganda undertook to
comply with it in implementing the ARSDP project, stating, in its final draft
report on resettlement policy framework for the project, that, ‘The World Bank’s safeguard policy on involuntary resettlement, OP
4.12 is to be complied with where involuntary resettlement, impacts on
livelihoods, acquisition of land or restrictions to access to natural
resources, may take place as a result of the project.’[81] The
Government observed that the involuntary resettlement policy, ‘… compliments existing law in Uganda related to property
rights and land ownership by recognizing the socio economic value this presents
to persons affected’ and pledged that, ‘The higher of the two standards will be
followed in this policy framework, since that procedure also satisfies the
requirements of the lesser standard.’[82]
6.2.
Islamic Financing
The other alternative source of funding for a project like Karuma
HPP is Islamic financing.[83] This financing modal is
concerned with the conduct of commercial and financial activities in accordance
with Islamic law. Islamic financing has moved from being a mere niche to the
mainstream, thanks to the economic prosperity of Middle Eastern countries where
it is prevalent, but also the growing trend of governments, financial
institutions, and individual Muslims worldwide investing
in a manner which is consistent with Islam.
Islamic financing is sourced from Sharia’a law which reflects a compilation of the values, norms and rules which govern all aspects of a
Muslim’s life (such as family life and economic
activities), as manifested in the divine will of Allah and expressed in the
Qur’an and Sunnah (words or acts) of Prophet Muhammad.
Islamic financing is achieved using
different techniques. The bedrock of Islamic financing is profit and loss
sharing since Islam perceives that
the ideal relationship between contracting parties should be that of equals
where profit and losses are shared. According to John
Dewar and Mohammad Munib Hussain,
Mudarabah (investment fund
arrangement) and Musharaka (joint venture arrangement) are two finance
techniques which facilitate this priority. With the need for diversity in
risk/return profiles and conventional lender reluctance to enter into a profit
and loss arrangement where the lender would otherwise expect the client to
remain liable for the principal and interest regardless of how the venture
performs, certain traditional Islamic trading techniques have been adapted
which, to an extent, are Sharia’a-compliant versions of conventional
finance products. These include Murabaha (cost plus financing), Istisna’a
(commissioned manufacture of a specified asset), and Ijarah (lease
purchase finance). Finally, a key source of Sharia’a-compliant financing
is the Sukuk (trust certificates), which have similarities to
conventional bonds.[84]
For a huge building project like Karuma
HPP, Istisna’a would be the most appropriate Islamic financing technique. An Istisna’a is a construction and procurement contract
for the commissioned manufacture of a specified asset and can be used during
the construction phase of a project financing. Here, following a request from
the client, the financier procures the contractor to manufacture an asset which
meets the specifications of the client for delivery by a specified date.
Sharia’a requires that the price payable for the asset is fixed at the
outset (but not necessarily paid in full at this point) and only altered if the
specification of the asset is amended by the client.
Relating this technique to the Karuma HPP scenario, UEGCL (on
behalf of the Government of Uganda) would approach CEXIM bank with a proposal
to finance the construction of a dam (Karuma HPP). Upon being satisfied that
the proposed project does not offend the principles of Islamic financing, CEXIM
bank would appoint UEGCL as its Wakil (agent)
to enter into a contract with Sinohydro Corporation Limited to
build the dam. The agent (UEGCL) would also hire AFRY Switzerland Ltd to play a
supervisory role during the construction process. UEGCL would also hire other
sub-contractors as circumstances demand. Although UEGCL contracts
under
the EPC contract as an agent, there is no privity of contract between UEGCL and
Sinohydro Corporation Limited once the dam has been
constructed. So the warranties given by Sinohydro
Corporation Limited to CEXIM bank in respect of the dam concerning defects in
the dam,
for example, will be assigned to UEGCL. The constructed dam must be
accepted by UEGCL if it meets the given specifications. Once the dam has been
constructed,
title to it must be transferred by Sinohydro Corporation Limited to CEXIM
bank, who will then either sell the dam to UEGCL outright or
alternatively lease it to UEGCL pursuant to Islamic
finance principles.
It was stated that a project like Karuma HPP should comply with
principles of Islamic financing if it is to be financed under this modal. But
what are these principles? In Islam, there is a presumption that everything is
permissible (halal) unless there is an express
law which rebuts that presumption by declaring it as forbidden
(haram). The pertinent Sharia’a principles
that relate to Islamic finance are that the following are avoided
in any transaction:
(a)
riba (excess or increase) –
This means any excess paid or received
on the principal or an additional return received on the principal derived by
the mere passage of time. It includes interest as charged in conventional loans
because Sharia’a regards money as having no intrinsic value in itself (unlike
commodities such as gold, silver, dates and wheat) and is merely a means of
exchange to procure goods and services such that it cannot therefore derive a profit
either from the exchange of money of the same
denomination or due to the passage of time. Riba is forbidden in
Qur’an, Surah Al Baqara 2:275, Qur’an, Surah Al Baqara 2:276-280, Qur’an, Surah
Al-Imran 3-130, Qur’an, Surah An-Nisa 4:161, and Qur’an, Surah Ar-Rum 30:39. It
is also forbidden in the Sunnah Majma al-Zawa’id, Ali ibn Abu Bakr al-Haythami
(vol 4, 117). Using the Karuma HPP scenario, it follows that CEXIM bank cannot
charge interest for money it gives to UEGCL to hire the EPC contractor, Sinohydro
Corporation Limited.
It should be understood however, that Sharia’a does not prohibit the making of profit per se; it only scrutinizes
the basis upon which profit is made as, for example, charging interest could
exploit the client in a time of hardship whilst the financier’s wealth is
increased by no effort of its own. Islam instead empowers the financier to
derive a profit by investing its money or other consideration directly (or
indirectly through a joint venture arrangement, for example) in real assets –
in this case the dam and everything appurtenant to it.
(b)
gharar (uncertainty) –
It can be defined as the
sale of probable items whose existence or characteristics are uncertain or
speculative (maisir), the risk of which makes it akin to gambling (qimar).
The rationale for prohibiting gharar and maisir stems from the
belief that bargains should be based upon contractual certainties as far is
possible in order to bring about transparency and avoid conflict over key terms
of a contract such as the object, the quality of goods, the time for delivery
and the amount payable. Contemporary examples of gharar include: the sale of an object prior
to it coming into existence, which subject to certain exceptions, would render
the contract as void; where the object is unknown; where the specifications of
the object are unknown; and where the price or rent cannot be ascertained with
certainty. Using the Karuma HPP scenario, that undertaking would be void and
unqualified for financing if, for instance, the megawatts to be generated by
the dam were unknown.
(c)
maisir (speculation) –
This is the same as uncertainty and
therefore similar to (b) above.
(d)
qimar (gambling) –
This is also similar to (b) above.
(e)
prohibition on investing in or being involved with haram products and activities (such as alcohol, pork and gambling
establishments); and
(f)
prohibition of becoming
unjustly enriched.
Therefore, Islamic financing is truly a viable alternative to ECA
financing, even for mega public works like Karuma HPP. On this note, it should
be pointed out that in Uganda, the Financial
Institutions Act, 2004 was amended to cater for Islamic Finance in January
2016. The amendment became effective on 4 February 2016. Bank of
Uganda, as the financial services regulating body, is mandated to promote and
ensure stability in the Islamic financing domain. Islamic financing, however,
is not yet operational and rolled out in the country because there is
preparatory work still going on.
6.3.
Other ‘Official’ Funding Sources
There are other ‘official’ financing sources that could have been
resorted to in financing Karuma HPP. These sources operate through private
players in their home countries and so the extent to which they are official is
somewhat hazy. These programmes and entities cannot
cleanly be categorized as ECAs or multilateral development banks because they
are not directly tied to exports or development.[85] They
provide project developers with other options for officially backed credits
where the requirements for ECA or multilateral development banks funding
may not otherwise be met.[86] Neither do they conform to Islamic
principles so as to be categorized as Islamic financing. Jonathan
Maizel and Alexander Borisoff give good examples of these programmes and entities.[87]
One, there is the Overseas Private Investment Corporation (OPIC),
a development finance institution that is an agency of the United States
government whose purpose is to promote economic development in new and emerging
markets through US private sector investment in a manner that is complementary
with US foreign policy objectives. Title IV, s 231, Foreign Assistance Act of 1961 (P.L. 87-195) that establishes OPIC
states that the purpose of it is to ‘mobilize and facilitate the participation
of United States private capital and skills in the economic and social
development of less developed countries and areas . . . thereby complementing
the development assistance objectives of the United States’. This authorizing
statute limits OPIC to participating in projects that meet specific eligibility
criteria, including substantial US person participation in the relevant
project. Much like an ECA, OPIC provides two primary forms of support to
projects: (1) financing support, where OPIC provides either a loan guaranty or
a direct loan; and (2) political risk insurance.[88] Karuma HPP is
an economic and social emancipator because the electricity generated from there
will enable business growth, improve livelihoods and uplift people from poverty,
thus fulfilling the requirements for OPIC funding.
Two, in France, there is Promotion et Participation pour la Coopération
Économique’s (PROPARCO) whose mission is to be a catalyst for private
investment in developing countries which target growth and
sustainable development. PROPARCO is a bilateral agency
partly owned by Agence Française de Développement and private shareholders.
It finances operations which are economically viable, socially equitable, environmentally
sustainable, and financially profitable, and it tailors its operations
to the level of a country’s development, focusing on infrastructure and
equity
investments. PROPARCO’s products include a range of financial instruments for
private investors in developing countries, including direct loans and
equity
guarantees.[89] A World Bank report found that Karuma HPP satisfies
these conditions[90] and would therefore be eligible for PROPARCO
funding, with assistance of the Embassy of France in Uganda.
Three, the Millennium Challenge Corporation (MCC) is a development finance
institution whose purpose is to provide large-scale grants to less developed
countries to fund projects aimed at reducing poverty. MCC is a bilateral United States foreign aid agency
established by the U.S. Congress in 2004, as an independent agency separate
from the State Department and United States Agency for International
Development, to tackle some of the most pressing challenges people face in
developing countries, like supplying electricity so businesses can operate and
students can study after dark.[91] The Millennium Challenge Act 2003 (P.L. 108-199), which establishes the
Millennium Challenge Corporation states that the purpose of the Corporation is
to provide assistance in a manner that promotes economic growth and the
elimination of extreme poverty and strengthens good governance, economic freedom,
and investments in people. Grants given by MCC fall into two categories:
‘compacts’, which are five-year grants for countries meeting MCC’s eligibility
requirements, and ‘threshold programs’, which are generally smaller sized
grants awarded to countries that substantially meet MCC eligibility requirements
(and undertake to fully meet those requirements). For a country to be selected
as eligible for an MCC assistance program, it must demonstrate a commitment to
policies that promote political and economic freedom, investments in education
and health, the sustainable use of natural resources, control of corruption,
and respect for civil liberties and the rule of law as measured by 17 different
policy indicators. MCC selects countries for the Threshold Program based on the
country’s overall performance on all 17 MCC policy indicators, the country’s
commitment to improving their scores on each of the 17 MCC policy indicators
that they have failed and the country’s ability to undertake reform.[92]
Karuma HPP guarantees availability of electricity, which boosts business growth
and personal productivity, hence promoting economic growth and eliminating
extreme poverty, thereby strengthening economic freedom – meaning eligibility
for MCC funding.
7.
Conclusion
Being an emerging economy, Uganda suffers perennial budget
shortfalls. As such therefore, foreign funding sources remain extremely vital
for meeting the country’s expenditures and development needs. Export credit
agencies are indispensible allies in achieving the country’s infrastructure
demands. But where ECAs are unable or unwilling to cover the budget deficits,
regard may be had to other official funding sources as analyzed above.
References
1.
A.S. Hornby, A.P. Cowie and A.C. Gimson,
Oxford Advanced Learner’s Dictionary of
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2.
Tom Ogwang and Frank Vanclay,
‘Resource-Financed Infrastructure: Thoughts on Four Chinese-Financed Projects
in Uganda’ 13 Sustainability (2021)
3259, at 2.
3.
Jonathan Maizel and Alexander Borisoff,
‘Official Funding Sources: Export Credit Agencies and Multilateral Development
Banks’, in John Dewar (ed), International
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4.
Moses Owori, ‘Uganda’s loans from
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5.
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6.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 215.
The
Export-Import Bank of China is a state-funded and state-owned policy bank with
the status of an independent legal entity. It is a bank directly under the
leadership of the State Council and dedicated to supporting China’s foreign
trade, investment and international economic cooperation. The Bank’s mission
and main mandate is to facilitate China’s national development strategies and
build a policy bank which has clear-cut market positioning, well-defined
business portfolio, unique functions, sufficient capital, good governance,
strict internal control, safe operation, high-quality service and sustainable
development capability. CEXIM bank’s financial support goes to foreign trade,
cross-border investment, the Belt and Road Initiative, international industrial
capacity and equipment manufacturing cooperation, science and technology,
cultural industry, “going global” endeavors of small and medium enterprises and
the building of an open economy. See The Export-Import Bank of China, ‘About
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7.
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According
to this Organization, CEXIM bank is just one out of many Chinese state-backed
banking institutions that are supported by massive national reserves of
accumulated liquidity of over US$2 trillion, ready to be shifted into the
global market at a moment’s notice. Other Chinese ECAs include the China
Development Bank, Industrial and Commercial Bank of China, China International
Trade and Investment Corporation, China Export and Credit Insurance Corporation
and Sinosure. All these are ECAs that have vast resources at their disposal and
are able to provide discounted loans to Chinese corporations on the overseas
acquisition trail. They are part of a golden triangle that exists between
Chinese companies, the state and quasi-commercial lending institutions (i.e.
ECAs) that provide Chinese companies with cheap finance to undercut other
competitors in the world and have been critical to China’s economic successes
in the world, more especially Africa, largely because most Chinese loans are
tied to the procurement of Chinese goods and services.
8.
Glossary of Statistical Terms, ‘Export
Credits’ (2003). Accessed online at https://stats.oecd.org/glossary/detail.asp?ID=909,
on Sunday, 14th August, 2022, at 11:29 hrs.
9.
Ibid.
10.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 214.
11.
Ibid.
12.
Ibid.
13.
Ibid.,
at 214.
14.
Ibid.
15.
Ibid.
16.
Ibid.,
at 213.
17.
NS Energy, ‘Karuma Hydropower Project’.
Accessed online at ttps://www.nsenergybusiness.com/projects/karuma-hydropower-project-uganda/#,
on Tuesday, 9th August, 2022, at 18:55 hrs.
18.
Uganda Electricity Generation Company
Ltd, ‘Karuma Hydropower Project’ (2022). Accessed online at https://www.uegcl.com/projects/karuma-hydropower-project/,
on Tuesday, 9th August 2022, at 06:00 hrs.
19.
Ibid.
20.
Ibid.
21.
NS Energy, supra note 17.
22.
Uganda Electricity Generation Company
Ltd, supra note 18.
23.
NS Energy, supra note 17.
24.
Uganda Electricity Generation Company
Ltd, supra note 18.
25.
Peter Labeja, ‘Pictorial: Karuma Hydro
Power Project Taking Shape’ Uganda Radio
Network (2017). Accessed online at https://ugandaradionetwork.com/story/pictorial-construction-of-karuma-hydro-power-project,
on Tuesday, 9th August, 2022, at 05:03 hrs.
26.
Ibid.
27.
Uganda Electricity Generation Company
Ltd, supra note 18.
28.
NS Energy, supra note 17.
29.
Peter Labeja, supra note 25.
30.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 221.
31.
NS Energy, supra note 17.
32.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 221.
33.
Wang Jihong and Wu Peng, ‘Applying for
Exim Bank of China’s overseas loans’ China
Business Law Journal (2019). Accessed online at https://law.asia/applying-chinas-overseas-loans/,
on Tuesday, 16th August, 2022, at 22:30 hrs.
34.
Ibid.
35.
Tom Ogwang and Frank Vanclay, supra note 2, at 10.
36.
Ibid.,
at 14.
37.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.
38.
The term ‘multilateral’ refers to
multilateral development banks (such as the World Bank), which according to ibid., at 218,
…
are bodies or agencies created by international agreement among multiple
nations whose purpose is to promote development among all or certain member
states.9 These development goals focus primarily on the economic and social
benefits to be achieved through the investment, as well as corollary matters
such as protection of the environment and sustainability. Unlike ECAs,
multilaterals are generally funded or financed by contributions from member
states party to the multilateral agreement or other arrangement creating such
multilateral.
39.
Ibid.,
at 217.
40.
Ibid.,
at 218.
41.
Ibid.,
at 217.
42.
China Dialogue, ‘China’s future will be
defined by resource constraints’ (2014). Accessed online at https://chinadialogue.net/en/business/6685-china-s-future-will-be-defined-by-resource-constraints/,
on Thursday, 11th August, 2022, at 18:10 hrs.
43.
Ibid.
44.
Obwona Marios, Guloba Madina, Nabiddo
Winnie and Kilimani Nicholas, ‘China-Africa economic relations: The case of
Uganda’ ECONSTOR (2007), at 1.
45.
The Independent, ‘Chinese investor seeks
to expand Lwera rice farm despite public uproar’ The Independent (2020). Accessed online at https://www.independent.co.ug/chinese-investor-seeks-to-expand-lwera-rice-farm-despite-public-uproar/,
on Thursday, 11th August, 2022, at 19:10 hrs.
46.
Worldometer, ‘China Population (2022)’.
Accessed online at https://www.worldometers.info/world-population/china-population/,
on Thursday, 11th August, 2022, at 17 32 hrs.
47.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.
48.
Japan External Trade Organization, supra note 7.
49.
Wikipedia, ‘Sinohydro’ (2021). Accessed
online at https://en.wikipedia.org/wiki/Sinohydro,
on Saturday, 13th August, 2022, at 06:10 hrs.
50.
Swiss Export Risk Insurance, ‘ABOUT
SERV’ (2022). Accessed online at https://www.serv-ch.com/en/organisation/about-serv/,
on Saturday, 13th August, 2022, at 08:55 hrs.
51.
Ibid.
52.
For more about AFRY, visit https://afry.com/en/offices/switzerland.
53.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.
54.
Ibid.,
at 217-218.
55.
See ibid.,
at 218.
56.
The Export-Import Bank of China,
‘Reducing Poverty in Partner Counties’ (2022). Accessed online at http://english.eximbank.gov.cn/Responsibility/PovertyA/,
on Saturday, 13th August, 2022, at 11:20 hrs.
57.
Ibid.
58.
Ibid.
59.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.
60.
The Export-Import Bank of China, ‘Export
Order Financing’ (2022). Accessed online at http://english.eximbank.gov.cn/Business/TradeFB/TradeF1/202110/t20211021_34890.html,
on Sunday, 14th August, 2022, at 15:25 hrs.
61.
Ibid.
62.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.
63.
Tom Ogwang and Frank Vanclay, supra note 2, at 11.
64.
Uganda Radio Network, ‘Uganda declined
China request to repay SGR loan with oil cash’ The Independent (2021). Accessed online at https://www.independent.co.ug/uganda-declined-chinas-request-to-repay-sgr-loan-with-oil-revenue/,
on Sunday, 14th August, 2022, at 09:10 hrs.
65.
Nation Media Group, ‘Exim Bank again
rejects Uganda's loan request to build railway’ Monitor (2020). Accessed online at https://www.monitor.co.ug/uganda/news/national/exim-bank-again-rejects-uganda-s-loan-request-to-build-railway-1879468,
on Sunday, 14th August, 2022, at 09:20 hrs.
66.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 218.
67.
Ibid.
68.
Moses Owori, supra note 4.
69.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 232.
70.
Ibid.
71.
Ibid.
72.
Ibid.
73.
The World Bank, ‘World Bank Project
Cycle’ (2022). Accessed online at https://projects.worldbank.org/en/projects-operations/products-and-services/brief/projectcycle,
on Tuesday, 16th August, 2017, at 21:15 hrs.
74.
Ibid.
In practice, the Bank and the Borrower work closely throughout the project
cycle, although they have different roles and responsibilities.
75.
Per International Bank for
Reconstruction and Development Resolution No. 93-10; and International
Development Association Resolution No. 93-6.
76.
The Inspection
Panel, Investigation
Report – Uganda: Private Power Generation (Bujagali) Project (Guarantee No.
BOl30-UG) (2008), at ii. (Emphasis in the original).
77.
The World Bank Group, ‘Involuntary
Resettlement’ (2004). Accessed online at http://web.worldbank.org/archive/website00515/WEB/OTHER/INVOLUNT.HTM,
on Sunday, 14th August, 2022, at 07:17 hrs.
78.
The World Bank Operational Manual,
‘Involuntary Resettlement’ (2001. Accessed online at http://web.worldbank.org/archive/website00515/WEB/OTHER/CA2D01A4.HTM?OpenDocument,
on Sunday, 14th August, 2022, at 07:34 hrs.
79.
Ibid.
80.
Government of Uganda, Resettlement Policy Framework for ARSDP
(2013), at iv.
81.
Ibid.
82.
Ibid.
83.
For an in-depth discussion
of this financing model, please refer to John Dewar and Mohammad Munib Hussain,
‘Islamic Project Finance’, in John Dewar (ed) International Project Finance: Law and Practice (2011), at 269-298.
This presentation is derived therefrom.
84.
Ibid., at 275.
85.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 221.
86.
Ibid.,
at 220.
87.
Ibid.,
at 220-221.
88.
Ibid.,
at 220.
89.
Ibid.
90.
The
Inspection Panel, supra note 76.
Much as this report concerned the proposed Bujagali dam, the Panel nevertheless
drew comparisons with the proposed Karuma dam to make more informed findings.
91.
Millennium Challenge
Corporation, ‘About MCC’ (2022). Accessed online at https://www.mcc.gov/about, on Monday, 15th
August, 2022, at 12:25 hrs.
92.
Jonathan Maizel and Alexander Borisoff, supra note 3, at 220.
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