The Financing of the Grand Ethiopian Renaissance Dam (GERD)

By Ezana Kebede March 29, 2015

Background on the GERD:

Ethiopia is building the largest hydropower dam in Africa known as Grand Ethiopia Renaissance Dam(GERD) on Abay or the blue Blue Nile near the Sudanese-Ethiopia border.  The Blue Nile contributes 86 percent of the water source into the Nile River.

Even thought Ethiopia has every possible sovereign rights to utilize the Blue Nile for Ethiopian economic development as it see it fit, the plan to build the GERD was conducted in secrecy by the Ethiopian government.

Before the leaked report by the Tripartite International Panel of experts on 31, 2014 to International Rivers, http://www.internationalrivers.org/gerd-panel-of-experts-report-big-questions-remain Information on project document, engineering, water security and planning, dam operations were not available for the public to comment . Several scholars have already written about GERD, some have called the project a “White Elephant” http://open.salon.com/blog/almariam/2014/04/18/dam_white_elephants_in_ethiopia

Others have made it a patriotic issue without presenting the economic-financial cost benefit analysis. To date the financing and the cost-benefit of the project has been missing for the Ethiopian public and in-depth analysis is difficult.

Building a dam on the Blue Nile is a multi facet project that raises issues of regional politics, local and Diaspora public involvement in financing, environment issues such as and soil conservation, project implementations. Therefore, what I have tried to address on this paper is only the tip of the iceberg. My attempt here is to do an eye opener for others to examine the financial feasibility of the project.

The article is mostly focused on the financial aspect of the project, but writing about the financing one could not ignore the political implications.  The objective of this paper is to encourage expert discussion and share inputs towards improving better understand of the GERD project financial implications. Any one that is familiar in GERD would realize that transparency has been missing in every aspect of the project. Therefore, I welcome any input from experts towards understanding the cost benefit analysis of GERD and improving the analysis and assumptions.

Financial Cost Benefit Analysis of GERD

Even thought the government is trying to build the GERD with tax payer’s money and public borrowing, the Government of Ethiopia (GoE) is handling the project with total secrecy. So far there is no public information on the cost benefit analysis.

Therefore, I have come up with a very simplistic one dimensional easy to understand approach to come up with the cost benefit analysis, which is based on the projected cost of Euro 3.422 billion (3.442 billion Euro x 1. 28 exchange rate= USD 4.38 billion).

Based on estimated 30 % income tax bracket for Ethiopian Elector Power Corporation (EEPCo), it would take more than 8.32 years= USD 4.32 billion/ USD 526 million cash to break even.   For the first 8.32 years, the Ministry of Finance of Ethiopia would get only tax revenue on the $526 million from EEPCo selling electricity to it neighboring countries, proceed less payment to bond holder will be going to EEPCo. The return on Investment (ROI) on Net Income for GERD project is 12.02 percent.

On the other hand, if EEPCo is a tax exempt firm it would be making $ 752 million gross revenue and the ROI would be much higher. Therefore, the simple payback period to break even would be would be 5.32 years= USD 4.38 Billion/ USD 752 million.

Assumptions: 

Maximum Net Head: 133 meters [4]
Installed Capacity of 6,000 MW operates at 8,760 hours per year (24hrs X 365 days)

Plant Load Factor: 31%  [4]

Assurance of Power Generation Factor: 95% [4]

Operation, maintenance, environmental, misc. expenses: 18% (author open for more reliable assumption)

Estimated Federal and Regional Tax = 30% (author open for reliable assumption)

EEPCo is planning to sale electricity to Kenya and Djibouti at US 0.07 per kWh.

Life of GERD= 50 years

Ethiopia has eight potential clients including Eritrea, South Sudan is a potential client even thought it currently at civil war. There is also an interest from Yemen to purchase electricity, even though Yemen is also at civil war. The Yemen Post has reported buying electricity from Ethiopia is not commercial feasibility and has not been proven yet. http://www.yemenpost.net/Detail123456789.aspx?ID=100&SubID=7594&MainCat=7

Ethiopia could sell power to North Sudan or as far as Uganda and Egypt. But so far the only serious buyers of electricity seem to be Djibouti and Kenya.  Kenya has signed a memorandum of understanding to buy 400 MW per year from Ethiopia (FT News). The 283 kilometer line to Djibouti transmission has been built. The tiny east African nation now can purchase up to 60 MW of Electricity. One could have different rate pricing for each country, but the cost benefit calculation is based on what Ethiopia has promised so far to sell to Kenya and Djibouti.

The internal rate of return (IRR) of the project is 15.17 percent on an annual cash flow of USD 526 million from exporting electricity.

Risk Factor:

My ROI and IRR numbers are very optimistic, because the project depends on the current planned capacity of the dam. It is not clear when the reservoir would get filled up and the dam would begin operation.  Depending on what Egypt is demanding, the change in current height (head) of dam would critically affect the production capacity of the power plant. That would alter the (ROI) and (IRR) of the project.

The final report by “Panel of Experts” on the Implementation Plan states that “the construction of the project started on January 2011 and the dam will be operational by 2017. It will take 3 years for commencement of generation of 216 MW from the first 2 units. Final installation of all turbines is anticipated to require 7.5 years.” If the Millennium bond matures before the dam is operational and complete EEPCo is still obligated to pay the bond holders ( Investors) depending on the maturity of date of the government bond that would expire within 5, 7 and 10 years.

News media such as Bloomberg has reported, quoting Bereket Simon, the former Minister of Information of Ethiopia reported “Birr 5 billion has been raised from the public by selling bonds”. $ 263 million is a small amount compared what is needed to build the Grand Renaissance Dam which is anticipated to cost $ 4.38 billion without project overrun.

Last year member of the Ethiopia community residing in UAE have purchase $422 thousand worth of bonds. It was also announced by the Ethiopian embassy in UK, Diaspora Ethiopian residing in Britain have purchased £130,620. However, it is not clear how much debt funding have been raised from the bond sales so far. The majority of Ethiopians are so poor to make a meaning full investment to purchase the Millennium Dam bond.

 Project Financing:

The government of Ethiopia (GoE) is partially financing the project by selling coupon paying bonds maturing in 5, 7 and 10 years. The state owned utility company Ethiopian Electric Power Corporation( EEPCo) have issued a bond that is paying a mediocre rate with negative return on investment that is paying 2.6 percent or (Libor + 2%) for its Zero Coupon bond holders and making a spread of 12.77 percent on the investment. The number one reason to purchase a Diaspora bond is patriotism, therefore purchasing the bond has charitable implications.

The EEPCo Millennium Bond is pays coupon annually, where as the Renaissance Dam Bond is paying semi-annual coupon. Both bonds are required to pay the face value at maturity. As a bench mark, the most recent Ethiopian Sovereign Bond (Euro Bond) is paying 6.625 percent coupon to ten private investors. The top four are Aberdeen, Blackrock Group, Goldman Sachs Group and Russell Investment.

However, all the Great Millennium Dam Bonds are based in floating interest rate. If interest goes higher at the time of maturity, GoE will end up paying higher interest that will benefit the Ethiopian investor. http://blogs.worldbank.org/peoplemove/ethiopia%E2%80%99s-new-diaspora-bond-will-it-be-successful-this-time

Considering the potential for future devaluation for Birr and inflation rate, Birr and the USD denominated bonds should have had a different pricing structure. A Birr denominated bond should be paying a higher yield than dollar denominated bond (Diaspora Bond). For the Diaspora investor there is no clear distinction between local currency Birr denominated bond and foreign currency bonds.

Under the current plan, GERD is expected to generate 6,000 megawatts. In 2010, EEPCo peak demand was around 1,100 MW which was well within its capacity.  According to the World Bank report (EEPCo) commissioned 3 large hydro power plants namely, Tekeze (300 MW), Gibe II (420 MW) and Beles (460 MW) power plants that increased its power generation capacity from about 850 MW to above 2,000 MW. The report states that FY2011, EEPCo’s peak demand was around 1,100 MW, which was well within its capacity. Ethiopia has 45,000 MW of hydro electric potential.

In simple terms, with the additional 6,000 MW supply, the GERD will exceed the current local Demand of 1,100 MW.  Therefore, from the excess supply one could only assume GoE is simply planning to sell electricity to neighboring countries.

In Conclusion:

The government of Ethiopia could succeed in making $526 million from export of electricity each year provided the GERD is at full capacity of 6,000 MW and the country is capable of getting funding for the power grid connectivity and transmission lines.

One could also assume the completion of GERD project could further help Ethiopia integrate economically and political with neighboring countries and give political leverage to the current regime. Ethiopia could be Africa’s power house by selling electricity. It seems at the moment the US policy is tilting toward Egypt.  President Obama’s US Power African initiative does not support the GERD.  In the future that might change. The US might assist GoE in getting financing from bilateral and multilateral institutions, such as the World Bank. The GERD would also create economic integration between East African countries, as it also may discourage neighboring countries from supporting one another opposition groups.

Most importantly the public and policy makers should explore the use of Ethiopian water resource holistically, with long term outlook and how best to utilize Nile tributaries for irrigation purpose besides power generation. According to UN-IFAD on June 2009 – “Ethiopia loses about 2 billion tons of fertile soils to land degradation each year”.

Ezana Kebede is a contributor on financial policy related issues that affect Ethiopians.

He can be reached at  email: Ethiopiancaptialmarkets@gmail.com

 

 

 

 

 

 

References:

Bloomberg News[1]

http://www.bloomberg.com/news/2011-04-07/ethiopia-tells-private-banks-to-buy-bonds-to-fund-infrastructure-projects.html

FT News[2]

http://www.ft.com/intl/cms/s/0/14d2026a-902d-11e3-a776-00144feab7de.html#axzz3B5C9IHxh

Fidelity

https://fixedincome.fidelity.com/ftgw/fi/FILanding?bar=p#tbindividual-bonds|yield

 

National bank of Ethiopia- Quarterly Bulletin [3]

http://www.nbe.gov.et/pdf/quartelybulletin/vol%2029%20Q2/Overview.pdf

International River [4]

http://www.internationalrivers.org/gerd-panel-of-experts-report-big-questions-remain

Security Exchange Commission [6]

http://www.sec.gov/answers/regis33.htm

The World Bank[ 7]

http://siteresources.worldbank.org/TOPICS/Resources/214970-1288877981391/MigrationAndDevelopmentBrief14_DiasporaSavings.pdf

http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/ORGANIZATION/EXTPREMNET/0,,contentMDK:22941860~menuPK:2880850~pagePK:64159605~piPK:64157667~theSitePK:489961,00.html

 

World Bank PROJECT INFORMATION DOCUMENT (PID)[8]

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/AFR/2012/04/18/D0BC4A2087103D0C852579E40051EC89/1_0/Rendered/INDEX/PID0Appraisal0018201201334760889511.txt

 

 

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