Chinese firm warns Uganda on Karuma

• `We will punish you’

• Energy officials accused of eating bribes

In the March issue of the international business magazine, Forbes, the billionaire Sudhir Ruparelia is asked in an interview what he thinks is the biggest weakness of the Uganda economy.

Sudhir answers:  “The left doesn’t know what the right is doing, unfortunately. The decision making process of this country has gone very bad. Although there are a lot of processes, unfortunately these checks and balances have been abused; thereby the people have been scared into making decisions. The only way people feel they will survive in the job is by not making decisions and that’s very bad”.

Nowhere has this decision making paralysis been as obvious as in the case of the proposed 600MW Karuma hydroelectric power project.

Finally, however, the circus over the Karuma Hydropower Project appears to be nearing an end after the Chinese firm, China International Water and Electric Corp (CWE), warned Uganda not to attempt to cancel its leading bid.

In an April 3 letter to the Permanent Secretary in the Ministry Energy, Fred Kabagambe Kalisa, CWE’s representative Xia Nenghai writes:

“We reserve our rights fully and will not hesitate to take appropriate legal action in the event of unlawful termination of the procurement process relating to the Karuma Hydropower Project.”

In the same letter CWE serves the carrot: Our aim is to extend the strong commercial relationship between our two countries and seek a tender process that is fair, transparent, and conducted in an open environment”.

But in the same letter, CWE also swings the whip:

“We hope… to prevent needless compromise of the bilateral commercial relationship and will permit further economic support in the development of infrastructure projects in Uganda”.

Interestingly, the letter is dated just a day after Kabagambe released a response to claims made against CWE by the Inspector General of Government, Irene Mulyagonja.

Kabagambe had in an April 2 memo to President Yoweri Museveni implied that Mulyagonja’s intervention was too late.

“The IGG’s letter was received at 9.43am when the financial bid for China International Water & Electric Corporation (CWE) had already been opened”.

In the multi-pronged procurement process, the financial bidding is the last stage and CWE is the lone bidder. Based on this Kabagambe recommended:

“The most logical and sensible option is to quickly take the procurement process to its logical conclusion by immediately assembling the Re-evaluation Committee to analyse CWE’s Financial Bid so that the Contracts committee pronounces itself on the best evaluated bidder”.

If that stage is reached, CWE is likely to be awarded the contract because, although the project is estimated to cost US$2.2 billion, according to Kabagambe’s memo, CWE had bid to do the project at US$1.4 billion.

Dire consequences

Kabagambe warns that among other dire consequences, if CWE bid is cancelled, “diplomatic relations especially with the Peoples Republic of China”, whose state corporation CWE has been faulted using questionable methods, “will suffer.”

Mulyagonja had in a Jan. 25 letter to Kabagambe ordered a halt to further action on the Karuma Procurement process. She said she was conducting her own investigation into allegations of lack of due diligence on CWE and other issues raised by an anonymous whistleblower.

On March 22, she released a report of her investigation that recommended that the Karuma procurement process be “cancelled and the process repeated right from the beginning”.

Although the IGG’s recommendation and report has been dismissed by the Energy PS, KabagambeKalisa, the Attorney General Peter Nyombi, and the CWE official,  Xia Nenghai, it is not clear what the legal and cost implications of proceeding to award the contract to CWE could be.

Kabagambe and CWE all focus on a point in the IGG’s findings where in her conclusions she writes that; “no evidence was found to support the allegations of bribery in the course of this investigation.”

But that same section also notes that it was wrong to continue with the procurement process in disregard of “irregularities and the discovery of falsehoods in CWE’s bid”.

According to the IGG’s report, CWE’s bid did not comply with the requirements of the PPDA solicitation document on evaluation methodology, and the ministry ignored a demand by PPDA for an administrative review of the process.

Significantly, the IGG pointed out that the promise by CWE’s parent company, the China Three Gorges Corporation, to guarantee CWE’s performance was “in contravention of the basic principle that a subsidiary may not rely on the business fundamentals of a parent company”.

“It was also unfair to other bidders who were not informed at the beginning of the bidding process that they would rely on parent company guarantees to improve their bids”.

Attorney General Nyombi has said the IGG has no mandate to meddle in the Karuma Dam procurement but his claim may not deter firms whose bids failed from seeking legal redress based on Mulyagonja’s report. If that happens, Karuma could once again go back to the beginning.

The show down between Kabagambe, Nyombi and CWE on one side and the IGG on the other is the lasted duel in drama characterized by government officials, commission agents, and investors fighting over a public procurement deal for personal gain.

At the centre of the jostling and lobbying are President YoweriMuseveni, Energy minister Irene Muloni, her junior minister Simon Du’Janga, the Permanent Secretary in the ministry of Energy, Fred KabagambeKalisa, the Attorney General Peter Nyombi, the Public Procurement and Disposal of Public Assets Authority (PPDA) Executive Director Cornelia Sabiiti, and the Inspector General of Government, Justice Irene Mulyagonja. Each of these officials can take action to interfere with or block the bidding process.

There are myriad other influential players inside the President’s Office, State House, parliament, the media, and intelligence organisations. It is the folly of Uganda’s procurement process that each of these institutions, or even a complaint by an anonymous entity, has the potential to interfere and cause the bidding process to be reversed, re-awarded, or stopped.

In the Karuma Dam case, President YoweriMuseveni has reportedly complained that some government officials, including his ministers, are also acting as commission agents. In the past, it has been powerful business people like Col. John Mugyeni of the Kisekka Market sale fame, tycoons like Charles Mbire, and Patrick Bitature, and foreign embassy officials to act as brokers.

The process is also riddled with spies and informants everywhere. When Minister Muloni in a July 16, 2012 correspondence to President Museveni appeared to clear way for CWE by claiming that Perlite lacked engineering, procuring and dam construction experience and was encumbered by US sanctions on Iran, a dossier by an anonymous whistleblower against CWE surfaced at the IGG’s office the same day the ministry was to open CWE’s financial bid on Jan. 25.

Forecasted Domestic Energy Demand (2010-2027)

Bribery allegations

It contained allegations of bribery, which are the most favoured tool used to sabotage the procurement process partly because they are so easy to peddle and so difficult to believably deny in the Ugandan context.

It is perhaps why IGG Mulyagonja, who attempted to investigate the claims is careful in her remarks about them in her report.

The IGG writes: “No evidence was found to support the allegations of bribery in the course of this investigation”. The former judge clearly does not mean her investigation found there was no bribery. A police investigation also failed to get evidence that corruption and bribery marred the procurement process.

Yet sources that have provided reliable information about the Karuma procurement process also alleged that Energy ministry bosses and officials received  US$ 4million (about Shs 10billion) each in advance and were promised US$ 52 million (about Shs131billion) by one of the bidders.
When The Independent put a direct question about the bribery allegations to Muloni, she refused to answer and said the PS Kabagambe was best placed to answer.

Kabagambe meanwhile attempted to downplay the allegations as “joke of the year”. In reality, this “joke of the year” could be the reason behind the irregularities cited by the IGG in the process and could cost the tax payer billions of shillings if the Karuma procurement process fails.

Already, the IGG dossier has raised eight issues that could lead to problems. Among them is an allegation that CWE misrepresented itself in its bid, claimed jobs it had not done, and made small jobs it had done appear big. As in other cases, this could result in misprocurement, project cost escalation, and further delay.

20-year delay

Jostling over Karuma has gone on for almost 20 years now. The project was first mooted in 1995. Its construction immediately hit turbulent waters when it was alleged that a Norwegian company, Norpak, which was lobbying to build Karuma had, through its British subsidiary, allegedly paid a US$10,000 bribe to a Ugandan government official in 1999.  A former minister who was recently in the press over alleged extortion in India was at the centre of this scandal.

But the current bid tenders for the construction of Karuma first went out in 2006.

In a three-tiered process with separate technical and financial bids constituting the final stages; six firms were prequalified. They included China Water and Electric Corporation (CWE) and Sinohydro from China, Perlite Construction Company from Iran, Orascom from Egypt,and Salini from Italy.

Officially, after the technical bid phase, only China Electric, Sinohydro, and Perlite remained in the race. Perlite was knocked out on a technicality and only CWE remained eligible in the financial bidding race.

The tendering process stalled following a PPDA directive last September and a court injunction secured by one of the losing bidders, Salini.

In a sign of the technical and legal imbroglio around the project, on September 6, 2012, the High Court ruled that the final stage; opening of financial bids, cannot proceed. Salini was the complainant. But two weeks later, on September 20, 2012, another High Court judge ruled that the financial bidding could go ahead. The Public Procurement and Disposal of Public Assets Authority (PPDA) was the defendant.

Muloni‘s woes

In another incident, Muloni, Kabagambe, and Nyombi appear to have concluded that CWE takes the deal. But President Museveni, although favouring a Chinese firm for funding purposes, has appeared determined to avoid mistakes of the past. On Aug.7 2012, Muloni wrote to the President about the issue.

Muloni wrote to the President: “My ministry has made all reasonable efforts to ensure that the procurement process for the Karuma Project progresses. We are however constrained to proceed when you are uncomfortable with the process.”

A source who has followed the drama between the President and the Energy ministry over Karuma says the President has used the `whistleblower’ claims as pretext to investigate CWE. He has bugged ministry meetings and installed secret cameras in the Contract Committee meetings.

“Remember some whistle blowers had  cast doubt  on CWE’S capacity and had asserted  that the figures  given by  the company  in their bid  documents were  at  variance  with the actual  work  done on the ground previously,” the President cautioned Muloni on August 20,2012.

When Muloni wrote to him that CWE’s parent Company, Three Gorges Corporation (CTG), had promised to guarantee funding for the project, the President cautioned her to get the pledge in writing.

“CTG committed itself in writing to guarantee the performance of CWE in case CWE wins the tender to build Karuma Hydro power as per attached copy of their letter dated 3rd August 2012,”Muloni told the President. Muloni and the due diligence team had apparently while in China on separate visits met the management of CTG.

In the same letter she says that on Aug. 7 2012 she met the Chinese Ambassador at her office to ensure a Government of China guarantee for the performance of CWE in the event it won the tender.

But Muloni clearly states: “The actual guarantees can only be secured when the procurement is completed and a contract awarded.”

On August 20, 2012 the President asked Muloni to put the assurance That CWE would fund the project in writing. Secondly, he said, “Make sure that the Attorney General is satisfied with the legal linkage between the CWE and the bigger Chinese Government Company, the Three Gorges Corporation.”

This guarantee is what the whistleblower and IGG fear has marred the procurement process because the Energy officials appear to consider CTG as an improvement in CWE’s bid. According to the IGG, that is a contravention of the procurement rules.

Cost of delay

Meanwhile, experts are counting the cost of Karuma’s delay.

Official figures show that over the last five years, maximum domestic demand for electricity has increased from 379.7MW in 2007 to 445.8MW in 2011. Consequently, peak time maximum load shedding in the same period has fluctuated between 152 MW to 162.3MW in 2011.

Yet load shedding is the most expensive option for Uganda’s energy needs.  The economy could lose close to US 50 cents ($0.5) per unit of load shedding, which is about $262.8m (about Shs 680 billion) per year. Though cheaper, heavy fuel is not any cheaper.  Jacobsen Namanve and Electromaxx generate 100 MW of heavy fuel . However, each unit of heavy fuel generated costs about US 18 cents per KWh compared to hydro power generated power, which costs between US 8 to 10 cents.

A business person with interests in the energy sector says Uganda spends averagely US $1million per day that is US$365 million annually (about Shs 930 billion) for the business opportunity foregone due to the delays in constructing the 600MW dam.

A member of parliament, Aja Baryayanga (Kabale Municipality) has sued the IGG in the Constitutional Court over her role in the procurement process.

He told The Independent: “Karuma should have come yesterday in economic terms. But we are saying we have oil. How will we benefit from a refinery with expensive power, or load shedding?”

Aja is concerned that additional total industrial demand for electricity is projected to be 171 MW between 2012 and 2014 and if the construction of Karuma or another dam will not have started by 2014, the demand will outstrip supply.

“I don’t care whether CWE or any other contractor takes the deal but for us we need power and cheap power,” the MP says.

Matthew Karuhanga and Patrick Kakwezi, both lecturers of procurement and logistics at Makerere University Business School told The Independent that the Karuma Project had problems from the start   with whistleblowing even before the evaluation exercise was complete. They said this means information was being leaked to the bidders.

As the anonymous whistleblower said: “It is imperative that a precedent is set that the flouting of procurement procedures and laws …such that there is no illusion that Uganda will be a country of laws and will not be a country where personal interest and corruption will be the barometer by which decisions are made”.

When the Cabinet sat on April 15, unofficial reports say it agreed with the IGG’s position that the Karuma procurement is restarted from the beginning. If that happens, CWE could be blacklisted according to PPDA Act. That could be ominous.

“In China you are hanged for under delivering,” an interested party in the tendering process told The Independent.

Karuma Bidding Timeline

{gallery}issue262/Energy_Pics262{/gallery}