Uganda paying back $1.4bn Chinese loan for Karuma

This is the largest loan that the country has borrowed from Beijing for a single project

NEW ANALYSIS | MUSINGUZI BLANSHE | Uganda has started paying back a $1.44bn loan to China. However, the flagship 600MW Karuma hydropower project that the government paid for is not finished, an official tells The Africa Report. Researchers say Uganda is responsible for the mess it finds itself enmeshed in.

Situated on River Nile, 270 miles north of the capital city Kampala, sits the Karuma hydroelectric power dam. The 600MW project is a symbol of the China-Uganda partnership, which is yet to bear fruits.

Envisaged as the linchpin of Uganda’s economic transformation through provision of cheap electricity, the government borrowed 85% (roughly $1.44bn) of the $1.7bn total project cost from China’s EXIM bank to bring it to life.

It’s the largest loan that the country has borrowed from Beijing for a single project. The project is being implemented by Sinohydro Corporation Limited, a Chinese state owned company.

Construction of the dam started in 2013 and was initially to be completed in December 2018. If juxtaposed with Ethiopia’s Grand Ethiopian Renaissance Dam (GERD), which is 10 times bigger and whose construction started in 2011, but started generating power in 2021, Uganda’s pace has been mediocre.

The loan’s seven-year grace period expired at the end of 2020. In August that year, EXIM Bank wrote to Uganda’s finance minister Matia Kasaija informing him that “both the available period and the grace period of the project will expire on 24 December 2020, then the repayment period commences, meaning the principal should be repaid accordingly, no matter the construction of the project is finished or not”.

Though the minister wrote to EXIM Bank asking for a two-year extension of grace period, it seems his plea was turned down. Therefore, the government had to start servicing the loan.

“We have started paying. We are not defaulting. We are paying as per the contract agreement because we must pay,” Jennifer Muhuriza, director of treasury services and asset management at the finance ministry, tells The Africa Report. She declined to answer more questions.

Why the delay? 

Since 2019, the project has been at 98.80%, in terms of completion. Several reasons have been advanced by the contractor, mainly the effects of the pandemic on flights that would have delivered equipment from China.

However, there have been numerous reports of cracks emerging inside the dam tunnels since 2016, which is indicative of substandard workmanship. In a 2016 letter, President Yoweri Museveni admitted that “disturbing reports of shoddy” were “to a large extent actually true”.

Reports of shoddy work also emerged at the Isimba hydropower project, a 183-megawatts dam that was also under construction by the Chinese. It was also bankrolled by a $567 loan from China EXIM bank and implemented by China International Water and Electric Corporation (CIWE).

The dam was launched in 2018, but in August this year, it was shut down for days due to defects caused by poor engineering.

Chinese diplomats in Kampala said that they were attaching “great importance to the defects issue of Isimba hydropower station” and promised to fly experienced engineers from Beijing to assess the defects.

In 2016, Museveni created another layer of project supervisors for the two dams, an indication of how serious he was taking the shoddy work reports.

Dr. Tom Ogwang, who has written about Chinese funded projects in Uganda, says the agreement between government and the contractor put the former in a weak position.

“You have a situation where the contractor is dictating the terms and conditions on how they are going to work and manage the entire project and [the] government somehow gave in.”

For the past three years, government officials have been postponing the commissioning of the dam. The last launch had been scheduled for October, but it didn’t happen.

Sidronius Okaasai Opolot, the state minister for energy, says the commissioning will happen in November 2022. “If you ring me next week, I will be able to give you a date when the two turbines will be commissioned.” Even so, one of the Chinese engineers working on the project says he is not sure of when the commissioning will take place, without giving further details. Opolot says the latest delay is due to lack of electricity to test turbines.

Government mistakes   

Dr. Tom Ogwang says Uganda made mistakes at the procurement stage by handpicking the contractor. Sinohydro Corporation Limited and China International Water and Electric Corporation (CIWE) competed for the Karuma project in 2012.

However, Museveni reportedly made a final call, handing Karuma dam to Sinohydro and Isimba to CIWE as a consolation prize.

“[The] government should be taking the blame for this mess because the Chinese wanted a contractor from China so the government was supposed to invite the Chinese companies and let them compete,” he says.

Ogwang says the blame falls squarely on Museveni because most Chinese loan projects are discussed at the highest level. “Once the president has made a decision on any of these ideas, the bureaucrats at ministries have no say.”

The Chinese contractors aren’t entirely innocent, Ogwang argues, adding that they must accept to follow internationally acceptable practices.

“Let them not take advantage that these are poor countries, desperate and in need of assistance,” he says. “Indeed, Uganda is a poor country in need of assistance, but that does not mean that when you’re constructing a road in Turkey, you do it in the right way and when you come to Uganda, you don’t do it the right way.”

China loan portfolio  

Uganda’s China loan portfolio is estimated to be almost $3bn. Another high profile loan project is the Entebbe Expressway, a $470m-road, partly funded by China EXIM bank. The road connects Kampala to Entebbe International Airport, Uganda’s gateway to the rest of the world.

China EXIM bank is also involved in the expansion of Entebbe International Airport, a $200m project which made the headlines early this year after claims emerged that Uganda had staked the airport as collateral.

The reports were debunked after AidData, an American research lab, got access to the contract whose contents revealed that the airport is not collateral.

AidData said Chinese had imposed tough terms on Uganda, including requirements that the government should channel all revenue from the country’s only international airport into an account held jointly with the lender.

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Adapted from The Africa Report.