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Delaying Karuma will cost Uganda heavily

By Ibrahim Kasita

Added 4th February 2013 01:11 PM

THE delay to kick-start the construction of the proposed 600 megawatts (MW) Karuma hydropower project due to complaints raised by bidding firms, is denying Uganda the opportunity to progress and industrialise.

THE delay to kick-start the construction of the proposed 600 megawatts (MW) Karuma hydropower project due to complaints raised by bidding firms, is denying Uganda the opportunity to progress and industrialise.

By Ibrahim Kasita

THE delay to kick-start the construction of the proposed 600 megawatts (MW) Karuma hydropower project due to complaints raised by bidding firms, is denying Uganda the opportunity to progress and industrialise.
 
And Uganda stands to pay the ultimate price - load-shedding returns to haunt the economy.
 
The energy ministry called for bidders to express interest to build the $2.2b hydropower plant two years ago. It was expected that the contractor would on site by March last year according the original bidding schedule. Construction is expected to last six years.

But then Italian firm Salini Spa (not Salini Constuttori) went to Court alleging that there was bribery in bidding process and irregularities in the awarding of the contract to China’s Water and Engineering (CWE) before the process was concluded.
 
Later the Attorney general later wrote to CWE to produce assurance of capacity to develop such a project.
 
Salini asked for the halting of the whole process and the Court granted that. However, the Court ordered for the re-evaluation process after a new bidding team was constituted.

Although it took about two month, a team was reconstituted and re-evaluated the bids as the Court had instructed.
 
Then as the technical evaluation was finalized and the process moving to the financial re-evaluation, another “whistleblower”  goes to the Inspector General of Government (IGG) raising the same issues –bribery in the procurement process.
 
The “whistleblower” went ahead to claim that the contract has already been awarded to the Chinese firm!
 
The procurement process

For starters, the award of contracts of multi-million dollar project is not conducted in secrecy. It is high profile and public ceremony where the media witness the signing of the agreements.
 
But before the climax, the procurement process starts with call of expression of interest. Then interested firms who meet the prequalification are shortlisted and requested to submit their technical and financial bids.
 
At this point, the contracts committee conducts due diligence on all the firms and the best technically evaluated firms go to the next stage which is the financial performance evaluation.
 
The best evaluated firm is selected and invited for negotiations. When all terms and conditions are met then the contract is awarded to the best selected bidder and signing takes place.
 
However during the whole process information regarding the bids is confidential for commercial interests until the best evaluated bidder agrees the terms and conditions of the contract and signs.
 
Why then the saga?
 
It is clear that the contract was and has never been awarded to any firm. The contracts committee was moving to the next stage –financial evaluation- before the “whistleblower” claimed that the contract was already awarded.
 
The IGG intervened and stopped the whole process and this is further delaying the project. And let the IGG investigate and find the truth.

However, the public must know that the Karuma procurement saga is mainly driven by selfish interests. The price tag of Karuma hydropower project is close to $2.2b. Any firm will do what it takes to either win the contract or deny its competitor the opportunity.

In such mega deals, there are brokers/middlemen who will push for competing firms to earn commissions.
 
Just imagine a broker promised to be given a commission of 10% of the $2.2b dollars? That is about $220m that the broker will earn. The broker will do anything to make sure that he/she earns that commission.
 
Implication for the Karuma delays

 
Power demand is growing at 15% per annum. It means that every year Uganda should be able to commission 50 MW project online if we are to avoid going back to load-shedding
 
The demand forecast was that the surplus energy Uganda is enjoying now will be consumed in the next 18- month before the undesired load-shedding returns.
 
The increased demand is due to intensified investment in industries that heavily rely on electricity and heightened economic activities.
 
The uninterrupted power supply is expected to enhance economic activities and has reduced on the use of expensive standby diesel and petrol generators.
 
For instance, there have been factories that were under-producing due to unreliable power supply but now have resumed operation.
 
For instance China’s group, Tiang Tang Steel factory, the biggest steel manufacturer in East Africa needed close to 35 MW for it to operate efficiently.
 
The National Water and Sewerage Corporation (NWSC) is embarking on construction of five water treatment plants, which will need about 25 MW of electricity to power all of them.
 
Uganda Investment Authority has indicated that there are more 62 projects especially in the manufacturing and agriculture sectors that are in the pipeline and expected to be commissioned early next year.
 
Already a joint venture between Uganda and South Korea has been entered to build $7.4m fruit factor in Teso region. Egyptian investors have shown intention to expand and equip the meat factory as well as build a pharmaceutical industry.
 
Such investment projects will need electricity to keep them operating. Likewise there is increased domestic and commercial connectivity as real estate businesses pick up. Agro processing is on the rise and they need electricity to add value to the produce.
 
Access to affordable, reliable and sustainable energy plays a central role in the achievement of the Millennium Development Goals (MDGs) including reduction in poverty levels, elimination of gender disparities in education, reduction of maternal health and child mortality and achievement of environment sustainably.
 
Can Uganda learn from Bujagali history?
 
Uganda needs to learn from its past history during the construction of the just concluded $250MW Bujagali hydropower project.
 
The project that was conceived about 15 years ago was delayed due to bribery allegations and unprincipled politics. Even when Bujagali was nearing completion, there were attempts to derail the project by speculating on how much capacity the project will deliver.
 
The cost of delaying Bujagali has been very high. Subsidies for thermal power plants reached Uganda $760m in the six years, which could have been used in other areas of the economy.
 
There was loss of business to Uganda, and the cost of unserved energy was very high. The actual cost of the Bujagali project increased significantly for both capital and construction.

As a result of the delay, Uganda finally got financing at a higher cost and even the construction costs had gone up.
 
As a matter of fact, Uganda became a victim of world catastrophies, like the Tsunami in the Far East of 2004 and Hurricane Katrina of 2005 of the Gulf of Mexico, since at the time of bidding for the Bujagali contractor in 2005/06, the international markets were constrained because most contractors were focusing on the Far East and American reconstruction contracts. 

The consequence was that the total project cost went up from $550m in 2001 to the current completion level of $890m.
 
Conclusion
 
Uganda is still experiencing one of the lowest electricity consumption per capita in the world currently at 75 kWh per year. The current generation cannot support the medium term government industrialisation plans contributing to slow economic transformation.
 
The National Development Plan (NDP) clearly identifies limited generation capacity and corresponding limited transmission and distribution network is among key constraints to the performance of the energy sector.
 
The NDP further set out increasing power generation capacity as the first objective to address this problem and construction of larger hydropower plants as the first intervention strategy.
 
The current situation of power demand and power supply option for Uganda therefore indicate the proposed Karuma Hydropower Project as a much needed development as it will add up to 600 MW to the national grid.
 
The project must be fast tracked and the time is now.

THE delay to kick-start the construction of the proposed 600 megawatts (MW) Karuma hydropower project due to complaints raised by bidding firms, is denying Uganda the opportunity to progress and industrialise.

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