Questions over Karuma dam

By Agather Atuhaire & Joan Akella

US$ 2 billion project starts with no signed contract?

Will electricity finally get cheaper when the 600MW Karuma Hydropower Dam is completed sometime in 2018?Possibly not. But a lot depends on outcome of a meeting that took place in China on Sept.27 between a delegation from Uganda and their Chinese counterparts. The Minister of Finance, Maria Kiwanuka led the Uganda delegation that departed on Sept.22.

On team were the permanent secretaries of the Ministry of Finance, Keith Muhakanizi and that of the Ministry of Energy, Fred KabagambeKaliisa and other technocrats.

The visit follows a bilateral meeting between Uganda and China on Sept. 17 at the Office of the Prime Minister, AmamaMbabazi in Kampala.  Zhang Dejiang, chairman of the Standing Committee of the 12th National People’s Congress of the People’s Republic of China represented his government.

Mbabazi praised China’s support to Uganda’s economic development through finance from China Exim Bank which, he said, has facilitated the country’s pursuit for strategic national development objectives.

He pointed out projects the bank has previously financed including the National Backbone and E-Government Project Phase I at US$ 30 million, equipment supply to Local Government’s (Kampala City Council) at US$10 million, the Kampala- Entebbe Express-Way Project at US $ 350 million, the Supply of road, sanitation and firefighting equipment Phase II at US$100 million), the National Backbone and E-Government Project –Phase II at US$61million and Karuma Hydropower Dam which is the biggest of them all. The cost of Karuma has not been finalised, The Independent has learnt and Finance Minister Kiwanuka’s mission was to complete negotiation of what the technocrats call the Engineering, Procurement, Construction and Financing (EPC+F) with Export -Import (EXIM) Bank of China which is providing a loan to the contractor; Chinese hydropower monolith Sinohydro.

Mbabazi explained that the Karuma deal was agreed on March 28 when President Xi Jinping met with President YoweriMuseveni in Durban, South Africa.

In what has become a common, and quite dangerous, practice for Uganda, the award of the tender for the construction of the Karuma Dam to Sinohydro was done before any contract was signed.

Insiders at the ministry of Energy told The Independent that as President YoweriMuseveni was busy launching the start of the construction of Karuma dam on Aug.12, Sinohydro Corporation Ltd officials, were running up and down the corridors attempting to finalise contract negotiations with the Ministry Contracts Committee.

The Committee had a pile of queries top of which was how Sinohydro Corporation Ltd had won the award of the contract ahead of the leading bidder,  China International Water Electronic Corporation (CWE).

Sources say the committee tossed the contractor back and forth saying the contract was not awarded through proper procedure and it was not impressed by Sinohydro’s claims that it won the contract through “a presidential directive”.

To compound Sinohydro’s problem, it did not in fact have a contract but was waiving a Memorandum of Understanding. Give us a break, the Energy Committee officials reportedly told Sinohydro, your piece of paper was not even signed by the President but by a mere minister.

Although the contract was supposed to have been signed on August 02 in readiness for the launch according to the company’s implementation schedule, sources say it was finally signed after the event on August 16.

Energy PS KabagambeKaliisa has been at this game for quite some time and dismissed any claims that the dam was launched before the contract was signed as a “misconceived rumour”.

“The contract had long been signed,” he told The Independent when consulted, “What the contracts committee and the company were still negotiating was the engineering, procurement, construction and financing.”

Sinohydro was awarded the contract through what the experts call a Private Public Partnership direct award process after a bilateral arrangement agreed in South Africa between President Museveni and his Chinese counterpart. Under the deal, the Chinese government would extend a loan to the government of Uganda to cover 85% of the cost of the project.

Before that, Kaliisa explained, Sinhydro is going to provide “bridge financing” in anticipation of the Government to Government financing. That explains why Maria Kiwanuka and company were in China and why Sinohydro needs a loan from the Exim Bank of China. It’s an old and well-practiced move by these Export-Import banks of the rich countries.

Chinese financing

Although the Exim Bank of China provides concessional loans from the Chinese government to approved countries, it also has a commercial arm which provides export credits to Chinese export entities like Sinohydro that are engaged in huge projects abroad. The net result is that their entities make tonnes of money while pushing up the cost of projects they are financing in the recipient poor countries.

The belief that the Exim loan terms will be manageable because it is a concession from a rich government to a poor one is mistaken. What that argument does not factor in is the commercial interest of Sinohydro and Exim Bank. Although both are government entities, the Chinese government is quite firm when demanding high revenue results from the managers of its entities. To this point, therefore, it is not clear how much Karuma Dam will cost or when actual work will start.

By mid-August when The Independent visited the site, Sinohydro had not opened their offices although a geotech company had set up camp to start drilling the rocks at the construction site to test the hardness of the rocks.

Regarding cost of the dam, officials of the Ministry of Energy, sector watchers and experts, and pundits have been bandying around myriad cost figures.

Most expensive dam?

The Minister of State for Energy, Simon D’Ujanga says the dam will be constructed for US$1.3 billion and the Permanent Secretary of the ministry, KabagambeKaliisa puts it at US$1.39 billion. Meanwhile another official in the ministry who preferred not to be named because he is not authorised to speak to the press on this issue put the cost at US$1.6 billion. Then there are `well informed’  individuals like  Andrew AjaBaryayanga, the MP from Kabale municipality who has followed the case closely and sued the Inspector General of Government over unnecessarily delaying the project, who claim it will be built at US$2.1 billion.

If the dam is built for US$1.3 billion; the lowest quotation that is most likely based on a quote by a bidder who lost anyway, its cost per megawatt of electricity will be almost equal to that of the 250MW Bujagali Hydroelectricity Dam that was completed in 2012 at an eventual cost of US$862 million.

Initially, the Bujagali Dam had been budgeted to cost US$250 million. That cost shot up when the procurement process was frustrated over allegations of corruption and the initial contractors, the American outfit AES Corporation, quit. When Bujagali Energy Limited (BEL), the consortium that eventually built the dam arrived on the scene, their initial quotation was US$580 million. In the end, that figure shot up by 48%.

If that happens in case of Karuma as is expected, then the construction cost will shoot from US$1.3 billion at the lowest to US$1.9 billion at the lowest. It could also shoot from US$2.1 billion to US$3.1 billion at the highest. That means Karuma, even by the lowest estimates will not only be Uganda’s most expensive dam to date, it will also generate the most expensive electricity for consumers.

At the lowest, the cost for constructing each MW of electricity could be between US$3.1 million to US$5.1 million at the high end. The Bujagali Dam cost US$3.4 million per megawatt to construct in an industry where the mean cost is US$1.4 million for each megawatt.

Hydroelectricity dams are, of course the most expensive to build after nuclear power plants, but even by international standards, Uganda is gaining a reputation for very high costs.

When Ugandans were facing acute power outages and paying highly for thermal generated scarce power, the government always promised cheap uninterrupted power once Bujagali came on board. Government explained that the reason power was costly was because of the thermal generators that were supplementing Nalubaale and Kiira dams use expensive fuel.

Surprisingly, barely a month after Bujagali was commissioned on January 15; Minister Muloni announced an increment in the consumer tariffs.

Her deputy D’Ujanga later told MPs on the natural resources committee of parliament that power would be expensive even after the completion of Bujagali because the dam was financed using a loan which needed to be paid back.

D’Ujanga told MPs that Ugandans would get cheap power after the construction of Karuma because Karuma would be “solely financed by government using money on the Energy Fund”.

The ministry in March denied reports that money on the energy fund had been used to purchase jets. D’Ujanga had said that the energy fund was still intact and that the money would still be used to construct Karuma.

With the loan coming in from China, the Energy ministry now says the money on the Energy Fund will be used for other energy projects like building transmission lines.

But the same ministry recently went to parliament to approve three loan components for the construction of new power projects, transmission lines, and rural electrification.

Appeasing Karuma bid losers

But the government has another problem; what to do with the unresolved complaints from the perceived winner of the procurement process, CWE.

Sinohydro was among the three prequalified bidders but it was not invited for the financial bidding because the Energy ministry Contracts Committee in their technical evaluation report said the company had submitted insufficient information regarding the roles and responsibilities of the partners in the joint venture and analysis of its work plan.

After the procurement process, CWE emerged the best evaluated bidder. But the process was cancelled over court cases, allegations of corruption and abuse of the process.

Amidst the confusion, a Memorandum of Understanding was signed in June between the ministry of Energy and Sinohydro giving it the deal to construct the dam and the transmission line.

Immediately, CWE wrote a letter to the ministry on June 20, the same day when the MOU was signed, threatening to take legal action over alleged abuse of procurement process and contempt of court proceedings.

Legal experts say CWE has a case and going ahead with Sinohydro could cost government money in fines.

Uganda Law Society Secretary General Nicholas Opio told The Independent that as long as a court pronounced itself, any action defying that ruling is contempt of court. Opio said whether CWE had done work on the project or not, it can sue for abuse of process.

Ndorwa East MP and lawyer Wilfred Niwagaba also told The Independent that if CWE had already incurred any costs on the project it is entitled to be compensated.

He said that the law provides that the company be given back the money it has incurred and its anticipated profits.

Such cases have been seen before, significantly in the Hima Cement case in which court awarded an investor billions of shillings in compensation from the government for breach of contract after President Museveni unilaterally cancelled their concession.

Minister D’Ujanga told The Independent that Uganda’s procurement laws allow bilateral arrangements such as that negotiated by Museveni and China to bypass them. In any case, Minister Muloni argues, the public had lost faith in the procurement process because of endless allegations and court injunctions.

But Baryayanga told parliament that because proper process was ignored, it will now be almost impossible to hold Sinohydro to account if it does not perform to expectations.

This, Baryayanga says, is dangerous because Sinohydro has done shoddy work in a number of countries and should not have been entrusted with the country’s biggest power project.

Shoddy work feared

Media reports in Botswana where Sinohydro was hired to build a terminal expansion of the Sir SeretseKhama International Airport, which project was later cancelled citing substandard works and construction delays, appear to back Baryayanga’s fears. But then, in the true nature of a dragon, Sinohydro which is China’s biggest dam builder has so many subsidiaries that it is impossible to say whether the Ugandan entity, in fact, has any connection to the Botswana one or any other.

Iran also cancelled their contract to construct a hydro power project although the reports were not clear on the reasons for cancellation.

It is not clear how Sinohydro outmaneuvered CWE in the final negotiation process to win Karuma. According to documents related to the case that The Independent has seen, the Chinese government only asked the government of Uganda to choose any of the qualified Chinese companies but left to them the decision on the choice of the company.

There are reports that as part of the deal, CWE was awarded the Isimba Hydropower Project also on the River Nile.

If correct, that could also prove controversial because, the Indian government had in May already pledged a US$$450 million (Shs 1.12 trillion) loan to finance the construction of the 140 MW.

The Indian state-owned Bharat Heavy Electricals Ltd had undertaken to construct the dam project located in Kamuli District in Eastern Uganda.

On completion in 2017, the dam will be the fourth largest in the country. The Indian company will also participate in oil and gas exploration among other sectors including IT, agriculture, food processing, and security.

The credit facility and cooperation in other areas were decided during bilateral talks when India’s External Affairs Minister, Salman Khurshid, visited Uganda.

Plans to construct Karuma go way back in 1995 when a Norwegian company Norpak was hired to do its feasibility study. Almost 20 years later, construction is yet to commence.

Sinohydro pledges to construct the dam within a period of 60 months but obviously, the fights over Uganda’s hydropower dam construction are not over yet.