Chinese quit Museveni’s refinery deal

US$4bn project fails to get investor again

KAMPALA, UGANDA |HAGGAI MATSIKO| President Yoweri Museveni’s oil refinery project has once again suffered a major blow with a major Chinese contractor quitting. As has happened in many major infrastructure deals, frustration over in-fighting, intrigue and lobbying had already taken root with cabinet officials, President Yoweri Museveni’s relatives, diplomats and senior technocrats at the Energy Ministry being cited in this case.

The Independent has learnt that China Petroleum Engineering & Construction Corporation (CPECC) in June wrote to the government indicating that it had pulled out of the deal. The departure of CPECC is a major set-back because it is affiliated to China National Petroleum Corporation (CNPC), the world’s third largest oil company, and it is considered the largest company with specialties in oil engineering, manufacturing, construction, and contracting in China.

CPECC was part of a Chinese consortium put together by a well-known and highly connected Chinese group in Uganda; Dongsong Guangzhou Energy Group, that had following a June review emerged the best contender for the refinery project. That group had beat three others including an American consortium led by Yaatra/ Intra-continental Asset Holdings and including the renowned global manufacturing giant General Electric and Saipem; the Italian oil and gas contractor.

Insiders say the Dongsong win had everything to do with CPECC, which was being fronted as the Engineering, Procurement, and Construction (EPC) contractor or the main contractor in the consortium. Others in the group included China Africa Fund for Industrial Cooperation (CAFIC), Guangzhou Silk Road, East China Design and Engineering Institute, EXIM Bank of China, and Industrial and Commercial Bank of China (ICBC).

The Dongsong win appeared to have ended Museveni’s long and convoluted search for the refinery constructor in the best possible way because it was said to have the money and expertise needed for the US$4 billion job.

“They had the money and the technical capacity to build the project,” an official close to the deal told The Independent, “but they disagreed amongst themselves and the main contractor pulled out.”

Given the secrecy amongst Chinese companies, it is hard even for most insiders to pinpoint what exactly happened. However, the generally accepted view is that CPECC was unimpressed that Dongsong, which is a much smaller player although it had been fronted as the consortium’s leader, wanted to have controlling powers on the project; including over finances. Sources say CPECC was not ready to accept.

Matters are not helped by Dongsong’s incapability to deal with a project of that magnitude.  It is already struggling with the Usukuru phosphates project in Tororo, eastern Uganda, which requires only $620 million. President Museveni, sources say, had been warned about Dongsong’s financial weakness but, for unclear reasons, he appears to rate it favourably most of the time. That is partly why the Dongsong deal went ahead.

Also, the Dongsong consortium defeated the competition mainly by claiming to have the financial muscle required.

In meetings with the ministry technical team, the Dongsong group provided their equity and debt financiers; China Africa for Industrial Cooperation and Guangzhou Silk Road, and EXIM Bank of China and ICBC, respectively.

The government team also noted that the Chinese consortium exhibited adequate assurance and availability of the required major contractors.

“The China Petroleum Engineering & Construction Corporation (CPECC) and the East China Design and Engineering Institute were presented as EPC and O&M partners respectively,” a memo prepared by the ministry review team reads in part.

On the cost of financing the project, the China consortium also had the best offer. The consortium put the cost of borrowing for debt finance in the range of 4%- 7% and both the EXIM Bank and ICBC expressed interest in providing the debt funds for the project.

All appeared on course for the refinery as it also appeared to have good will from one of the major players in the sector—Total E&P.

Early this year, the French major offered to take a 10 percent stake in the project. 10 percent is easily over US$ 400 million, just $ 100 million shy of the $ 500 million government officials indicated was needed to kick start the project.

Total E&P’s offer was important because it signaled a break from the past when the international oil companies—CNOOC, Total E&P and Tullow—opposed to the refinery. The oil companies were keen on the $3.55 billion pipeline, which hit a milestone with the signing on May 26 of a construction agreement deal between Uganda and Tanzania.

There was only a small glitch. ICBC, which intended to provide the debt finance for the project noted that for such type of financing, it would require a sovereign guarantee from the government of Uganda.

The technical team was concerned that the sovereign guarantee may involve the issuance of a financial guarantee from the Finance Ministry.

“This position is not desirable to GOU as it can expose the government to risks associated with debt repayment, especially if the consortium is inefficient,” a confidential brief noted.

Apart from this, all else appeared fine. Dongsong Group had already committed to provide up to USD 100million of Pre-Final Investment Decision (FID) funds. They also noted that they are prepared to provide a bank guarantee to GOU to assure availability of the said funds.

The Dongsong consortium had also already interfaced with a number of Chinese state-owned financial institutions to interest them in the refinery project and obtained letters of intent from both equity and debt financiers, which, the technical team noted, “demonstrates readiness to finance the entire project”.    Up to this point, the deal appeared to be on track.

But now with CPECC out, the deal appears to have collapsed. This is because according to confidential documents seen by The Independent, the consortia were required to present among others; a co-signed letter of intent between the consortium financiers, a co-signed letter of intent between financier, EPC and Operations and Maintenance Company, conditions precedent for Pre-FID activity, proof of finances for pre-FID activity and proof of project financing.

The fall out, therefore, means the Chinese consortia cannot meet some of the necessary conditions.