RVR, owned by South African parent company Sheltam Trade Close Corp, beat a rival bidder from a group led by Rail India Technical and Economical Services.

The guarantee will be underwritten by the World Bank’s Multilateral Insurance Guarantee Agency but premium payments will be met by RVR and not the Government.

The political risks covered by the guarantee are the expropriation of assets like it happened to the Asian community in 1972 or changes in the law that could affect the concession.

RVR, who last year won the right to run the Uganda and Kenya railways, paid Uganda a $2m (sh3.5b) entry fee and will pay 11.1% of gross revenues as annual fees to the two countries for the 25 years of the concession.

The new rail owner has also delivered a $3m (sh5.2b) performance bond they will forfeit.

At the end of the concession, the Government will have the right to repossess the railway assets.

In reports published in the press last week, the wrong impression was created that the Government was raising the sh26b to prop up Rift Valley Railways’ operations.

“During the 25 years, RVR is expected to invest money in the railway.

“It is this investment that RVR is insuring against,” the Privatisation Unit’s director, Michael Opagi , explained.

Under the terms of the concession, RVR has an obligation to invest in development of the railway network.
To that end, RVR has already borrowed $64m (sh120b) and put up $24m (sh45b) as equity.

Kenya has already provided a $45m (sh79.2b) partial guarantee while Uganda’s $15m (sh26.4b) guarantee still awaits Parliament’s approval.

See also:

Uganda: Here Are the Facts About the Shs26 Billion for Railway Investor

The Monitor (Kampala): February 15, 2007
OPINION, Jim Mugunga

The Daily Monitor, in its report published February 9 under the headline 'Govt to give Shs26bn to broke Railway 'investor' got it all wrong and did a disservice to its readers.

The headline made a serious and unqualified assertion that few people with knowledge of regular journalistic practice would justify. To declare someone broke, despite the far-reaching consequences for such a declaration, is a grave and dangerous misnomer.
Western Union

To refer to the Rift Valley Railways (RVR) as broke, based on the contents of the story, was unfortunate and reckless. This is a consortium whose bid was accepted by Kenya and Uganda, operating two separate control systems. Both countries were satisfied with the suitability of the investor.

RVR, likewise, proved its seriousness by committing $88 million (Shs165 billion); making good on all payments as were supposed to be made under contract i.e. $2 million (Shs3.7 billion) entry fees and $3 million (Shs5.5 billion) performance bond in the case of Uganda.

Financial undertakings of a similar nature but for bigger amounts ($3 million entry fees and $7 million for the bond) were made and fulfilled for Kenya. Hence for purposes of entry the consortium is rightly in charge and for purposes of operating the business it continues to regularly meet its financial obligations.

The most confusing part of the report was the reference to the $15 million Partial Risk Guarantee (PRG) as a loan intended by government to bail out the investor. There is, of course, also the insinuation that the so-called loan is an invention outside the joint concession contract documents.

The PRG is a facility provided by the World Bank to cover the eventuality that the concession is terminated either owing to a default by government or indeed on account of failure by RVR to perform in which case government would owe the concessionaire money accruing from the unused portion of his investments.

In order to trace the origin of the PRG, one needs to go back to all joint concession documentation and contracts as entered into by the parties to the concession. The Concession Agreements provide that in the event government terminates the concession on the basis of failure (default) by the concessionaire, the concessionaire shall pay to the government in United States dollars within 30 days after the termination date:-

any concession fees or other sums payable by the concessionaire to URC as may have accrued up to the time of termination, and the cost of re-tendering the concession; the cost of returning the conceded assets to the standards stipulated in the agreement (in good condition) and delivering it to URC; and compensation by way of liquidated damages, amounting to:

(i) the concession fees for the previous two years, or

(ii) $3.5 million.

On the other hand, the agreements also provide that in the event the concessionaire terminates the concession on the basis of failure by government, government will pay the concessionaire in United States dollars within 30 days after the termination date:-

(a) all costs directly and properly incurred by the concessionaire in terminating any sub-contracts relating to the freight services as a direct result of government failure (default); and

(b) compensation for liquidated damages, amounting to the lesser of:

Concession fees in the previous two years, or $3.5 million.

Matters of accounts

The agreement provides that the depreciation charge on all the conceded assets shall be kept. On the other hand, the depreciation charge on the assets bought by the concessionaire shall also be kept.

These shall be recorded in the Conceded Assets Account. Upon termination of the concession, a reconciliation of the two accounts (Depreciation on Conceded Assets vs Depreciation on the Assets Financed by the Concessionaire) is done; if the balance on the Conceded Assets Accounts is negative, government shall pay such amount to the concessionaire and if it is positive, the concessionaire shall pay such amount to government.

The record in the Conceded Assets Account can be likened to a record of the usage of the assets; both conceded by URC and those funded by the concessionaire in a bid to meet the targets in the concession. If the net usage is in favour of the government, then government pays and vice versa.

It is in light of the above, that the PRG as contained in the Direct Agreement is necessary and indeed a component of the whole transaction to give comfort to RVR that in the event that GoU has the benefit of usage, then they will be paid. Its design and structure will in summary be rooted in the following sets of documentation:-

Guarantee Agreement: Between the World Bank and the Concessionaire. The World Bank will guarantee that in the event that the government does not pay the amount owing within the 365 days as per the Loan Agreement, it will pay the same for and on behalf of the government.

Indemnity Agreement: Between the government and the World Bank. Under this agreement, government indemnifies the World Bank for any payments made by the Bank under the terms of the Guarantee Agreement.

Loan Agreement: Between the Concessionaire and Government. Upon occurrence of a default/failure by the government, and the amounts owing by government determined, to allow government ample time to pay it, under the Loan Agreement the amount owing is deemed to be a loan from the Concessionaire to the Government. The Loan will be payable within one year.

For clarity purposes, the fees/costs of the PRG are met by the concessionaire and not government and indeed as Privatisation Unit Director Michael Opagi put it, "during the 25 years RVR is expected to invest money in our railways. It is this investment that RVR is seeking insurance cover for."

It is standard practice for modern-day investors to seek guarantees against various forms of uncertainty and this is not exclusive to Uganda. For example, in yesteryears whereas political instability (read military coups) were hardly uncovered and possibly a taboo to talk about despite being common, in today's modern business world, political or PRGs are provided in many transactions. Serious investors will seek protection from political calamities that threaten their investments just as is the case for "natural" adverse effects climatic change.

For Uganda to attract and retain serious investors, the sooner we embrace modern world standards without compromising transparency the better.

The writer is spokesman for the Privatisation Unit in the Ministry of Finance.