Uganda’s electricity sector tells an important story about how large infrastructure projects are financed in emerging markets. Over the past two decades, the country has pursued ambitious power generation projects to meet growing demand, support industrialization and reduce reliance on expensive thermal power. Two projects in particular, the Bujagali Hydropower Project and the Karuma Hydropower Project stand out not only because of their size and impact, but also because they were financed in fundamentally different ways.
While both projects are technically viable and strategically important, only one was structured to attract significant private financing. This difference highlights a crucial but often misunderstood concept in infrastructure development; BANKABILITY. By examining Bujagali and Karuma through a bankability lens, this article explains why some electricity projects are able to mobilize private capital while others depend almost entirely on sovereign financing.
What is bankability?
In simple terms, a project is considered bankable when lenders are confident that it can repay borrowed money from its own revenues, without relying on the general finances of the government. Banks and other financiers are not primarily concerned with whether a project is socially desirable or technically impressive. Their focus is whether the project generates stable, predictable and enforceable cash flows over a long period of time.
For electricity projects, this usually depends on:
- Whether electricity produced will definitely be bought?
- Whether the buyer can reliably pay?
- Whether risks are clearly allocated and legally enforceable?
- Whether lenders can protect their money if things go wrong?
With this in mind, the financing paths taken by Bujagali and Karuma become much clearer.
The Bujagali Hydropower Project: Background and purpose
The Bujagali Hydropower Project was conceived in the early 2000s, a period when Uganda was experiencing severe electricity shortages that constrained economic growth. After an initial failed attempt, the project was restructured and eventually reached financial close in 2007. It was commissioned in 2012 with an installed capacity of approximately 250 megawatts.
Bujagali was developed as an Independent Power Project (IPP). This means it was owned and operated by a private project company (Bujagali Energy Limited) rather than the government. The core idea behind the project was to expand electricity generation without the government having to fund the project directly from public resources.
In policy terms, Bujagali stood for Uganda’s commitment to private sector participation in the electricity sector and to using project finance as a tool for infrastructure development.
Bankability of the Bujagali Project
Bujagali’s ability to attract private financing was not accidental. It was deliberately engineered.
First, the project was supported by a long-term Power Purchase Agreement (PPA) with the national electricity off-taker (Uganda Electricity Transmission Company Limited). This agreement ensured that all electricity generated by the project would be purchased at agreed tariffs over a long period. For lenders, this translated into predictable revenue.
Second, concerns about the financial strength of the off-taker were addressed through government support arrangements. These included guarantees and other mechanisms designed to ensure that payments would still be made even if the utility encountered financial difficulty.
Third, the project involved development finance institutions (DFIs) alongside commercial lenders. DFIs played a critical role in reducing perceived political and regulatory risk, thereby encouraging private banks to participate.
Finally, lenders were granted strong security and control rights, including rights over project accounts and the ability to step in if the project company defaulted.
While Bujagali faced delays, public opposition and cost overruns, these risks were allocated through contracts in ways that lenders could assess and price. The project therefore met the core test of bankability: risks were not eliminated, but they were structured.
The Karuma Hydropower Project: Background and Purpose
Construction of the Karuma Hydropower began in 2013 and the project was designed to generate approximately 600 megawatts of electricity more than double the capacity of Bujagali. Karuma was promoted as a transformative national project capable of turning Uganda into a regional power exporter.
Unlike Bujagali, Karuma was not developed as an IPP. Instead, it was largely financed through sovereign borrowing, with the government taking responsibility for funding, repayment and overall project risk. The project therefore reflected a policy choice to pursue large-scale, state-led infrastructure development.
Karuma stood for national ownership, scale and speed rather than private capital mobilization.
The Bankability of the Karuma Project
From a traditional project finance perspective, Karuma was not designed to be bankable. Financing was provided on a sovereign basis as lenders did not require the project to demonstrate independent revenue sufficiency. Risks such as construction delays, cost overruns and repayment obligations were absorbed by the government rather than being allocated across contractual relationships. There was no need for:
- Extensive lender security packages
- Complex risk allocation frameworks
- Strong off-taker credit enhancements designed for private banks
This approach simplified financing and reduced transaction complexity. However, it also meant that the project’s risks were transferred almost entirely onto the public balance sheet. Karuma’s viability therefore depended not on project cash flows, but on the state’s long-term fiscal capacity.
Comparing Bujagali and Karuma: Two financing models, two risk outcomes
When compared, Bujagali and Karuma illustrate two distinct financing philosophies.
Bujagali shows how bankability disciplines can attract private capital even in high-risk environments. Through contracts, guarantees and legal protections, project risk was redistributed among private parties, lenders, and the state.
Karuma demonstrates how projects can proceed without those disciplines by relying on sovereign financing. While this can accelerate development and preserve public control, it concentrates financial risk on taxpayers and limits private sector participation.
The key difference is not technical feasibility or national importance. It is who ultimately bears the financial consequences when things go wrong.
Why bankability matters going forward?
As electricity demand continues to grow, Uganda and other emerging markets face difficult choices about how future projects are financed. Bankable project structures enable governments to leverage private capital and reduce fiscal exposure. However, they require strong institutions, contractual credibility and regulatory consistency.
Sovereign financing, while sometimes necessary, should be approached with a clear understanding of its long-term implications for public debt and risk concentration.
Conclusion
The experiences of Bujagali and Karuma demonstrate that bankability is not a theoretical concept reserved for financiers. It is a practical framework that determines whether electricity projects attract private capital or rely on public resources. Understanding this distinction is essential for designing sustainable energy infrastructure in emerging markets.
